Should You Choose a Different Business Structure After the Tax Cuts and Jobs Act?

The Tax Cuts and Jobs Act was passed by Congress in November of 2017 but did not take effect until the beginning of this tax year (2018). It brings enough significant change to the tax code to prompt the question, “Should I choose a different structure for my business to take full advantage of this new law?” Our answer: “Yes, No, Maybe.”

Fortunately, those are the only three choices. Unfortunately, these otherwise simple choices become more complicated when associated with the tax code. As you can probably imagine, one size does not fit all when it comes to tax planning.  It never did.  And, with the Tax Cuts and Jobs Act, one size doesn’t even fit one size anymore.

For instance, if you’re a business owner whose company is structured in any way other than a C-corporation, you might be aware of the new “Qualified Business Income Deduction.” With the Qualified Business Income Deduction, you get to deduct 20% of your flow-through business income on your personal tax return and pay tax on 80% of the business income. Sounds simple, right? This section of tax law has more restrictions and limitations – we’ll call them “weeds” – than Round-Up could ever hope to control, but we’ll keep the explanation that simple to gain a general understanding.

If your business is a Sole Proprietorship with no payroll and no assets that nets $200,000 – absent of any “weeds” – you get a whopping $40,000 deduction and pay tax on only $160,000 of your net income.  Since a sole proprietorship does not differentiate between the business and the owner, the owner is entitled to take the full $200,000 “out of the business” without any tax consequences.

Ah, but now here comes a “weed.”  Corporations are required to pay salaries to the owner for the money they take out of the business. Partnerships must classify the money the owner takes out for services as “guaranteed payments.” Both salaries and guaranteed payments do not qualify for the 20% deduction mentioned above.

Therefore, if the Corporation or Partnership has the same $200,000 net annual income, and they pay a salary (Corporation) or guaranteed payment (Partnership) of $80,000, then what remains eligible for the 20% deduction is the $120,000 bottom line business income. So, a business organized as a Corporation or Partnership, doing the same exchange for services as a Sole Proprietorship, netting the same annual income, will only qualify for a $24,000 deduction. The only difference between the three? Their business entity structure.  And so, one size – each one is a business — isn’t truly one size under the Tax Cuts and Jobs Act.

By now you’re probably thinking, the best recommendation would be to structure your business as a Sole Proprietor if your business type allows for that to make sense. Yes, but, what happens when the business is even more profitable than $200,000 per year? Let’s say that in 2019, you net $500,000 (before salaries or guaranteed payments). That’s when the “weeds” really take over, and their explanation would require a dissertation, not a blog post. Take our word for it. With such an increase in income, under the Tax Cuts and Jobs Act, the Sole Proprietor, and Partnership businesses would not qualify for any deduction. And yet, an S-Corporation that is the same business, providing the same services, netting the same income, would qualify for a $62,500 deduction.

So, not only is “one size fits all” a thing of the past. “One size” isn’t even “one size” from year to year. What happens when your Sole Proprietorship profit is low one year and high the next? You can’t switch business entities each year based on projected income. So, based on the current realities of the tax code, what is the wisest move for a business owner? Absent any other information, the recommendation would be to do business as an S-Corp.

This new tax code will affect every business in the United States, regardless of size or entity structure, which is how we arrived at our initial answer to the question, “Should I change my business structure under the Tax Cuts and Jobs Act?” is “Yes. No. Maybe.”

Let’s find out what entity will be right for you. Contact us online or call 215-723-4881 to schedule a consultation.

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Computer Recycling Program

In an effort to support our environment, provide our Customers with a cost effective, easy way to dispose of their unused computer equipment and comply with local equipment disposal laws, we are announcing a new computer equipment recycling program. Here’s how it works:

At your request, we will recycle your used computer equipment for you. Computers will have their hard drives rendered inoperable (so that there is no possibility of anyone extracting data from them). We will then transport your equipment to a certified computer equipment recycling center for proper disposal.

To encourage as much participation in this program as possible, we are keeping the fee for this service to a minimum. To have your computers recycled, simply:

  1. Complete the form below, indicating the quantity of each item to be recycled
  2. Drop your equipment off at our office (along with this form), or give your equipment to one of our staff persons when they are at your office for another engagement
  3. We will send you an invoice for the service fee

Computer Equipment Recycling Program (PDF)

Canon Capital Technical Support Request

Note: Please use this form for NEW support requests only. Do not use for general correspondence or for checking the status of an existing request as this will create duplicate entries in our ticketing software.

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How to Complete a Form W-4

We’re a little over halfway through 2018, the first tax year affected by the Tax Cuts and Jobs Act. Earlier this year, we recommended doing a “Paycheck Check-up” and making any necessary adjustments to your Form W-4 (Employee’s Withholding Allowance Certificate) to avoid withholding too little Federal tax from each paycheck, which could lead to an unwelcome tax bill or penalties in April 2019. All that requires is updating the Form W-4 on file with your employer.

The IRS provides an online Withholding Calculator to help you determine the right type of withholding for your situation. But even with this calculator, completing a Form W-4 can be confusing. Let’s break it down:

Fields 1 through 4
These are straightforward, requesting your name, Social Security number, address, marital/filing status, and whether or not your name matches your Social Security Card.

Fields 5 and 6
This is where it can become confusing. Field 5 requests the “total number of allowances you’re claiming.” Calculate the number of allowances using the worksheets provided on the Form W-4. Field 6 asks how much, if any, additional funds you would like withheld from each paycheck. This is where the online Withholding Calculator is helpful.

Field 7
In the event you meet both of the outlined conditions for exemption, indicate “Exempt” in this field.

Fields 8 through 10
These fields are to be completed by your employer.

W-4 sample

You may adjust your withholding amounts via an updated Form W-4 as often as necessary for your situation. Outside of changes in your income or tax law, you will also need to complete an updated Form W-4 with these life events:

  • Change of address (especially if you move to a new town/township/city/state)
  • Change in marital status/marital filing status
  • Name change

If you have any questions, we’re here to help. Contact us online or call 215-723-4881.

Download our FREE Sample Form W-4, where we take you through each question using a sample scenario.


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Philadelphia Wage Tax Changes July 1, 2018

July 1, 2018 marks the beginning of the new fiscal year for the City of Philadelphia and with it a reduction in the Wage Tax.

The Wage Tax affects all businesses that operate within the city as well as businesses outside of the city who hire Philadelphia residents.

Any paycheck issued with a pay date after June 30, 2018 must withhold the Philadelphia City Wage Tax at these new rates:

  • 3.8809% (.038809) for Philadelphia residents
  • 3.4567% (.034567) for non-residents

If you are a Philadelphia-based business who does not collect the Wage Tax on behalf of your employees, or if you work for a business in Philadelphia and do not have the Wage Tax collected on your behalf, you – the employee – are responsible to pay an Earnings Tax directly to the City of Philadelphia. These rates will also be lower as of July 1, 2018:

  • 3.8809% (.038809) for Philadelphia residents
  • 3.4567% (.034567) for non-residents

We are happy to answer any questions you might have regarding this or any issue related to your payroll. Call 215-723-4881 or contact us online.

Client Technical Support Request

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Computer Solutions

Canon Capital Computer Solutions has put together a staff of talented, knowledgeable, and experienced technology consultants who pride themselves in providing the very best, yet sensible, solutions available for each business we work with.

Whenever your business needs help with applying technology to improve communications, boost productivity, or increase revenue, just call on our experienced staff of technology consultants.

In today’s fast paced, ever changing, Internet connected world, you can turn to us to help your business keep up with it all. You can rely on us to be there for you!