The Tax Cuts and Jobs Act of 2017 made substantial changes to the way companies and their owners are taxed under the federal income tax laws. LLCs can be taxed four ways:
- sole proprietorship if the LLC has one owner or is owned solely by a married couple as community property,
- partnership if the LLC has two or more members,
- C corporation if the LLC files an IRS form 8832 and elects to be taxed as a C corporation under subchapter C of the Internal Revenue Code of 1986, as amended, and
- S corporation if the LLC files an IRS form 2553 and elects to be taxed as an S corporation under subchapter S of the Internal Revenue Code of 1986, as amended.
If you have an entity that owns investment property or that operates a business you must now consider which of the federal income tax methods is best for your company under the new tax law. If the best tax method is not the company’s current tax method then you may want to change the company’s current tax method to the best method. However, before you make the change, have your tax advisor do an analysis to determine if there will be a cost to make the change. See for example, “Converting from C to S corp. may be costlier than you think.”
The first step is to determine which tax method will be best for your company is to compare the tax consequences of the different tax methods under common scenarios. An excellent article that may help you make a decision as to which tax method is best for you is “2017 Tax Act.” This is a must read article for all small business owners. The authors give examples of operating and selling a businesses taxed as:
- LLC/S corporation with qualified business income (QBI)
- LLC/S corporation
- C corporation
The examples in the article will give you a better understanding of the new tax law and how it will affect you and your company.
For existing companies that are not taxed as S corporations that want to change their tax method to S corporation, these companies must file the IRS form 2553 no more than 2 months and 15 days after the beginning of the tax year the election is to take effect, or at any time during the tax year preceding the tax year it is to take effect. If your company wants to change its tax method to C corporation the change cannot take effect more than 75 days before the date the the IRS form 8832 is filed, nor can it take effect later than 12 months after the IRS form 8832 is filed.