Heartland’s Tax Benefits
“Pass-through income” gets a big tax break under the tax law passed earlier this year. One of the central features of the tax law is a new 20 percent deduction on pass-through income. This deduction applies to businesses that operate as pass-through entities. Heartland Income Properties, as a limited liability company (LLC), is defined as a pass-through entity. As a “partnership” LLC, we are mandated to distribute 100% of our net income (See note below), and Heartland does not pay taxes on this distributed income.
This means LLCs generally don’t owe any taxes, leaving more of their earnings to be passed on in the form of dividends to investors, who are taxed on that income. As a result, the new tax law significantly benefits LLC unitholders.
That’s because LLC distributions are taxed at the individual unitholder’s rate, rather than the corporate rate. The 20 percent pass-through deduction reduces the top tax rate on LLC distributions from 37 percent to 29.6 percent for a taxpayer in the highest tax bracket. And unitholders in lower brackets would have even lower rates on the same dividends.
Unitholders can deduct that 20 percent of pass-through income from LLCs and other pass-through entities, even if they don’t itemize deductions on their federal tax return. This change could prove to be more significant for LLC investors than the across-the-board reductions in individual tax rates.
For investors in high tax brackets, the reduction from 37 percent to 29.6 percent on Heartland distributions can be significant in reducing investor’s overall tax burden.
Note – 100% of our net income is distributed. 90% to the investors and 10% to the Manager, Heartland Capital Partners. Please remember, though, that the investors own 100% of the assets of Heartland Income Properties. The Manager is only entitled to distributions from net income. Therefore, the Manager’s incentive is to generate as much income as possible for investors consistent with maintaining prudent risk.