What are the new changes to federal tax laws, and how will those new changes impact small and mid-sized business owners in the state of Florida? Here are the details:

The key elements in the Tax Cuts and Jobs Act of 2017 are a reduced rate for corporate taxes and a substantial new deduction for pass-through entities.

The federal corporate tax rate, which was previously 35 percent, is now set at 21 percent as a result of the Tax Cuts and Jobs Act, which became law in December.

HOW WILL THE NEW TAX LEGISLATION AFFECT YOUR FLORIDA BUSINESS?

If you are the owner of a small or mid-sized business in the state of Florida, how will the new legislation impact your business? How will it impact your taxes?

By lowering the taxes imposed on corporations, Congress hopes that more new corporations will start up and that established foreign corporations will move to the United States.

The owners of many small and mid-sized businesses are also now thinking about transitioning those businesses into C corporations to benefit from the corporate tax rate of 21 percent.

Is that a good idea for business owners in Florida?

You’ll want to keep reading if you own a business here, because several state laws that you will need to know about must be considered if and when that decision is made.

HOW IS A “C” CORPORATION DISTINCT FROM AN “S” CORPORATION?

A C corporation’s profits are taxed separately from its owners under subchapter C of the Internal Revenue Code. In an S corporation, the profits are passed on to the shareholders, and are taxed based on personal returns under subchapter S of the Internal Revenue Code.

C corporations are owned by the shareholders, who elect directors to make business decisions and determine policies. A C corporation’s owners have limited liability.

C corporations pay taxes at the lower, new 21-percent tax rate.

Owners of pass-through businesses – partnerships, S corporations, sole proprietorships, and LLCs – pay taxes on their own share of the operation’s income at the higher rate for individual taxpayers – as much as 37 percent now under the Tax Cuts and Jobs Act.

WHY SHOULDN’T A PASS-THROUGH ENTITY BECOME A C CORPORATION?

Nevertheless, there are good reasons – like the state of Florida’s tax laws – why business owners in Florida may choose not to convert a pass-through entity into a C corporation.

One reason: There is actually a double tax, in effect, on a C corporation.

A C corporation pays taxes on its profits at 21 percent, but there is, in effect, another tax when a corporation distributes its profits to shareholders as dividends. Shareholders are then generally taxed at a 23.8 percent tax rate.

This makes for a combined shareholder and corporate and tax rate (for top bracket shareholders) of 39.8 percent. If the company is a pass-through business, an owner’s highest tax rate is only 37 percent.

Most small and mid-sized business owners in Florida are in a lower tax bracket. When the additional tax is accounted for, converting a Florida company to a C corporation may not be a good idea.

WHO PAYS FLORIDA’S ONLY STATE-LEVEL “INCOME” TAX?

Additionally, in this state, C corporations alone are subject to a state-level income tax. Converting to a C corporation in Florida adds an extra 5 percent to the company’s taxes. That five percent would pass through to the owners in a pass-through business.

Because of that 5 percent tax in our state, the tax for a top tax bracket owner of a C corporation would be 43 percent, rather than the 37 percent top rate for a pass-through business.

The Tax Cuts and Jobs Act also creates an automatic 20 percent deduction for most pass-through businesses, so if the income of your Florida business totals $100,000 in 2018, for instance, only $80,000 of that total will be taxable.

When a Florida business is eligible for the 20 percent pass-through business deduction, the total tax for a pass-through business owner is 29.6 percent.

WHY DOESN’T CHANGING A FLORIDA BUSINESS TO A C CORPORATION HELP?

In states with an individual income tax, a pass-through entity’s owner pays tax on the income the business earns. Florida has no personal income tax, so converting to a C corporation does not help a business owner in our state.

Even among the states that do not collect an individual income tax, Florida is different.

Other states without an individual income tax impose gross receipts or franchise tax on both pass-through businesses and corporations. In these situations, a mediation attorney in Houston, TX may be able to help.

Therefore, the owners of businesses in those several states are not disadvantaged – like Florida’s business owners – when they convert a pass-through business to a C corporation.

WHEN SHOULD YOU CHANGE THE STRUCTURE OF YOUR BUSINESS?

Only after consulting with a Central Florida business attorney and with your tax advisers should any Florida pass-through business be converted to a C corporation.

The single exception to the 20 percent deduction rule is that owners of service-oriented businesses may take advantage of the deduction only if their operations earn under $157,500 a year (for an unmarried owner) or less than $315,000 (for a married owner).

When will Florida’s business owners begin to see the effects of the Tax Cuts and Jobs Act of 2017? It could take some time. The legislation only became law in December, so many business owners have been revising their budgets and business plans for 2018.

The typical wage earner and the typical business owner may not have their personal taxes lowered before 2019. Take-home pay will rise immediately, but only slightly.

HOW CAN A BUSINESS ATTORNEY HELP?

Sound legal and tax advice from a business lawyer can protect a business owner from making the wrong decisions and from paying too much in taxes. Every business owner needs an attorney.

Do not wait until you need a lawyer’s help; that may be too late. You need a reliable legal partner at your side right now who will constantly be working on your behalf.

With the right business lawyer on your team, routine legal matters will be dealt with expeditiously and unanticipated legal issues will be handled by someone you know and trust.

If you own a business in the state of Florida, and if you have any questions regarding the Tax Cuts and Jobs Act or the structure of your business that have not been answered here, an experienced Daytona Beach business attorney can help.

By: Melody Lankford
After graduating from Davidson College, Melody Lankford earned her J.D. from Florida State University’s College of Law in 2004 and was admitted to the Florida Bar that same year. Ms. Lankford joined Raydon Corporation as in-house counsel in 2004. She worked there until 2012, when she founded the Lankford Law Firm. She is an experienced Daytona Beach small business attorney who offers sound legal counsel and experience-based insights to her business clients.