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Pass-throughs versus C corporations under the new tax law

C corps may become a bit more popular under the new regime given the big reduction in their tax rate, but pass-throughs still seem to have the upper hand, advisers say


The new federal tax law has changed the calculus around the selection of business entities by financial advisers and their clients.


Advisers trying to determine whether it's best to be a pass-through entity or a C corporation under the new regime will find the answer likely isn't as straightforward as a simple math calculation. The considerations are complex and may go beyond near-term tax savings to longer-term questions about future business goals and decisions.


"There are new levels of convolution that provide opportunity but also confusion," said Leon LaBrecque, managing partner at LJPR Financial Advisors.


"In the past I told people to go pass-through, not C corp, for most startups," Mr. LaBrecque added. "Suddenly, that becomes less prevalent."


Roughly 92% of private businesses in the U.S. are structured as pass-through entities. Pass-throughs, such as limited liability companies, partnerships and sole proprietorships, pass their business income through to their owners' tax returns. Profits are taxed at the owner's income-tax rate.


The tax law slightly reduced marginal income-tax rates, so taxes on pass-through business income will automatically be lower for most Americans. In addition, the law grants a tax break to pass-throughs in the form of a 20% deduction on qualified business income. Some may not qualify for that deduction, though, or may get a lesser deduction, because of