Business Roundup: How Might the New Tax Law Impact Your Business?
Just before the New Year, Congress voted to enact the most sweeping U.S. tax reform bill in decades, the Tax Cuts and Jobs Act (or “TCJA”). So how will the new tax bill impact your business? That depends largely on your business’s entity type, and where your company does the majority of its business.
Some key provisions of the TCJA include:
- A permanent reduction in the U.S. federal corporate income tax rate from 35% to 21%. This constitutes the lowest corporate rate in the United States in nearly 80 years, and is significantly lower than those in other major markets. For example, China is at 25%, Germany, at 30%, Japan, at 31%, France, at 33% and Spain, at 25%.While most individual rate deductions under the TCJA expire over time, this deduction looks to be permanent. This is welcome news for any existing C corporation, or for any owners of the typical pass-through entities (partnerships, S corporations, and limited liability companies) looking to expand their business and convert to a C corporation.
- Reduced tax rates (ranging up to 29.6%) for pass-through entities. Pass-through entities include most partnerships, limited liability companies, and S corporations, wherein the owners are not subject to U.S. federal corporate income taxes, but are instead taxed on the entity’s profits “passed through” on their own individual returns. Although a majority of these companies are closely held, some are as large as publicly traded companies. Historically, owners of these companies have paid high taxes on such profits at the individual rates, some as high as 39.6%. The TCJA provides various deductions, subject to certain restrictions, that would effectively reduce the top tax rate to 29.6% of the profits of most pass-through entities.
- Immediate expensing of the full costs of equipment bought before 2023. The TCJA allows for most tangible property, other than real estate, acquired after September 27, 2017, and before January 1, 2023 to be fully expensed during the first tax year in which it is used for the business. The provision applies to both new and used asset, provided it is the first use in the business for that taxpaying person or entity. After 2023, the deduction will scaled own 20% each year, with no special expensing allowed for 2027 and subsequent years. This provision will make it more attractive to structure acquisitions of equipment-intensive business as asset purchases, rather than stock purchases, as the purchaser will immediately be able to expense all newly acquired equipment.
This list is by no means comprehensive, and each business owner and individual taxpayer should consult their respective tax professionals to thoroughly outline the impact of the TCJA on the business and on the individual owners of the business. For assistance with structuring your entity, corporate governance, business disputes, and all other business matters, please contact us as Khashayar Law Group and LOKK Legal.