Should You Incorporate or Not Under New Tax Law?

New Tax Law
Share on facebook
Share on google
Share on twitter
Share on linkedin
Reading Time: 3 minutes

Since the introduction of the new tax laws, many of our clients and future clients are thinking whether to incorporate or not under new tax law? In short, how to save money? How to maximize deductions? So let’s dive in and let’s make this easy for you to understand by taking a look at various scenarios:

When To Incorporate:

  • If you are an employee claiming unreimbursed employee expenses on a Schedule A: In such case, you have to ask yourself three questions before opting for incorporation. How much are you losing in tax deductions? Are you ready to be an individual contractor? And, are you a highly compensated individual? Find out what changed for individual tax payer in 2018. For the first question, it should be noted that there are various costs involved in incorporation. That means, at the end, you should not be exchanging one expense for the other. Secondly, you can save a lot of taxes when you choose to be an independent contractor rather than being an employee as you can deduct a lot of expenses (deducted as business expenses) on Schedule C. But first make a complete check of all the factors, read about what changed for business in 2018 and then take the step. As far as the third question is concerned, do not incorporate unless you are a key employee in your company.
  • If you are a pass-through business and a specified service business with a taxable income above the threshold amount: If you are a high-income taxpayer in a specified service business like law, health, athletics, consulting, brokerage services, financial services, etc., you don’t have any benefits of the deduction. There are high chances that you may end up paying double tax – at the corporate level and individual level. Read more about Section 199A- Impact on Small and Pass Through Business. You do require a lot of tax planning in this case, wherein you can maximize your expenses caused by the corporation. Only then will you be able to benefit from deductions. Read about opting out of S election for small business corporation. 
  • If you are a pass-through business other than a specified service business with a taxable income above the threshold amount: In such cases, it is important to first analyze how you will be saving your taxes. The taxes and fees for incorporating may vary from state to state. That being said, you might not get the benefits you are looking forward to one state and you might get the results in some other state. So, have a look at how things work in your state and accordingly opt for incorporating. Only then you will be able to benefit from it.

May be To Incorporate or Not To Incorporate:

  • When you are a sole proprietor and filing Schedule C: In this case, the answer is not as simple as one would think. There is no tax benefit to incorporation if you are only worried about the loss of deductions on your Schedule C. If you are a taxpayer who claims employee-related deductions in Schedule A, then only will the elimination of deductions affect you. On the other hand, if you are a businessman and file Schedule C, this will have no effect on your business-related deductions.
  • If you are a pass-through business with a taxable income below the threshold amount: For individuals, the threshold amount is $157,500 and for married taxpayers, it is $315,000. Compare 2018 with 2017 tax brackets. If your taxable income below this threshold amount, there is absolutely no tax benefit to incorporation as you can easily qualify for the pass-through deductions.

When Not To Incorporate:

  • If you have rental properties and filing Schedule E: There is no tax benefit to incorporation as Schedule E remains the same. Your rental property mortgage will remain deductible on your Schedule E. In case of properties reported on Schedule A, the limits and caps on mortgage interest and real estate taxes will apply.
  • If you have a farming business and filing Schedule F: Similar to rental properties, there is no tax benefit to incorporation if you have a farming business and are worried about the deductions on Schedule F. Your Schedule will remain the same and your farm-related expenses will remain deductible on your Schedule F. In case of properties reported on a Schedule A, the limits and caps on mortgage interest and real estate taxes will apply.

There is no one size fit all scenario as every individual tax situation is unique. Taxes do not work in a simple way rather they are very complex. So, it is important to take advice from n tax expert rather than planning everything by yourself. After all, “The hardest thing to understand in the world is the income tax.” – Albert Einstein. Contact us or learn more about services. You might be interested in reading cryptocurrency and taxes.

Leave a Reply

Your email address will not be published. Required fields are marked *

Client Reviews
Based on 95 reviews
powered by Google
Ammoria Daniels
Ammoria Daniels
02:11 16 Sep 21
We contacted Akif with an urgent matter regarding corporate taxes. Akif immediately understood what was needed and... within days had everything ready to sign. The level of service we received was amazing and unmatched. Waqar expertise in trucking industry made our situation seamless. His communication was outstanding; I heard from him daily and could have been completed sooner if I was as fast as he was 😃 Highly recommended!read more
Joe Paneitz
Joe Paneitz
18:30 18 Aug 21
What an absolute pleasure to work with this CPA firm. My business is already seeing such a positive impact and growth.... I cannot believe I didn't connect with them sooner. This firm is helping in so many ways! 5 stars is an understatement! Thank you so much for your help AKIF CPAread more
Helptest ARCpoint Labs
Helptest ARCpoint Labs
15:02 18 Aug 21
The firm is quick, responsive, and has the latest technological software. Thus far, I have been with them for 3+ years... and will continue to work with them even after relocating. They make it easy even when I'm miles away. Would highly recommend more
Luz Tipaz
Luz Tipaz
16:06 13 Jul 21
Saim and his team are the best CPAs in town. I have been their client for years. All started when I needed help with... company structure with multiple companies and then accounting and Taxes. I have been very happy ever since. Thank you AKIF more
Maria perez
Maria perez
18:31 08 Jun 21
Me and my husband have been getting all of our personal Taxes, business Taxes, monthly bookkeeping, accounting and... payroll done with AKIF CPA. Recently, we had more stuff come up and had detailed analysis done on capital gains, single family rentals (SFR) and business disposition. You will only know how great this CPA company is until you have worked with them and given them a chance. Words can’t describe our experience. AKIF CPA gets the job done every time - very reliable, professional and more
Afnaan Amin
Afnaan Amin
22:14 02 Jun 21
Very good experience, we had unique situation in regards to cross border income as Canadians currently residing in the... US. Income on both sides of the border through completely different channels. Everything was very easy and completed timely, I also had lots of random questions and Mohammad provided top notch service along the way and even after we finished our taxes!! Highly more
Ryan Paton
Ryan Paton
10:56 08 May 21
I moved to the USA from Canada late 2018 as part of a promotion/relocation for work. For my 2019 returns, I used an... accounting firm recommended by the local Canadian social club in my city, which was a terrible experience. They were slow to respond to inquiries and would follow up in piecemeal requests which dragged out my return process over several months, often asking for information I had already provided.For the price I paid, I vowed to find better service. I found Mohammad online and decided to reach out. Mohammad was extremely responsive, took care of my US and Canadian returns as well as my wife's business returns in a timely manner. Overall, it was a very positive experience and I would recommend him to another in my more
Tuan Vo
Tuan Vo
01:59 20 Apr 21
I relocated to Texas from Alberta, Canada and needed a CPA to help me with my cross-border taxes as I was not happy... with the CPA that I used previously. During my interviewing process to find another CPA, I had good feedback from Mohammad as he was able to answer my questions regarding my unique tax situation with expertise, and importantly to me, in a timely manner. I decided to use his services for the current tax year and I have nothing but compliments for the work Mohammad provided. If you are in need of a professional cross-border CPA, I highly recommend reaching out to Mohammad more
See All Reviews