Before December 2017, conventional wisdom preferred limited liability companies (LLC) over corporations (C-Corp) for new entities. Tax laws often favored LLCs over corporations, especially for privately-held businesses not raking in millions in profits. But, this past December brought American businesses more than yuletide cheer—President Trump signed the Tax Cuts and Job Act, otherwise known as the Trump Tax Plan. A few swift movements of the president’s pen may have changed that conventional LLC wisdom. With all the changes to U.S. business tax laws, contractors may need to reexamine whether an LLC or Corporation is the proper structure for their construction business.

The Laid Back LLC

Under the new tax plan, LLCs appear to have a pretty sweet deal with a new standard 20 percent tax deduction on the company’s profits (also known as the Qualified Business Income deduction). So, if a roofing business brings in $100,000 in annual profits, then it will only be taxed for $80,000. This QBI deduction is perfect for smaller businesses where the combined pass-through advantage means remaining an LLC or S-Corp likely still makes the most sense.

However, the LLC/non C-Corp deduction comes with a few stipulations.

• Business owners are eligible for a deduction of either 20 percent of qualified business income or 50 percent of the total wages paid by the business.
  • Business owners must have a taxable income less than $157,500 single/$315,000 joint to be eligible for the 20 percent QBI deduction.
  • Taxable income generated by the business that exceeds $157,500 single/$315,000 joint is only eligible for the 50 percent W-2 wage deduction.
• Any businesses that earn revenue from professional services (medical, law, accounting, consulting fields) are excluded.

If a remodeling business is already clearing $100,000 annually, it doesn’t need to change a thing if it is treated as a pass-through. But, what happens if the business income is more than $157,500 (if single) in a year? The business would be phased out of the 20 percent deduction and only eligible to deduct 50 percent of the total W-2 wages paid by the company. For a sole proprietorship or a partnership with little to no employees, there would not be much (if anything) to deduct at tax time.

In addition, the Tax Act excludes LLCs that provide a professional service, which may include certain consulting firms. Engineers, however, have specifically been spared from being grouped with lawyers, doctors, accountants and others who provide professional services. Although a traditional construction company is also likely not included, a tax professional will ultimately be able to advise on specific businesses measure up in 2018.

With the exclusions and the confusion about the tax treatment of pass-through entities such as LLCs and S-Corps, contractors may now be considering whether it makes sense to convert from an LLC to a corporation, despite the double taxation on company profits. With the lower corporate tax rates, the double taxation has less bite.

The Corporate Suit

Corporations will see the most windfall from the new tax plan. Before December, the corporate tax rate was on a sliding scale between 35 percent and 15 percent. The new tax plan dropped the scale and set the new tax rate at a standard 21 percent.

Corporations are not the only beneficiaries of this particular deduction; personal service corporations (PSC) are also included, such as those in the accounting, consulting, health, engineering and performing arts fields. If an engineering company is currently structured as an LLC, it may want to research the new tax plan and see if it might be better served by a different structure.

Moreover, if a company is a high earner and phased out of the 20 percent deduction for LLCs, it may reach a certain level where it is better off paying the 21 percent corporate rate at the corporate level and then paying the dividend tax rates on the profits distributed to the owner. In the end, the business owner will need to consult tax professionals about whether a corporate switch is a productive move.

Clear as Mud

Even though President Trump signed the Tax Cuts and Jobs Act into law on Dec. 22, 2017, the government is still working on providing the IRS and business owners with more specific guidelines and better interpretation of the more than 500-page bill. Most tax advisors would suggest business owners wait a little longer before making any big changes to a company’s structure.

If an LLC is already pushing on the ceiling of the new salary limitations, and the owner knows that it wants to keep the current business form, the owner may consider using W-2 employees instead of independent contractors. That option creates another level of tax and legal issues that will require consideration and advice from tax professionals. The silver lining is that the business would still be eligible for some kind of deduction under the new tax laws.

Changing Gears

The most popular way to switch entity types is through a statutory conversion; however, dissolving and forming a new company is expensive and complex. The process can also result in significant tax implications, as the assets of one company must be distributed and then another one formed. On the other hand, a statutory conversion usually only requires a filing with the appropriate Secretary of State without the need to shut down and reopen as a new entity.

The Best Match

Which business structure is better? The construction industry is no less affected by the new tax bill than any other sector. In fact, some of the other perks in the Tax Cuts and Jobs Act might be more of a boon to America’s builders than anyone else. The tax cuts for corporations and LLCs make both business types more attractive and depending on how fast a company is growing, business owners may lean more towards a C-Corp. Additionally, if the company is weighing the possibility of ever going public and/or expanding your business internationally, it may want to consider trying that “suit” on for size.