Continue reading to see how businesses should learn to deal with the issues of the tax reform complexities.
The 2017 Tax Cuts and Jobs Act (TCJA) has been a substantial adjustment for businesses across the board. In general, most small and medium-sized businesses should have been able to take advantage of federal legislative changes to improve their 2018 effective tax position.
Between reduced rates, accelerated depreciation deductions, the new “Qualified Business Income” deduction for flow-through entities, and a host of other changes, the federally based opportunities were abundant. The same can’t necessarily be said, however, at the state level, as many states attempted to “decouple”—or not allow—the favorable federal changes. As a result, many states—including here in the northeast—scrambled to protect their challenged economic and budget climates.
At the business level, while the new Qualified Business Income deduction was indeed favorable, many business taxpayers were left puzzled as to why the new deduction didn’t apply to their industry, or if it applied to their business at all. While the deduction could prove to be powerful with careful planning, several industries were left watching the parade go by as their industries were excluded from it.
Without question, one of the most oft-discussed aspects of the TCJA concerning businesses was the issue of incorporation status, and whether it made sense to take advantage of the new law by changing from an LLC or S Corporation to a C Corporation. The pros and cons of a business’s tax structure can be highly dependent on its short and long-term strategy, particularly the exit plan of the shareholders.
It is certainly possible to achieve immediate tax savings with a restructuring plan, which can also be fact-specific industry by industry, but a restructuring plan to achieve short-term savings could prove catastrophic in the long-term. Key factors to assess for short and long-term objectives might include industry factors, multi-state nexus implications, international tax exposure, shareholder compensation, accounting methods, accounting for inventories, corporate dividend patterns, estate and gift tax planning, merger/acquisition potential, corporate and shareholder exit planning, and future sale versus transferring the business to the next generation. Just to name a few.
One of the biggest challenges the TCJA brought to the table was the umbrella of uncertainty it created for businesses and individuals alike. Although some legislative changes were supported by detailed regulations and guidance, the tax community still waits for guidance on a host of other very important changes. In many cases, taxpayers were unable to file their returns and were forced to extend the due date in hopes of guidance being published in the coming months. As an example, nearly 400 pages of regulations were just issued in the summer of 2019 in relation to sweeping international tax provisions. These challenges will continue to be a concern.
Businesses should spend the balance of 2019 exploring many of these issues; there is still ample time to carefully assess current legislation and take concrete action. While some decisions can be made before December 31, others might need to be made sooner to truly capitalize on potential benefits for 2019.
Legislation is constantly changing, and there doesn’t appear to be any end in sight in terms of legislative developments and the host of opportunities in front of the business community. Business owners should be working to prioritize goals and maximize tax benefits while the opportunities exist. The political climate and political leadership can pull back on or eliminate many of these opportunities with little to no warning, which is why planning now is essential. In the coming months, business leaders and families are encouraged to revisit their tax planning strategies, as well as exit and estate planning strategies, while the opportunities are abundant. More specifically, businesses exposed to multi-state or international taxes should ensure these matters are on the top of their priority list and challenge their prior strategies.
Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.