Congress passed the Tax Cuts and Jobs Act (TCJA) in late 2017, effective January 1, 2018. This statute included substantial changes to taxation of corporations and LLCs.
The federal corporate income tax rates used to be graduated. Corporations making not more than $50,000 per year had a tax rate of 15%. Over $50,000, the rates fluctuated, from 25% to 39% and ultimately down to 35% for income of $18,333,333 and up. The Tax Cuts and Jobs Act did away with the graduated tax schedule. The federal income tax rate for all corporations is now a flat 21%.
So if you are a small corporate business owner with taxable corporate income of $50,000 or less, the Tax Cuts and Jobs Act did you no favors. Your tax rate was 15% but is now 21%. On the other hand, once you get past $50,000, the Tax Cuts and Jobs Act does cut your tax rate substantially.
The Tax Cuts and Jobs Act also made a change to how the IRS taxes LLC income to the owners of an LLC. The Tax Cuts and Jobs Act did not change the fact that LLCs are pass-through entities for tax purposes. The income of the LLC is still passed through to the owners and taxed at the owner’s personal income tax rate. But now, a member (owner) of an LLC can exclude up to 20% of the pass-through income from an LLC on the member’s individual tax return. So an LLC owner can receive as much as a 20% discount on the amount of LLC income taxed to the owner.
This 20% exclusion phases out when the LLC’s main asset is the skill or reputation of the owners or employees. Examples are lawyers, accountants and financial services firms. When this is the case, the 20% exclusion is in effect for single taxpayers with no more than $157,000 in taxable income and $315,000 in taxable income for married taxpayers filing jointly. The 20% exclusion decreases after these levels of taxable income are reached. It vanishes entirely once a single taxpayer hits $257,000 in taxable income and a married couple filing jointly hits $415,000 in taxable income.