With the Republican-led tax bill headed to the President’s desk, The Wall Street Journal takes a closer look at how the overhaul affects homeowners, families, retirees, and business professionals. Here are the highlights for the Architecture and Engineering industry:
Although owners of S corporations, partnerships, and other pass-through businesses are set to receive some of the fewest benefits from the overhaul, the final bill eases up somewhat on A/E firms. The agreement allows pass-through firms to deduct 20% of certain business income, but this break phases out for business owners above certain income levels depending on filing status. However, a last-minute change for architects and engineers exempts them from this phase-out.
Corporate Tax Rates
While the top statutory income-tax rate on service firm owners who don’t qualify for the pass-through break would be 37%, the bill lowers the top corporate tax rate to just 21%. This difference may incentivize many pass-through entities to consider switching to ‘C’ corporations. Quoting Chris Hesse, a certified public accountant with CliftonLarsonAllen LLP, the WSJ article notes that “service firms that are looking to expand or have cash flow they don’t need to pay out will look hard at becoming C corps to get the benefit of the 21% rate.”
Owners looking to sell or merge their businesses may be wary of immediately switching to ‘C’ corporations – this status typically means paying two layers of tax on a potential transaction, while sales of pass-through firms incur only one layer of tax. Additionally, while switching to ‘C’ corporation is often straightforward and inexpensive, it can be costly to revert back to being a pass-through entity.
Read the WSJ’s full article here.