When starting a business in Ohio, there are a few legal requirements entrepreneurs must consider before they can set up shop. One of the main things businessowners need to decide is the business type they want to operate under. Most entrepreneurs choose an LLC. However, this comes with a wealth of other options. This includes whether or not they want to elect to be treated as a corporation, and what kind of corporation that would be. Why then do so many people choose S-corps?
According to Forbes, an S-Corp is not subject to taxes. Instead, the shareholders pay taxes on the profits taken from the business. This naturally makes an attractive option for businesspeople who focus on reinvesting in the business rather than paying out high salaries. Even though S-Corps do not pay taxes, businessowners do need to file a return for them every year.
CNBC also notes that there is a brand-new tax break of up to 20% that S-Corp businessowners can take advantage of starting with 2018 tax returns. However, not everyone will qualify. Regardless of the industry a person works in, they must have a taxable income less than $315,000 if married and less than $157,000 if single. Businessowners who make more than this may struggle to get the tax break.
While the tax benefits are tempting, accountants warn that businessowners should think twice before making big changes to their business just to qualify. This could raise red flags with the IRS and no one wants to be under the IRS’ scrutiny. It may be a better idea to make gradual changes, or to elect to be treated as an S-Corp for the next LLC created. Note also that this deduction is only available until year-end 2025.