Due to its highly touted “business friendly” nature, the new Republican tax bill—which recently passed both the House and Senate—has been highly anticipated by many business owners. Known as the “Tax Cuts and Jobs Act,” both the House and Senate versions reduce tax rates, adjust tax structures, and revamp tax benefits for businesses to stimulate economic growth.
While it's uncertain what the final bill will include, or if it will even pass, both versions include common elements, which prudent business owners should be aware of when planning 2017's year-end taxes. For example, you can 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, or do the exact opposite if your rate will be increased or if certain tax deductions will not be available to you in 2018. Just keep in mind—nothing is set in stone, yet.
One thing is clear though, proactive planning with a trusted advisor can help you navigate the changes, once they are set. Those who are educated and plan ahead can make the most of whatever the tax law does become through re-structuring or structuring new entities. So even if you are reading this and it's “too late” for 2017, contact us now so we can begin planning for 2018 early in the year.
Reduced corporate tax rate
Both the House and Senate versions of the tax bill reduce the top corporate tax rate from 35% to 20%. According to the bills, the new rate is actually “below the 22.5% average of the industrial world.” The current top rate is 35%, although the effective tax rate after deductions and expenses is 23%.
Limit corporate AMT
The corporate alternative minimum tax (AMT) is aimed at ensuring business owners pay at least some federal income tax. Currently, they pay the AMT only if their income tax liability is less than the current 20% AMT rate, in which case the corporation pays the difference. The House eliminates the AMT entirely, while the Senate keeps it, but expands exemption amounts at which the provision takes effect.
Changes to tax credits & deductions
The bills retain tax credits for research and low-income housing, but they limit the net interest expense deduction for C corporations. The proposals also repeal the Section 199 deduction for domestic production activities, along with most industry-specific deductions, business credits, and special exclusions.
The bills offer 100% bonus depreciation—for at least five years—for new investments in depreciable assets (except buildings constructed after September 27, 2017). Existing tax law allows 50% bonus depreciation for such assets, but this drops to 40% in 2018, 30% in 2019, after which it will be eliminated. So if you are considering investing in an otherwise depreciable asset, consider waiting until next year, when you may get a 100% deduction right away.
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 will cap 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%. Notably, lawmakers plan to add anti-abuse provisions to “prevent the recharacterization of personal income into business income.”
It appears that the new tax bill will likely impact W-2 employees negatively, but could provide significant benefits for 1099 Independent Contractors. As a business owner, you have the opportunity to structure how you get paid, and that's something we could work closely with you on in 2018 to maximize your tax benefits and minimize the greatest expense to your business and life.
Business owners looking to take advantage of the potential benefits this bill may bring should contact us as your Creative Business Lawyer® immediately to consider tax-savings strategies in the new year.
We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule. Or, schedule online.