Would it surprise you to learn that American businesses lose $400 billion in productivity complying with tax laws? Or that we spend 8.9 billion hours preparing and filing taxes?
Perhaps not. In 1938, the tax code ran 504 pages. By 2014, it weighed in at 74,608 pages. The 2018 Tax Cuts and Jobs Act — the first major tax reform legislation to pass since the Reagan Administration — has offered businesses and individuals significant tax relief. But it hasn’t relieved some of the confusion that business owners face going forward. We’re highlighting four of the most important considerations here:
1. Your benefits depend on your corporate structure.
The corporate tax rate dropped from 35 percent to 21 percent. This cut was designed to enhance cash flow so businesses, especially small businesses, can upgrade, expand and hire. It’s also an enticement for big overseas corporations to move here, making the U.S. what one commentator calls “a tax-haven country.”
We work with our clients and their tax advisers to determine how these changes affect their budgeting and planning, especially for areas like capital expenditures, hiring and compensation. As you plan, it’s important to understand how the new law affects different types of businesses — i.e., partnership, LLC, S Corporation or C Corporation — and what type of business you’re in.
2. Not every business gets a 20 percent tax deduction.
C Corporations are taxed at a corporate rate, which traditionally have enjoyed substantial deductions. If you have an S Corporation, sole proprietorship or partnership, however, the new law has a bigger impact on you. As a “pass-through” company, your earnings and expenses pass through to your personal tax returns. They’re taxed at individual rates and now you also get a 20 percent deduction on your taxable income.
Some professional services, however — i.e., law, accounting or medical practices — don’t get the same advantages. They are usually closely held and not inclined to hire a substantial number of new people. In fact, individuals in this category only get the 20 percent deduction if their annual income is below $157,000 (or $315,000 for a married couple).
3. Buying business property or equipment? You get more relief.
Interest on business-related financing will still be deductible, up to 30 percent of taxable income.
The bonus depreciation rules have changed. Now, for qualified property placed in service between Sept. 17, 2017 and Jan. 1, 2023 — equipment and software, for example — you can deduct 100 percent of the purchase or leasing price in the first year. That’s double the previous rate.
If you buy tangible, depreciable property for business purposes, the expensing parameters under Section 179 have also changed. They used to be deductible to a maximum of $520,000 (not to exceed taxable income). The new maximum is $1 million, with a phase-out threshold of $2.5 million.
What’s more, you can no longer carry back net operating losses; instead, you can carry them forward indefinitely, up to a limit of 80 percent of taxable income.
While the focus of this article is on business taxation, individuals will also see a modest rise in after-tax income and significant changes to deductions. The new law has important implications on estates, gifting, trusts, retirement plans and investments — all good reasons to review your plans and your portfolio with your advisers.
4. The time to review your plans is now.
Tax reform can affect many aspects of your plans, from expansion and capital equipment investment to hiring and payroll management. In turn, you’ll also see an impact on your personal taxes and investment choices. And, as with any major legislative change, the complexities and nuances can generate misunderstanding and misinformation.
So the time is right to review your big picture with your entire team of advisers: your accountant, attorney, insurance agent and banker. Take a fresh look at your plans from their perspectives. Make sure that fresh cash flow not only helps your long-range plans move forward, but also translates efficiently into your day-to-day operations.
Together, your team can help you get maximum benefit of tax reform, so you can make the most of the opportunity.
Opinions expressed are that of the author and not Webster Bank N.A. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors with respect to your personal situation.
Timothy D. Bergstrom is Hartford regional president and head of business banking for Connecticut for Webster Bank. Bergstrom can be reached at firstname.lastname@example.org.