Trump/Republican Tax Proposal Kills Off S Corporation for Small Businesses

[SeattleCPA]

If you operate a small business as an S corporation, you may want to peek at this thread in the taxes subforum:

https://forum.mrmoneymustache.com/taxes/25-tax-rate-on-pass-through-biz/

The Tax Cuts and Jobs Act basically vaporizes the old S corporation tax loophole for many small service businesses.

[calimom]

Oy. Thanks for the link. Hopefully this will go the way of most of Trump's 'proposals'. Crazy pipe dreams that don't actually come to fruition, but get everyone worked up. If recent history holds true, he'll distract us with this latest shiny object while he drops a nuclear bomb on North Korea or has a toddler level Twitter tantrum over the Pledge of Allegiance or something

[khizr]

Oy. Thanks for the link. Hopefully this will go the way of most of Trump's 'proposals'. Crazy pipe dreams that don't actually come to fruition, but get everyone worked up. If recent history holds true, he'll distract us with this latest shiny object while he drops a nuclear bomb on North Korea or has a toddler level Twitter tantrum over the Pledge of Allegiance or something

Well said :)

I do not think this bill will be passed, and even if it does the end result is going to be so different then what we see we might as well wait a bit and keep it relaxed. We do know they intend to try to do some type of tax changes to pass through entities but it is really hard to do that and prevent abuse. They also said their intent was to bar some businesses from getting that, but that is really hard to do and not expect a ton of loopholes.

SNAFU.

I was really hoping we would finally switch from being one of the only countries in the world with a worldwide tax system to territorial for people and companies, as well as get some VAT stuff going. We will see if Congress can overcome all the dirty money they require to run for office in this screwed up system to change things.

[bwall]

I was really hoping we would .... . get some VAT stuff going.

VAT is a nightmare scenario, fraught with fraud and abuse. Under no circumstances should we have that in the USA. For example, exports are generally not taxed. In a VAT system, the tax is collected upfront and then re-claimed upon export. Sounds easy on paper, but if you export anything, then you either have to hire an accountant and pay them thousands every year to keep track of your monthly VAT filings OR forego the refund, which means that you are at a competitive disadvantage thanks to the government. Either way business gets much harder to do.

Since America is the world's second largest exporter, we would suffer greatly.

[SeattleCPA]

Ok, here's an updated summary of the pass-through entities tax cuts in the House version of the Tax Cuts and Jobs Act. It now looks like like the House bill doesn't kill off the S corporation.

https://evergreensmallbusiness.com/pass-through-entity-tax-cut-rules/

But that said, I don't think the law holds much attraction for typical small businesses (sole proprietorships, partnerships and S corporations)...

[tralfamadorian]

Thanks for taking the time to write that blog post, SeattleCPA! There is so much information regarding the changes that more broadly affect swatches of taxpayers, but not much on bits like this.

[SeattleCPA]

tralfamadorian... I agree, I agree.

Lots of talk about the individual tax cuts... some about the "C" corp tax cuts.

But little about the small business stuff.

[Laserjet3051]

Thanks for taking the time to analyze the current bill on your website. Very informative, it matches my interpretation of the bills language as it applies to pass through entities (I did "try" to read the legalese). As it stands, it seems that my s-corp consulting firm, being a professional services entity, would be required to run 100% of my firms payout to the owner through payroll, as I dont see any opportunity to run a % through distriubtions/owners draw.  If this turns out to be true, I am looking at a deadline of adjusting payroll in roughly 6 weeks. How can the IRS expect me to comply with the new law, which MIGHT go into effect Jan 1, 2018, when the details arent even hashed out, or the bill approved?

Am I expected to make a last minute scramble the eve of Dec 31, only minutes after it (might be) voted into law? Seems like a ridiculous timeline. My accountant may need time to review the law once enacted before he can even advise his clients on how to comply moving forward? This feels like walking a tightrope, might there be any grace period for compliance if/when it is enacted?

Thanks for your consideration SeattleCPA.

[SeattleCPA]

Thanks for taking the time to analyze the current bill on your website. Very informative, it matches my interpretation of the bills language as it applies to pass through entities (I did "try" to read the legalese). As it stands, it seems that my s-corp consulting firm, being a professional services entity, would be required to run 100% of my firms payout to the owner through payroll, as I dont see any opportunity to run a % through distriubtions/owners draw.  If this turns out to be true, I am looking at a deadline of adjusting payroll in roughly 6 weeks. How can the IRS expect me to comply with the new law, which MIGHT go into effect Jan 1, 2018, when the details arent even hashed out, or the bill approved?

Am I expected to make a last minute scramble the eve of Dec 31, only minutes after it (might be) voted into law? Seems like a ridiculous timeline. My accountant may need time to review the law once enacted before he can even advise his clients on how to comply moving forward? This feels like walking a tightrope, might there be any grace period for compliance if/when it is enacted?

Thanks for your consideration SeattleCPA.

Laser, sorry, I maybe wasn't clear enough in the blog post I did today.

I think your situation will be fine under the House version. I.e., you don't get anything... but you also don't lose the essential benefit of an S corporation.

Also, note that the House version isn't effective until 1/1/2018, so you would get time to deal with this even if Senate passes law and then in conference, the law morphs into something that's small business "unfriendly."

For now, therefore, I think we S corporation owners take a "watchful waiting" approach... Also, if someone is politically inclined, I think the Senate version of the bill will be better for small business owners. For what that's worth...

[SeattleCPA]

In case anyone is interested, here's a summary of how the passthrough entity tax deduction works in the bill Senate passed last night:

https://evergreensmallbusiness.com/sec-199a-qualified-business-income-deduction/

The Cliff Notes version: You probably get a deduction equal to 23% of your sole proprietor, S corp, partnership or real estate profits as long as you have W-2 wages "in" the business.