Income-Based Effective Tax Rates and Choice-of-Entity Considerations Under the 2017 Tax Act
32 Pages Posted: 15 Jul 2018 Last revised: 2 Aug 2018
Date Written: July 5, 2018
This Article uses a simple model to graphically present the effective tax rates at various income levels for small businesses under the Tax Cuts and Jobs Act of 2017 (TCJA) and compares them to effective tax rates at various income levels for small business prior to the TCJA. The graphical presentation reveals that the various tax rates under the TCJA complicate choice-of-entity analyses and undermine general rule-of-thumb concepts that drove choice-of-entity decisions prior to the TCJA. Under TCJA, choice-of-entity preferences will likely be highly situational and may feature combinations of various entities. Using a typical business situation, the Article illustrates how different types of entity can cause the effective tax rate on business income at the $1,000,000 level to vary from 21.36% to 34.60%. The most favorable effective rate results from an entity structure that combines a C corporation and passthrough entity. Rate variations based upon entity combinations portend subtle, carefully calculated, shifts in choice-of-entity actions following JCTA.
Keywords: Choice of entity, organizational form, passthrough deduction, effective tax rates, corporate tax, section 199A
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