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small business tax reform

12% of Americans Want to Incorporate for Tax Breaks—Should You?

As the New Year is upon us, we are going to see changes to the current US tax structure. One of the most significant changes will be the corporate tax rate which has dropped to 21%. As a result, millions of American taxpayers are thinking of incorporating a business. We are sure you probably have a lot of questions. What is the new tax law? How will it affect small businesses? Will it have any effect on future incorporations?

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What is the new tax law?

The Tax Cuts and Jobs Act aims to build up the American economy by lowering taxes for families and businesses. With the cut in tax rates, the new tax law aims to encourage businesses to increase wages and supply more jobs, which should, in turn, spur economic growth in the US. The law takes effect January 1, 2018, and will govern taxes filed for the 2018 tax year. It will not affect income taxes that will be filed in April 2018, since those are for the 2017 tax year.

How will the law affect businesses?

Lower corporate rates

The new law will be changing the federal corporate tax rate for C-Corporations, which currently ranges from 15-35 percent to a flat 21 percent rate. C-Corporations will generally have a higher tax burden than pass-through entities, like LLCs, but if you are considering incorporating or changing business entities, it is important to talk to a business lawyer about the best option for you.

20% tax deduction for pass-through income

Small business owners of sole proprietorships, LLCs, S-Corps, and partnerships, who are paying a share of the business’ taxes through their own individual tax returns may be eligible for a 20 percent deduction. However, there are limits for high-earners and people in the professional services industry. There are also a number of factors that determine one’s eligibility for the maximum deduction, so it is important to discuss your specific situation with an accountant or tax attorney.

New expensing rules

According to the IRS, business expenses are the cost of carrying on a trade or business. The new expensing rules will allow businesses to write off new equipment they purchase immediately, rather than writing off the cost over a series of years. This is an increase from the current 50 percent cap. The immediate write-off will only be available until 2022. After 2022, the cap will decrease by 20 percentage points each year until 2027. The tax law will also increase the Section 179 expensing maximum from $510,000 for the 2017 tax year to $1 million for the 2018 tax year. A tax professional can help you determine what qualifies as an eligible business expense.

How can I take advantage of these changes?

Many people are looking for opportunities to lower their taxes under the new law, and in particular, are considering incorporating as a way to benefit from a more favorable tax regime for businesses. In a recent survey of 1,000 respondents representative of the US population, 12% of respondents reported that they plan on incorporating to take advantage of the new tax laws.* This is estimated to represent between 25 and 35 million individuals in the US, which is more than the total number of people alive today who have incorporated!

Power up your business

We make it easy to incorporate with step-by-step guidance

If you are interested in starting your incorporation process, Rocket Lawyer is here for you. Our business specialists have helped thousands of people start and run their companies. From choosing a business entity to filing your incorporation documents and defining your operating procedures in the form of an LLC Operating Agreement or Corporate Bylaws, we’re there to help every step of the way.

If you still have questions regarding incorporation or how the new tax law is going to affect your business, you can always ask a lawyer a question.

This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.

*Online omnibus survey by Caravan – ORC International for Rocket Lawyer, conducted among a demographically representative US sample of 1,029 adults aged 18+. Fieldwork December 11-13, 2017.

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