Income-Based Effective Tax Rates and Choice-of-Entity Considerations under the 2017 Tax Act

Bradley T. Borden

National Tax Journal, 2018, vol. 71, issue 4, 613-634

Abstract: This article uses a simple simulation to graphically present the effective tax rates at various income levels for small businesses (those with taxable income of $1,000,000 or less) under the Tax Cuts and Jobs Act of 2017 (TCJA) and compares them to effective tax rates at various income levels for small businesses prior to the TCJA. The graphical presentation reveals that the various tax rates under the TCJA complicate choice-of-entity analyses and undermine general rule-of-thumb concepts that drove choice-of-entity decisions prior to the TCJA. Under the TCJA, choice-of-entity preferences will likely be highly situational and may feature combinations of various entities. Using a typical business situation, this article illustrates how different types of entity can cause the effective tax rate on business income at the $1,000,000 level to vary from 21.36 to 34.60 percent. The most favorable effective rate results from an entity structure that combines a C corporation and passthrough entity. Rate variations based upon entity combinations portend subtle, carefully calculated, shifts in choice-of-entity actions following the TCJA.

Date: 2018
References: Add references at CitEc
Citations:

Downloads: (external link)
https://doi.org/10.17310/ntj.2018.4.02 (text/html)
Access is restricted to subscribers and members of the National Tax Association.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ntj:journl:v:71:y:2018:i:4:p:613-634

Access Statistics for this article

National Tax Journal is currently edited by Stacy Dickert-Conlin and William M. Gentry

More articles in National Tax Journal from National Tax Association, National Tax Journal Contact information at EDIRC.
Bibliographic data for series maintained by The University of Chicago Press ().