Most small businesses are entities set up as Limited Liability companies, partnerships or S-Corporations. These entities pass their profits directly to the owners. What happens when the individual tax rates start creeping up and the owners are now getting hit much harder? You and your tax advisor may want to consider a C Corporation. Currently, the top corporate tax rate is 35 percent and there has been a great deal of discussion in Congress to lower that rate to give U.S. corporations parity with their foreign competition. Converting your entity to a C Corporation carries its own set of issues including the issue of double taxation on C Corporation earnings. However, when the top individual tax rates exceed the corporate tax rates by a significant amount, it is a tax strategy to consider.
What else sunsets or is reduced after Dec. 31, 2012?
- Marriage penalty relief
- Child Tax Credit will be reduced
- Coverdell Education Credit will be reduced
- Limitations on itemized deductions will be reinstated
- Child & Dependent Care Credit will be reduced
And many more provisions will change. You and your tax advisor need to be in close contact throughout the remainder of the year to maximize every possible tax advantage and consider the strategies that will work best for you. Be sure to keep an eye on Congress and the Supreme Court.