The Tax Cuts and Jobs Act of 2017 (TCJA) dramatically reduced the effective tax rates on income for all businesses, including C corporations and pass-through entities. The new 21% flat rate for C corporations applies to both income and gain on the sale of assets. For many pass-through entities structured as limited liability companies or S corporations, the flat tax rate is very attractive. Should you convert your practice to a C corporation for tax relief?
Traditionally, medical practices have been structured as either a sole proprietorship or a small group of physicians organized as a partnership. However, as the business of providing medical services became more complex and tax rates increased, more physicians began to organize their practices as corporate entities. Today, the legal forms of organization that a medical practice may choose among include sole proprietorship, general partnership, limited partnership, C corporation, S corporation, limited liability company (LLC) and limited liability partnership (LLP).
Entity Choices Post-Tax Reform
New tax reform has caused many physicians currently structured as pass-through entities – such as S corporations – to consider switching to C corporations to take advantage of the significantly reduced 21% corporate tax rate.
However, keep in mind that it’s not just C corporations that are getting a break. Most physicians and dentists structure their practices as pass-through entities. The new tax law offers a big break on profit share (but not salary) for owners of certain pass-through entities, such as S corporations, sole proprietorships, partnerships, and some LLCs. Under the TCJA, owners of certain pass-through entities will receive a 20% deduction on “qualified business income,” effectively reducing their maximum effective tax rate from 39.6% in 2017 to 29.6% in 2018.
That sounds appealing, but the new law excludes the deduction for taxpayers above the threshold in “specified service trades or businesses,” and that includes healthcare professionals. Whether you qualify for the 20% deduction depends on your income.
Service business income (including medical practice income) is only eligible for the full deduction if your individual income is no higher than $157,500 or your household income as a joint filer is no higher than $315,000. Those with an income up to $207,500 for single filers or $415,000 for joint filers receive a partial deduction; if your income is higher, you receive no deduction.
Time to Restructure?
Physicians should consider which business structure will help them meet their specific needs. Under the TCJA, many of the deductions you have enjoyed for years may be offset by the lower percentage you will be paying of your income to taxes. Either way, there are a number of customized tax strategies that can help physicians save thousands in taxes.
Download our free e-book, “Tax Reform Implication for Medical Practitioners,” for more information. Topics include:
- Tax Brackets and Standard Deductions
- Key Individual Provisions Affecting Physicians
- Enhancements to Section 179 and Bonus Depreciation
- How Will Tax Policy Shape the Future of the Medical Profession?
The healthcare accounting team at Goldin, Peiser & Peiser will monitor IRS guidance that provides clarification around the TCJA. For more information about our healthcare services, please contact Erick Cutler at 214-635-2541.