Tax Reform: Should I be an S Corporation?
The new tax laws opened up a new 20 percent tax deduction for certain pass-through entities. Will your business structure capitalize on the 20 percent tax deduction?
You may not be able to capture it if you….
- Make too much money
- You lack salary & wages
It might be time to switch to an S corporation.
To qualify for the full 20 percent deduction (tax code Section 199A) on your qualified business income you need to make less than $157,500 if you are single or $315,000 if you’re married.
If your taxable income is greater than $207,500 (single) or $415,000 (married), you don’t qualify for the Section 199A deduction unless you have wages or property.
Example. Dan is single and runs an “in favor” sole proprietorship (not a doctor, lawyer, consultant, etc.), that generates $400,000 of proprietorship net income, and has taxable income of $370,000. In this condition. Dan’s 20 percent (Section 199A) tax deduction is ZERO.
Now let the S corporation helps Dan. The S corporation pays Dan a reasonable salary, let’s say that’s $100,000. With this salary, Dan now can pocket:
- $10,871 on his self-employment taxes
- $17,500 on the new 20 percent deduction 🙂