Take a pass

Take a pass

By electing to operate as a pass-through entity, you can benefit from the legal advantages of a corporate structure as well as the tax advantages available to a sole proprietorship.

August 23, 2018
Mark E. Battersby

The annual tax return provides an opportunity to re-consider the options available. Entities with more than one shareholder or member can elect corporate status on their annual tax returns. Thus, an entity that is a partnership under state laws may elect to be taxed as a ‘C’ corporation, or S corporation, for federal taxes by using Form 8832 (Entity Classification Election). Unfortunately, under those so-called “check-the-box” regulations entities formed under a state’s corporate laws are automatically classified corporations and may not elect to be treated as any other type of entity.

Determining who will benefit and who will face a higher tax bill under the new rules for pass-through income is difficult because there doesn’t appear to be a cohesive policy. Guidance is needed to define specific “service” trades or businesses because, under the new law, a service business isn’t eligible for the tax break.

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