Chicago Tax Law: Should I Re-Classify My Profitable Business Under The New Tax Code as a C Corp?

July 17, 2018

It’s time to talk a little Chicago tax law. As you know, there’s a new tax code in town. And right now, every startup and established business should be asking itself a critical question: On account of the new 21% corporate tax rate, what business designation now works best for us? Not to mention that some pass-through businesses owners can, for a limited time, knock off as much as 20% of their taxable earnings via the qualified business income deduction.

Below, we’ll compare the maximum tax percentage between C corporations and pass-through entities — like sole proprietorships, single-member LLCs, partnership LLCs, and S corporations — for profitable businesses.

Before the Tax Cuts and Jobs Act (TCJA), many entities chose a pass-through structure to avoid double taxation (corporate tax and shareholder dividends tax). However, under the new tax plan, C corporations are more attractive than before.

QBI Deductions and NIITs: Changes Under The New Tax Code That Could Affect Your Profitable Business

Under the new tax code, eligible entities can subtract up to 20% in qualified business deductions from their taxable income. The net investment income tax stands at 3.8% under the new plan, as well. So let’s take a look at how these two figures could impact your tax position.

Chicago Tax Law: Payments From A Profitable Corporation

When a profitable business is registered as a C corporation, the business itself first pays a tax on its profits.  Under the TCJA, the tax rate for corporations is now 21%.  Additionally, shareholders receive the company’s after-tax profits in the form of assessable dividends. Assuming the dividends are qualified, Shareholders are then subject to a maximum 20% federal tax on the dividends, plus a 3.8% NIIT (for taxpayers who make over a certain amount).    So a C corporation has its profits taxed twice — first at 21% at the corporate level and again at the individual level as dividends.

Chicago Tax Law: Profits From A Pass-Through Company

When a profitable company is registered as a pass-through entity, such as an LLC or partnership, revenues “pass through” to the owners, who are then responsible for paying taxes on it. Under the new tax code, the highest federal tax rate for such set-ups weighs in at 40.8% — 3.8% NIIT or the self-employment Medicare tax portion, plus the 37% tax highest tax bracket rate.

However! If you can grab the full 20% QBI deduction, then a pass-through entity may be the best option.

Again, a tax law attorney will best be able to assess your situation and advise on the optimal course of action.

Connect With A Chicago Tax Law Attorney

The Gordon Law Group works with businesses and individuals throughout Illinois, across the country, and overseas. Our team handles everything from tax reporting to positioning to conflict resolution. We also work with startups and businesses on a multitude of transactional matters, including cryptocurrency concerns. We like to think of ourselves as a one-stop-shop law firm for today’s commercial market.

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