By Jamie Moore Marcario, Managing Attorney Thrive Law: a Business Law Boutique with Kathy Cregan, CEO Cregan and Co.
Although many progressives warned that No. 45’s tax plan would bring nothing but wailing and gnashing of teeth, the highly touted “business friendly” nature of the Republican tax bill allowed it to pass both the House and Senate, and many business owners are anxiously anticipating its effects. Known as the “Tax Cuts and Jobs Act,” the bill reduces tax rates, adjusts tax structures, and revamps tax benefits for businesses to stimulate economic growth.
No matter what your political leanings, the new tax bill includes certain elements of which prudent business owners should be aware when planning 2017’s year-end taxes and devising tax strategies for 2018. For example, as a business owner, the bill allows you to adopt tax-saving strategies like deferring income to 2018 or accelerating deductions into 2017 if your business’s marginal tax rate is likely to be lower in 2018. You can also do the exact opposite if the new bill means you’ll experience a tax rate increase or if certain tax deductions will be unavailable to you in the new year. Wicked or windfall? You be the judge.
One thing is clear: proactive planning with a trusted advisor can help you navigate the ebb and flow of the changing tax waters. If you take time to educate yourself and plan ahead, you’ll be well-positioned to make the most of the new tax law by re-structuring existing entities or even creating and properly structuring new ones. So even if you’re reading this and thinking “too late for 2017,” give Thrive Law a call today! We can help you strategize your 2018 tax year now so you can take advantage the windfall components of the new law.
For your reading pleasure, we’ve included a short summary of what made it to the final tax bill:
Reduced Corporate Tax Rate
The final version of the tax bill reduces the top corporate tax rate from 35% to 20%. The White House word is that the new rate is actually “below the 22.5% average of the industrial world.” (Note: The current top rate is 35%, although the effective tax rate after deductions and expenses is 23%.)
Limited Corporate AMT
The corporate alternative minimum tax (AMT) is aimed at ensuring business owners pay at least some federal income tax. Currently, you pay AMT only if your income tax liability is less than the current 20% AMT rate in which case your corporation pays the difference. While the House version of the bill repealed the AMT entirely, the final compromise version keeps it but expands the exemption amounts at which the provision takes effect.
Changes to Tax Credits & Deductions
The final bill retains tax credits for research and low-income housing, but they limit the net-interest expense deduction for C corporations. The bill also repeals the Section 199 deduction for domestic production activities, along with most industry-specific deductions, business credits, and special exclusions.
Have you been putting off investing in an ordinarily depreciable asset, such as a building, capital equipment or some other BIG corporate purchase? Consider going for it in 2018 because you might get a 100% deduction right away! The new tax law offers 100% bonus depreciation—for at least five years—for investments in depreciable assets (except buildings constructed after September 27, 2017), whereas the old law allowed 50% bonus depreciation for such assets, which dropped to 40% the following year and 30% the year after, after which depreciation would be eliminated. Even better, under the new tax law: (1) depreciable property no longer has to be “new” to qualify, (2) the maximum deduction increased from $1M to $2.5M, and (3) the expanded definition of “Qualified Real Property” now includes more major improvements to nonresidential real property, such as rooftops, HVACs, and the like.
Cap on Tax Rate for Pass-Through Businesses
For owners of so-called “pass-through” businesses, including sole proprietorships, partnerships, S-corporations, and LLCs, the bill caps the top tax rate at 25%. Currently, these entities are taxed at the owner(s) personal income rate, which can be up to 39.6%. Not only that, the new law expands the number and nature of entertainment deductions available to pass-through business owners who regularly break bread over working lunches and dinners with their employees and clients.
Negative Effect on W-2 Employees
Although the new tax bill will likely affect W-2 employees negatively, it could provide significant benefits for 1099 Independent Contractors. As a business owner, you have the opportunity to structure the way your business pays you. The Legal Team at Thrive Law can work closely with you in 2018 to maximize the potential tax benefits of these changes and minimize your tax obligation—the biggest expense to your business, and, if not properly managed, the largest financial burden you will bear over your lifetime—even greater than your housing, education or healthcare costs.
Business owners and creative entrepreneurs looking to take advantage of the potential benefits this bill should contact the Thrive Law legal team as early in the year as possible so we can develop tax-savings strategies that work for you. Call us to schedule a Healthy Business Check-Up Today: 727.300.1990. (Mention that you read this article, and get your Thrive Law Check-Up, a $1,250.00 value, for free! Valid January 22, 2018 until March 31, 2018.)
This article is an educational service of Thrive LawTM, a business law boutique. It does not constitute legal or tax advice or imply an attorney-client or accountant-client relationship. At Thrive Law, we offer a full spectrum of legal services for businesses and are equipped to help you make the wisest choices about your business dealings while you’re alive and well or in the event of your incapacity or death. We also offer a Healthy Business & Creative Checkup for ongoing ventures, as well as outsourced general counsel plans for businesses who need a legal team on speed dial. Contact us today to schedule: 727.300.1990 or firstname.lastname@example.org. We cannot wait to meet you!
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