Confusing New Rules About S Corps

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This information refers to the new tax plan passed by the House, but not yet by the Senate.

You may have heard about the new maximum tax rate for pass-through business entities like S Corporations or LLCs, taxed as S Corps. It’s 25%! Hooray! Not so fast.

The 25% max rate only applies to the capital percentage. Only non-service businesses will have capital percentage allocated. The default is 30%.

To break it down, let’s say that the S Corp is a service business. This doesn’t help you a bit.

Let’s say the S Corp is a non-service business with $100,000 of income. The default is that you get a lower tax rate on $30,000 of the income. The rest is taxed at your regular tax rate.

It is possible to use an “alternative capital percentage” calculation, but don’t get too excited. There are a lot of restrictions

The 25% PTE rate only applies to the “capital percentage,” which by default is 30% for non-service businesses and 0% for service businesses. It does not apply to the remaining “labor percentage” attributed to the officer/owners. PTEs may use an “alternative capital percentage based on the business’s capital investments,” but for many that may not improve the results by much.

Limited Partners Get the Pass-Through Rate

By definition, a limited partner does not work in the partnership. Therefore, the bill treats all distributions under the lower tax rate. That’s good news!

S Corp Strategies

The deal for most small business owners turns out to be not that great. Definitely, it’s not as good as the new tax rate for C Corporations.

This may be a good time to consider adding a C Corporation to your strategy. They worked before and now it will be an even better strategy. We’ll be covering this in more detail in coming coaching classes. Click Here to find out more.

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