Think twice before moving your business to a low-tax state

Business


If it’s difficult to uproot your business, talk to your accountant about whether it makes sense to change your company’s structure from a pass-through entity to a C-corp.

Under the new tax law, pass-through entities — including S-corps, partnerships and limited liability companies — may qualify for a 20 percent deduction of qualified business income.

These small businesses get their name from the way income and profits “pass through” to the owner’s individual tax return. Pass-throughs are subject to individual income tax rates, which run as high as 37 percent.

Business owners with C-corps can take aggressive deductions — and they’re subject to a corporate tax rate of 21 percent.

“If you’re paying taxes in many different states, you should consider the large state and local income tax deduction that you can get as a C-corp but not as a pass-through entity,” said Mark Nash, a tax partner at PwC.

However, C-corps are subject to double taxation, meaning profits are taxed to the corporation and then levied a second time when shareholders get their dividends.

Your accountant may help you develop a strategy to soften the blow.

“You might be able to avoid the double tax if you reinvest in the growth of the business,” Nash said.

More from Personal Finance
Here are the highest and lowest state and local taxes
Four quirky tax deductions that could save you money
How to navigate that 20 percent tax break for small businesses.



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