Tax Reform and Impacts to Business Owners

March Madness can be unpredictable, just like life. And Americans like to root for the underdog. Many Cinderella teams have captured our hearts since the first NCAA tournament in 1939. North Carolina State was a 6 seed that won it all in 1983. Butler almost beat Duke at the buzzer 61-59 in 2011 – 8 seed versus number 1. And this year a history making 16 seed took out a 1 when UMBC dominated Virginia, two 13 seeds defeated 4 seeds (Buffalo over Arizona and Marshall over Wichita). And because the Tourney is still on, I won’t talk about the others for fear of jinxing them.

We build March Madness brackets. We build plans for retirement and financial success. Both provide thrills. Both have uncertainty. However, one has much bigger stakes, and hopefully, demands greater focus and energy. May what remains of your bracket be successful. More importantly, may your future be secure and prosperous.

The Tax Cuts and Jobs Act represents one of the most significant tax changes over the past three decades. It impacts all taxpayers. This article focuses the possible implications to business owners, and briefly summarizes related details.

  • How does this impact me? – Tax simplification, while a worthy goal, continues to be an oxymoron. And rather than talk about generalities of “most” or “some” people, cut to the chase and meet with your CPA and other advisors and fine-tune a plan specific to you.
  • Flexible and adaptable – Be prepared for change. The 1,000-page legislation will need reform of its own to fix or clarify. And expect revision as the political pendulum shifts direction.
  • Global tax shakeup – You don’t always want to be at the top of the list. US moves from being the highest corporate tax jurisdictions of the 35 developed countries, to number thirteen. Tax reduction has global and domestic economic implications – stimulative for the short-term, however, some worry long-term if budget deficits persist. Will lower corporate taxes attract more interest by foreign investors and might this be an opportunity for private companies to sell?

Lower personal tax brackets and simplified deductions – Many individuals may be paying less taxes and filing may be easier. However, taxpayers in high income tax states may pay more due to limited deductions. Rates have come down until 2025. And three out of four taxpayers may be taking the standard deduction rather than itemizing. The standard deduction is increased to $12,000 for single and $24,000 for married filing jointly.

Corporate taxes – The most notable change has been the reduction of the highest corporate tax rate from 35% down to 21%. And corporate alternative minimum taxation was repealed. Including state corporate taxes, the average US company pays 25.75% versus 38.9% before tax reform. The intent was to increase business cash flow (less taxes) to encourage increased plant and equipment investment and hire more employees.

Qualified business income deduction – Some companies might be tempted to corporate entities given the lower corporate tax. The qualified business income deduction was meant to help address this. Pass thru entities (Sub S, LLCs, partnerships, sole props, etc.) may be eligible for a deduction of 20% of their qualified business income. Eligible businesses include manufacturing and real estate companies, but not professional services. Talk to your CPA to determine if you’re business is eligible. Professional services including doctors, lawyers, accountants, financial advisors, performing arts, athletes, etc. are ineligible. However, architects and engineers may be eligible for the deduction.

Repatriation – There’s an incentive for companies to bring back business profits to the US that may fuel spending and investment.  The one-time repatriation tax is 15.5% for liquid and 8% for illiquid assets.

Higher expensing – Businesses may be eligible to expense up to 100% of certain business assets acquired through 2022. This means increased free cash flow for operations or to fund acquisition.

Miscellaneous deductions – Deduction for business related entertainment (e.g. sporting events) has been spiked, but businesses are eligible to deduct 50% of qualified meals. Deduction for business interest expenses is limited to 30% of adjusted taxable income.

This is a summary of the tax reform. It’s difficult to generalize on how taxpayers should cope with the new rules. Consult with your CPA or enrolled agent for more details and specific advice relevant to your situation. They’re going to be busy with preparation of 2017 returns, but not too busy to schedule an appointment to review 2018 and beyond for you to pay the minimum tax legally required.

About Brian Loy

Brian Loy writes insightful and inspiring articles about the ever-changing world of personal finance and the global trends that affect the risk and return on investments and shape the financial- and retirement-planning process.
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