Quick Question (Q2) – When asked: What is the biggest change in tax law (TCJA) from last year and how will it impact my growing businesses?
My answer is cash flow! When I hear the words “growing business” I go right to cash flow. Growth can actually bring serious problems to a business, and any problem is made worse by poor cash flow.
So what does that have to do with the new tax law? A lot! The new tax law has brought new wrinkles into the “entity choice” conversation – the biggest macro pieces are:
1. the new corporate tax rate of 21%; and,
2. Section 199A which allows for a potential 20% haircut on Qualified Business Income from “flow-through” entities. For instance, if my interest in an LLC generates $100,000 of income, I may be able to take a $20,000 deduction – thereby only paying income tax on $80,000. If only it were that simple…
A business owner would be wise to evaluate these provision because one or the other, or both – depending on circumstances – have the ability to increase cash flow in your business and to ownership.
We’ll gloss over #1 – is using a C-Corp and taking advantage of the lower rate right for my business? As always, it depends… check out our previous post on that here.
So lets jump to #2 – Section 199A – which applies to flow through entities e.g. S-Corporations, Partnerships, Sole-Proprietors, most LLCs, REITs and Trusts; and includes operating business (e.g. construction, consultants, retail, etc.) as well as real estate endeavors, those involved in the rental of real estate, whether residential or commercial. This is going to be enormously impactful to the majority of the businesses and business owners we work with.
There are a tremendous amount of factors, qualifying businesses and income stream considerations, income thresholds, phaseouts, qualifiers such as tangible assets and W2 wages paid that must be considered.
While I could go on and on about those factors, I’ll let “Tax Geek” Tony Nitti take it from here – it only took him 24 pages to put together what I feel is the best, succinct, summary of this part of the new tax law. Further, on Saturday, January 19, 2019 – less than 10 days before the start of “tax season” the IRS issued their finalized regs on Section 199A – again, I’ll defer to Tony who quickly jotted down 12,000 words to summarize. Also, we finally have some literature on the rental component, the IRS put out safe harbor factors on Saturday 1/19/19 as well.
So what does this mean to business owners? Plan! Have conversations with your advisors. Make sure that your income structure and income tax picture are designed to take advantage and be as efficient as possible.
The individual (not corporate) components of the new tax bill passed in December 2017, have a relatively short shelf life – they expire in 2025 – so please take advantage now, don’t delay.