At first glance, you wouldn’t think this news matters that much as most small businesses don’t pay Interest/Dividends tax. So, what’s changing? In 2022 the rate is 5%, and then 4% in 2023, 3% in 2024, 2% in 2025, 1% in 2026, and then completely repealed after 2026.
Although New Hampshire has NO personal income tax, a common technique used in other states is to reduce social security taxes by taking distributions from their S Corporations rather than wages.
Because of this ‘double tax’ of having to pay both business profits tax and interest/dividends tax when taking distributions along with the current 20% deduction for Qualified Business income on 1040 tax returns, we have generally advised our clients to be operating as LLC’s taxes as sole proprietors or partnerships.
With this eventual repeal of the Interest/Dividends Tax and phaseout over the next 5 years and the expected eventual expiration of the QBI deduction currently set for after 2025, S Corporation may suddenly look like a better choice of a tax entity.
Strategically, the S Corporation could even start ‘planning’ for this now, by simply letting their profits sit in the company and take them out in 2026 or later.
Every small business owner’s situation is going to be different, but these are things to consider, particularly if you are looking to establish a new business / tax entity today.
For more information, go to our website at www.appletreebusiness.com and schedule an appointment with one of our professionals today.