2018 Business Tax Changes

2018 Business Tax Changes

A huge part of the Tax Cuts and Jobs Act effective in 2018, is the major reduction in the C Corporation tax rate.

it was slashed from 35 percent to 21 percent. If you’re a pass-through entity right now, you might be wondering if you’d be better off as a C Corp to take advantage of that 21% rate.

If you are looking to re-invest profits back into the business, then a C Corporation might be the optimal business structure – this has always been the conventional guidance but it’s even more true now with the tax rate at 21 percent.

If you are looking to take a bulk of the profits out of the business and put them in your own pocket, a pass-through entity is still most likely better.

The bottom line is this is a good time to think about the tax changes and your business structure. Keep an eye out for when the IRS releases additional guidance. This is key to understanding the 2018 tax changes for business.

The truth is that nobody....including our firm...really understands how the changes will be interpreted by the IRS.

A primary reason to form an LLC or Corporation has always been the ability to minimize the personal liability of business owners from things that happen in the business.

Despite the 2018 tax law changes, this remains true.

The most important reason to form a business entity isn’t necessarily to save a bit on taxes; instead it’s to protect your personal assets for years to come.

20% Deduction for Pass-through Income

The law creates a brand new tax deduction for owners of pass-through entities like sole proprietors, members of LLCs, partners in partnerships and shareholders in S Corporations. For taxable years beginning after December 31, 2017 and before January 1, 2026, these individuals can generally deduct 20% of their qualified business income (QBI) from a pass-through entity. Sounds good, right? And it is — but there are a few details to know:

  • Haven’t heard of QBI before? You’ll become familiar with it now. QBI is the net amount of income, gain, deduction, and loss with respect to the trade or business. It does not include investment-related income/loss (i.e. capital gain/loss, dividend income or interest income).
  • Service business limitations: The law places limitations on virtually every occupation that provides a personal service (the two notable exceptions are engineering and architecture). If your pass-through business is a service business, like consulting or a medical practice, there are limitations. If your taxable income exceeds a threshold of $157,500 for single filers and $315,000 for joint filers, the deduction is reduced; if income exceeds $207,500 for single files and $415,000 for joint filers, there’s no deduction. So, if your income level is below these thresholds, there are no worries. But if you’re in a highly-paid field, you may not qualify for the deduction. The details and applications are still murky, so keep an eye out for further guidance from the IRS (and talk to your tax advisor!).
  • W2 wage limitation: When your taxable income is greater than the thresholds above, your 20 percent deduction is limited to the W-2 limitation. This is the greater of 50 percent of your allocable share of the company’s W-2 wages, or 25 percent of your share of the firms W-2 wages, plus 2.5 percent of your share of the company’s unadjusted basis of all qualified property.

Strategic Business Tax Planning is much more than a tool to obtain financing. If you still have all your plans and ideas locked up inside your head, preparing a strategic plan can help you clarify your company's direction. It can ensure that your key leaders are all on the same page, and keeps both management and staff focused on the tasks at hand.

A Strategic Plan is often needed when...

  • Starting a new venture, product or service

  • Expanding a current organization, product or service

  • Buying a new business, product or service

  • Turning around a declining business

Strategic Planning provides a blueprint, describing your company, its products, the competitive environment, management team, financial health, and business risks.

The plan allows you to...

  1. Identify and describe the target customer profile, features, advantages and benefits of your new venture, product or service.

  2. Justify that your plans are credible by fully researching the need being filled with your new venture.

  3. Develop marketing plans including full descriptions of targeted promotional campaigns with implementation timelines. You also get to examine market conditions, the nature of your customers, as well as your competitors, sales potential, and projected results of your promotional campaigns.

  4. Develop staffing plans including identifying the key players, skills, attitudes and expertise needed to build the venture.

  5. Develop management plans including full descriptions of management systems and timelines for implementation.

  6. Develop financial plans including projected startup costs, operating costs, revenue, profits, and break-even analysis for the first 3 to 5 years.

    Projected financial plans allow you to effectively predict upcoming problems, or prevent them. In other words, the perspective gained through your Strategic Business Plan can make a significant contribution to your company's success, and help you get the funding you require. In fact, most lending institutions and private investors will not even talk to you without a solid financial plan.

  7. Identify building and equipment needs including vendors and cost estimates.

  8. Formulate company milestones including timelines for upcoming products and services in development.

Remember: Failing to plan is planning to fail.

Let us help you develop a powerful Strategic Business Plan that drives your business to the level of success you deserve.

Request a free consultation below.

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