I’ve told you all many times that the rules have changed significantly with the passage of the Tax Cut and Jobs Act (TCJA).  For example, for decades, we’ve avoided setting up C Corporations for our clients, because of the double taxation whammy.  But, now with the maximum (and minimum) tax rate of 21%- and the personal limitation on SALT (state and local taxes) at $ 10,000, it’s past time to reconsider our old rule of thumb.

First, for many of you,  the S corporation  (or LLC operating as an S) is the best answer; it provides the lowest overall taxation. But, for those in the 24% or higher tax bracket… well, that old rule of thumb goes bye-bye.

Using the C Corporation with aplomb, we can bypass the $10,000 SALT deduction cap. Before the TCJA, our itemized deductions had no limits on SALT- income taxes, real property taxes, personal property taxes, foreign income taxes, foreign real property taxes.  (Of course, our mortgages were limited if the principal exceeded $ 1KK- and now that limit has been lowered to $ 750K.)

The TCJA changed all that.  No longer can we deduct foreign real property taxes..  And, if we are itemizing on our personal taxes, our SALT deduction tops at $ 10K ($ 5K if we are filing separately from our spouses).    Since an S entity pays no taxes (federally- there are some states that tax pass-throughs), that has no effect on the SALT limitation.

But, if you are a corporation- there are no SALT limits.  And, the C Corp only pays taxes on its net income, deducting all those cost from its gross profits.  The C would pay state taxes on the net income, so that pass-through of income  never shows up on your 1040.

When does this restructuring make sense?  If you are in a specified service or business that limits the QBI (qualified business income) deduction.   Or, you have consistent business losses- which means the IRS is just itching to make your business a hobby- and, therefore, not deductible.  Or, you plan to accumulate your profits in the firm and then use it like a Roth, withdrawing your funds (on your OWN schedule) when you retire.  (You could also withdraw dividends from the profits your firm accumulated two years ago- which makes them qualified dividends, taxed at preferential rates.)  Or, you have significant medical expenses, which means you need to set up a Section 105 plan to cover your health care costs tax-free.  Or,even sell the stock in your C corporation after a  specified waiting period, which means the capital gains on the stock sale are zero.

If you think this scenario applies to you, it’s time to call us.  While you are locked up in your house because of the coronavirus pandemic.

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