Tax Code Changes Create Challenges
What should small business owners focus on for 2015 tax planning?
An important, yet often overlooked, issue for small business owners is the choice of the form of entity under which they operate. For 2015, this will become critical as Congress contemplates major changes to the tax code. Currently, the maximum corporate federal tax rate is generally less than the maximum individual tax rate. This has led many business owners to consider converting their sole proprietorships and pass through entities (such as S corporations and LLCs) into C corporations, which are taxed at the lower corporate rate. Caution must be exercised before making this change, since C corporations have their own set of prickly tax thorns. Issues such as lack of a favorable capital gains tax rate on the sale of business assets, officers’ compensation and double taxation on dividend profits all need to be considered.
For those businesses that are operating as LLCs, owners need to be aware that any LLC member who performs services to the LLC will, under a new IRS ruling, now be subject to self-employment tax at a whopping 15.3%. (See IRS Chief Counsel Advice 201436049).
We think that the best thing business owners can do taxwise for now is to stay flexible and watch developments in Washington closely.
Next: Part 2
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