When the 2017 Tax Cuts and Jobs Act (TCJA) went into effect, there were a lot of benefits for businesses and individuals in the area of corporate and personal taxes. Many new deductions were created for S-Corps and owners of pass-through entities. Along with the benefits, there is still a layer of complexity to the new tax laws that many privately held organizations are still working to understand and navigate. To complicate matters, this tax reform will revert back to the tax code pre-2018 unless further legislation extends the provisions beyond 2025. This uncertainty makes it that much more important that strategies around the new tax law are carefully considered before they are implemented.
Here are a few areas that may specifically impact your closely-held business.
Business Loss Limitations
Business owners and investors of a pass-through entity and who use their business losses to offset income are now limited to $250,000 for individual filers and $500,000 for joint filers. This limitation will mean that many businesses will be revisiting their tax strategy. It may also make some S corps and LLCs reconsider their entity structure.
Corporate Structure Options
Many businesses are considering their corporate structure options in light of the tax reform. The reduced tax rate is making it attractive to convert to a C corp, however more than just tax implications need to be considered before making this decision. Overall business strategies need to be thoroughly considered. Once this change is made, you cannot revert back to a previous entity.
Exit Strategy Considerations
With all of the options the TCJA has created, business owners may speed up or delay plans to exit their business. With available deductions and corporate restructuring options, we will see businesses review their tax strategies and make adjustments that will affect the value of their business. Complete analysis of the possible scenarios is critical to make the best decision for your business and legacy.
When you talk to your business advisor, be sure to ask how the tax reform is going to impact your privately held business and your growth strategy. This could also affect how you incentivize your employees, decisions about capital expenditures and how you raise capital in the future. It’s important to keep all of this in mind for tax planning and day-to-day operations. Proper implementation is key and LvHJ’s business advisory team is happy to help.