Message To Self-Employed Looking for New Tax Break: Look Before You LLC

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By Andy Metzger

BOSTON — Hoping to cash in on the new federal tax law, some Bay State workers have shown a growing interest in forming limited liability companies in time for the tax year that starts Monday, but a top state official is urging them to look before they LLC.

The “key advantage” for small business owners under the new law passed by congressional Republicans is a provision enabling them to reduce the taxable portion of their “pass through” income by 20 percent, said David Johnson, the Massachusetts and Rhode Island chapter president of the National Association of Tax Professionals.

That advantage might make it more lucrative for ride-hailing service drivers, hairdressers, and artisans who previously did business on their own to register as an LLC. But Massachusetts Secretary of State William Galvin said there is some uncertainty about what lines of work will be eligible for the tax break.

“If you’re going to create it for the purpose of taxes you might want to do it this week, but there’s no certainty of it. That’s why I say we strongly recommend that people consult with their individual tax adviser before they make a strategic move,” Galvin said. “But some people have concluded that it will help. We’ve had an increase in interest in forming LLCs.”

An opponent of the tax overhaul signed by President Donald Trump last week, Galvin acknowledged that it offers savings for entities that “pass through” income to the owner, such as LLCs, although he said there are some unanswered questions about what particular businesses can take advantage of that.

“People are seeking clarity,” said Galvin. He said, “Accountants are working very hard this week answering questions from their clients.”

Congressman Richard Neal, a Springfield Democrat and his party’s ranking member on the U.S. House Committee on Ways and Means, is seeking clarity from the Internal Revenue Service about what occupations can take advantage of the tax savings, according to Galvin.

“The Congress put some limitations – which are primarily income – but they also limited certain categories of LLCs, such as simple real estate LLCs,” Galvin told State House News Service.

Chris Carlozzi, head of the Massachusetts chapter of the National Federation of Independent Business (NFIB), said the organization lobbied for small businesses to benefit from the legislation and he hopes the tax law will enable his membership to realize “significant savings,” which they could reinvest in higher wages, new equipment, and expansion.

While creating an LLC might yield tax savings, there is a price, too, which helps fill state coffers. The state charges a $500 annual fee for an LLC, and they can be registered online for an additional $20, according to the secretary of state’s office.

“It is faster and easier than ever to form an LLC in Massachusetts,” Galvin said in a statement. “I encourage anyone who will be submitting certificates by the end of the year to beat the rush and use our online filing system.”

Deciding how to organize a business is situationally dependent and varies from entity to entity, said Carlozzi, who agreed that the state’s online filing system can “certainly be helpful.”

The new law cuts the corporate tax rate from 35 percent to 21 percent, and Trump said it would make the tax code “simpler and more fair for everyday Americans.”

Galvin said that “notwithstanding” opportunities to save money through the formation of LLCs, the legislation “hurts average people” and will increase the country’s deficit.

The law caps at $10,000 the amount of state and local income and property tax deductions that people can take.

“It’s going to hurt public education in a number of communities because people are going to be very reluctant to see increases in their real estate taxes, which they won’t be able to deduct,” Galvin said. “It’s going to put people in a worse position. It’s just bad policy. It’s anti-Massachusetts.”