How Pass-Through Businesses Win at Taxes

Across the country, CPAs are crunching (and crunching, and crunching) numbers to assess how their clients can benefit from the new tax reform law. And for business owners, owning pass-through businesses is even more enticing than ever.

What Are Pass-through Businesses?

Nearly 95 percent of businesses in the U.S. are pass-through organizations and for a good reason. The structure is designed to reduce double taxation, or taxing a business both at a corporate level and at the owners’ level.

Instead of a twofold hit, company profits and losses are sent straight to owners/shareholders without a corporate pit stop. Business owners then file and pay taxes through their individual returns (not corporate returns). Sole proprietorships, partnerships, and S corporations all enjoy this no-double-taxation life. Most pass-through businesses are small, but a limited number of large businesses account for most of the profits and economic activity from pass-through entities.

Tax Reform Wins: How Business Owners Can Save Money

2018 is looking up for business owners all over the board thanks to the new bill. Pass-through entities can now deduct 20 percent of the business income that is passed to their individual return. This makes it a great option for low- to mid-income businesses. The single-filing threshold is $157,500 and the joint-filing threshold is $315,000.

Pass-through structure not in your cards? C Corporations will catch a break with the new tax bill, with the cutting of the corporate tax rate from 35 percent to 21 percent.

Are you above the 20-percent deduction threshold? Is your business under a different tax classification? A tax professional can help calculate your breaks.

Not every situation has a cookie-cutter solution when it comes to business taxes. If you’re a business owner, a tax professional can also help you decide on the most cost-efficient business entity and what tax reform means for you.