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Client Alert: Partnership & LLC Owners' Profits Affected By New Tax Law

Anomaly in Tax Law Puts Owners at Disadvantage

As you may well know, starting in 2018, the new Tax Law of 2017 has conferred a reduced income tax rate upon the business profits of owners deriving profits from entities that are accorded flow-through tax treatment (such as Subchapter S Corporations, Partnerships and LLC’s), enabling those profits to be taxed at 29.6% instead of the maximum 37% Federal rates.

It is less known, however, that these new tax benefits can be partially and even totally eliminated by a prescribed calculation which is a function of the Form W-2 wages paid by the subject entity. Since the compensation paid to the owners of a Subchapter S is considered Form W-2 wages, but those same amounts paid by a Partnership/LLC are not, the manner of this calculation has created an anomaly in the new law, which we believe has inadvertently put Partnership/LLC owners at a disadvantage in qualifying for the new reduced rate.

To those of you who find themselves in this situation, we wanted you to be aware of it, and let you know that we have been formulating viable solutions to enable you to take preemptive measures to counteract this untoward result.

We Can Help You

If you suspect that you may need assistance in this regard and would like to discuss this further, please contact Lance Rodgers or any of our other colleagues in the Tax & Business Planning Group, and we would welcome the opportunity to be of service in strategizing with you, your accountants and other advisors.

Barack Ferrazzano Tax & Business Planning Group

Encompassing a wide range of in-depth experience, Barack Ferrazzano's Tax and Business Planning Group represents clients in a multitude of tax-oriented practice areas, including domestic and international tax and business planning, estate, gift and generation-skipping taxation, and the successful resolution of federal tax controversies. Our tax attorneys are highly skilled in identifying creative tax solutions for complex problems arising in the areas of domestic planning, international tax matters and federal tax controversy matters, whether for the benefit of publicly held or private corporate or real estate clients, wealthy and entrepreneurially-minded individuals, partnerships, limited liability companies and other business entities, or tax-exempt organizations.

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