Thursday, September 10, 2009

The Rules Are Changing

Small business owners face a challenge as the tax climate shifts. What worked for over twenty years could be invalid soon.

Let me explain. In 1986, the tax code lowered the top individual tax rate below the highest corporate tax rate. Tax dollars were saved by organizing as an S-corp. As LLCs grew in popularity, many organized as an LLC, electing S-corp treatment for tax purposes.

Tax rates are going up. Previous tax cuts will expire at the end of 2010, bringing the top individual tax rate to 39.6% from today's 35%. Additional surtaxes proposed in Congress will bring the top rate to 45% or higher. This doesn't include state income taxes, just federal.

What does this mean for small business? It means regular corporations will provide better tax savings over the S-corp for some in the near future. It also means two levels of taxation. Even though this strategy will keep taxes lower, it will still be a tax increase.

More than ever, you need to work with your tax pro. Review your tax situation with consideration for the tax changes coming. It will be interesting the next few years.

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