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Archive for Passthrough Entities

Tax Planning For Pass-Through Business Entities After Tax Reform

John Dundon, Pass-Throughs And Tax Cuts And Jobs Act

Tax planning under the TCJA for pass through entities is a post for small business owners everywhere paying US income taxes.

Now that the Tax Cuts and Jobs Act (TCJA) is in full swing, many of you have been clamoring for tax planning strategies. This post addresses some essential aspects of the Act and suggest some strategic implications to be used for planning purposes.

One of the most significant changes coming out of the TCJA are the new tax rates:

  • The individual tax rate is reduced to a maximum 37%.
  • The tax rate for pass-through entities can be reduced by 20%.
  • The corporate tax rate is reduced from 35% to as low as 21%.

As a result of these new tax rates there is a growing debate over whether a business should be organized as a pass-through entity or a full blown ‘C’ corporation. 

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New Tax Laws: New Deduction For Pass-Through Entities

Haik Chilingaryan-

Under the new tax laws (“TCJA”), there is a new deduction available to owners of pass-through entities. Section 199A of the Internal Revenue Code allows owners of pass-through entities to deduct up to 20% of their business income from their income taxes. The first portion of this article provides an overview on the various types of pass-through entities that are included under Section 199A. The second portion of the article provides an analysis on the conditions that the owners of pass-through entities must satisfy in order to qualify for the 199A deduction.

PASS-THROUGH ENTITIES

For purposes of Section 199A, the following entities are entitled to the deduction: sole proprietorships, partnerships, limited liability companies, S corporations, trusts, and estates. The most distinguishing characteristic of pass-through entities is that the entities themselves generally do not pay tax. Instead, all of the earnings and expenses are passed through to the owners who pay the taxes on their individual tax returns. The sections below provide an overview on the general characteristics of each type of pass-through entity.

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New Deduction For Pass-Through Entities

Haik Chilingaryan- Tax Deductions For Passthroughs

Under the new tax laws (“TCJA”), there is a new deduction available to owners of pass-through entities. Section 199A of the Internal Revenue Code allows owners of pass-through entities to deduct up to 20% of their business income from their income taxes. The first portion of this article provides an overview on the various types of pass-through entities that are included under Section 199A. The second portion of the article provides an analysis on the conditions that the owners of pass-through entities must satisfy in order to qualify for the 199A deduction.

PASS-THROUGH ENTITIES

For purposes of Section 199A, the following entities are entitled to the deduction: sole proprietorships, partnerships, limited liability companies, S corporations, trusts, and estates. The most distinguishing characteristic of pass-through entities is that the entities themselves generally do not pay tax. Instead, all of the earnings and expenses are passed through to the owners who pay the taxes on their individual tax returns. The sections below provide an overview on the general characteristics of each type of pass-through entity.

Read more

Tax Planning Under The Tax Cuts And Jobs Act For Pass-Through Entities

John Dundon, Pass-Throughs And Tax Cuts And Jobs Act

Now that the Tax Cuts and Jobs Act (TCJA) is in full swing, many of you have been clamoring for tax planning strategies. This post addresses some essential aspects of the TCJA and suggests some strategic implications to be used for planning purposes.

One of the most significant changes coming out of the TCJA are the new tax rates:

  • The individual tax rate is reduced to a maximum 37%.
  • Tax rate for a pass-through entities can be reduced by 20%.
  • The corporate tax rate is reduced from 35% to as low as 21%.

As a result of these new tax rates there is a growing debate over whether a business should be organized as a pass-through entity or a full blown ‘C’ corporation.

Families with multiple businesses in various life cycle stages are compelled to think very carefully about tax implications associated with their ‘portfolio’ of business entities.
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Private Pass-Through Foundation Rules And The 50 Percent Contribution Deduction

IRS, TaxConnections

Contributions to a private nonoperating founda­tion may qualify for the benefit of the 50 percent contri­bution deduction limit, and donors may deduct the full value of appreciated property, if the pri­vate nonoperating foundation:

  1. Distributes an amount equal in value to 100 percent of all contributions received in the tax year by the 15th day of the 3rd month after the close of its tax year,
  2. Has no remaining undistributed income for the year, and
  3. Distributes only qualifying distributions that are treated as distributions out of corpus.

Qualifying distributions cannot be made to:

  1. An organization controlled directly or indi­rectly by the foundation or by one or more disqualified persons, or
  2. A private foundation that is not an operat­ing foundation.

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Domestic Partnerships, S Corporations, Passthrough Entities Are Required To Report Information To Partners, Shareholders, or Beneficiaries

In general, section 965 of the Code requires United States shareholders, as defined under section 951(b) of the Code, to pay a transition tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the United States. Very generally, section 965 of the Code allows taxpayers to reduce the amount of such inclusion based on deficits in earnings and profits with respect to other specified foreign corporations. The effective tax rates applicable to such income inclusions are adjusted by way of a participation deduction set out in section 965(c) of the Code. A reduced foreign tax credit applies to the inclusion under section 965(g) of the Code. Taxpayers, pursuant to section 965(h) of the Code, may elect to pay the transition tax in installments over an eight-year period. Generally, a specified foreign corporation means either a controlled foreign corporation, as defined under section 957 of the Code (“CFC”), or a foreign corporation (other than a passive foreign investment company, as defined under section 1297 of the Code, that is not also a CFC) that has a United States shareholder that is a domestic corporation.

According to IRC Section 965 domestic partnerships, s – corporations, passthrough entities are required to report information to partners, shareholders and/or beneficiaries in connection with the code. A domestic partnership, S corporation, pass-through entities or other passthrough entity should attach a statement to its Schedule K-1s, if applicable, that includes the following information for each deferred foreign income corporation for which such passthrough entity has a section 965(a) inclusion amount:

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Tax Planning After The Tax Cuts And Jobs Act (TCJA)

Tax planning will become more important than ever now that the TCJA has completely transformed the tax code landscape. There are significant implications for tax planning on every level, from individuals to businesses.

The following highlights provide a bird’s-eye-view of what tax planning considerations could be made in 2018 and beyond.

For Business Owners

Biz Journal takes note of several items that businesses should consider for tax planning. In particular, sole proprietorships and owners of pass-through businesses (partnerships, LLCs taxed as partnerships, and S corporations) enjoy a new tax deduction equal to 20 percent of qualified business income from a qualified U.S. business. (This deduction is also available to individuals, trusts, and estates and expires for taxable years beginning after Dec. 31, 2025.)

However, there are several limitations to consider that will impact whether your business can take the deduction:

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Tax Professionals – Question Of The Week For You!

TaxConnections, Tax Question
Am I Better To Put Rental Real Estate In A Sub-S Corporation, An LLC Or A Partnership?

 

Every Friday, TaxConnections addresses a question submitted to our Ask Tax Questions platform. We ask our members to offer their thoughts on the question of the week. We realize you may need more information which you can request in the comments section below or on the TaxConnections website directly with our visitor.

Please comment below or login to TaxConnections to answer the Question Of The Week. If you are not a member of TaxConnections sign up here.

 

Partnerships And Passthrough Entities – What Do You Do?

Question: Jane is a Partner in a partnership with a July 31 year end. What information does she use to calculate the Sec. 199A deduction she claims on her 2018 Form 1040, U.S. Individual Income Tax Return?

Short Answer: Jane uses the information from her partnership Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc., for the year ended July 31, 2018. It doesn’t matter that the K-1 includes months prior to the effective date of Sec. 199A because this provision applies to individuals for their tax years beginning after Dec. 31, 2017.

Now, the longer explanation:

P.L. 115-97, known as the Tax Cuts and Jobs Act (TCJA), added several new provisions to the tax code, many of which add complexity in terms of new calculations, interplay with other provisions and past tax decisions, and tax planning changes. Among these changes is new Sec. 199A potentially allowing a 20% deduction against qualified business income for certain noncorporate taxpayers. This provision consumes nine pages of the 185-page public law.

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