On December 22, 2017, the United States Congress passed the Tax Cuts and Jobs Act, the largest tax reform bill in over 30 years, principally lowering taxes across the board. Under the tax reform bill, corporations will see their tax rates reduced permanently. It is hoped that this major change will propel GDP growth, creating greater economic opportunities overall. With this new tax reform, it is important to determine how business owners can take advantage of what the new tax law has to offer.
Below are some of the most important tax law changes that impact businesses and their owners:
While the lower rate on C Corp earnings may seem appealing, after-tax profits that are left in the C Corp are subject to dividend tax rates if owners take them from the business. When the two taxes are combined, they are likely to be higher than what owners would pay if they operate a pass-through entity.
When evaluating whether to make any changes to your business entity type due to the new tax rates, there are several things to consider:
Different types of taxes that should be considered by business owners:
The newly implemented Tax Cuts and Jobs Act has been viewed positively in terms of business valuation. According to a recent article from Ernest & Young: “Investors appear to view the changes positively, and major stock exchanges have reached record high valuations in part due to the anticipated tax changes.” This positive impact on the market bodes well for owners who are planning to sell their businesses externally in the near future.
However, tax planning still needs to be done in order to minimize taxes on the transaction. For internal transfers, business owners should engage their CPA in tax planning activities and discuss the tax law changes, taking into consideration both their short- and long-term plans.
Now is an excellent time to review both current and future exit plans for both owners and their businesses.