35.3M of us filed pass through entity tax returns in 2015

In recent days, we have been talking on the topic of entity selection.

Note that the highest individual marginal tax rate has been lowered to 37% from 39.6%. In addition, owners of many pass-through entities can deduct 20% of pass-through income right off-the-top, reducing the effective tax rate to 29.6% (assuming that you qualify; sadly I'm told that many attorney's and physicians do not).

FYI, if you are a "S" or "LLC", business owners filed 35.3M pass-through returns in 2015*

* SOURCE: US Congress, Joint Committee on Taxation

Again, if you're considering an entity switch, you have until March 15 to make an election retroactive to the beginning of the year.

Of course, there are other "non-tax related" reasons to consider an entity change summarized here (by no means an exhaustive list):

  • "S" Corp limited to no more than 100 shareholders; owners pay personal income on taxes; shareholders must be US citizens
  • "C" Corp Owners pay personal income tax on dividends (distributions); business pays corporate tax
  • "LLC" shields personal assets from business liability; requires separation of business and personal assets
  • Easier to switch to a "C" than switch back

So, let's put this topic to bed and move on. If you're considering, here is a roadmap:

1.) Have your bookkeeper, accountant or CPA model the tax implications of the switch. See #3 below.

2.) Consult with your CPA and/or your tax attorney. Consider the constraints above. Additionally, if you're presently a "C" and (with intention) you have plans to sell in the next 5-7 years, it might make sense to convert to "S"; (again, consult your tax attorney). 

3.) Take the time to research the tax law change on your state and local tax deductions .

4.) If you intend to make the switch, make your election by the March 15 deadline.