Tax Reform: Corporations and Flow Through Income

After much speculation and anticipation, the “Tax Cuts and Jobs Act” was passed into law on December 22nd, 2017. This law will affect your 2018 return, which will be filed in 2019.

Corporate income tax once had eight tax brackets, ranging from 15-39%. The new tax law has eliminated all but one tax brackets, a 21% marginal tax rate. Qualified corporate dividends are still taxed to on individual tax returns at 15%, so many smaller corporations will still benefit from the S-Corporation election.

As corporations received a significant tax cut, the “Tax Cuts and Jobs Act” did not want to exclude other business owners from a tax reduction. Therefore, flow through income can receive up to a deduction of 20% of qualified business income. Flow through income can originate from sole proprietors (Schedule C and Schedule F), partnerships, and S-Corporations. However, there are multiple limitations and complex calculations to determine these limitations. The main limitation is to exclude the deduction for higher income personal service oriented businesses (Doctors, Attorneys, Accountants, etc).

Corporate AMT is also eliminated, which mainly applied to larger profitable corporations.

Our articles are not intended to be tax advice. To seek tax advice regarding your specific tax situation, it is best practice to consult with a Certified Public Accountant.