Learn about – and stretch – your increased capacity
As the full effect of the 2017 Tax Cuts and Jobs Act comes into focus, small-business owners all over the country are wondering what the real impact will be on their operations. The good news is that overall, the consequences of the new tax law are likely to improve your cash flow and create openings for you to decide the best use of that increased capacity.
As always, knowledge is power. The best thing you can do is become informed about your options so you can maximize any available opportunities. Here are three banking strategies to consider in light of the new law’s provisions.
1. Full Expensing: Take Advantage of It
Full expensing allows businesses to deduct the full value of investments from their tax liability in the year those investments are made. Reach out to your CPA for details, but in short, you can now write off the entire value of your investments in capital assets and equipment.
This should make it easier to make purchasing decisions on a rational basis, while before you might have avoided making capital investments because of the complicated tax depreciation schedule. Now, every dollar you put toward new investments and business growth will reduce your tax liability with limited hassle.
Key Takeaway: If you take advantage of full expensing, your taxable income is likely to go down, and what’s left will be subject to a reduced corporate tax rate (down to 21% from 35%). If this improves your cash flow in real terms, be sure you create a plan for that money and dedicate those funds to a specific role in the future of your business.
2. Increased Capacity: Get to Those Long-Delayed Improvements
Increased capacity born from a lower overall tax rate can create the right conditions for you to finally get to that list of improvements you’ve perhaps been putting off.
New buying power can have a big impact on your business. If you’ve been meaning to make a key hire, get to some maintenance projects, update your software, upgrade your equipment, expand your inventory or otherwise scale up, this may be a good time to set the ball in motion.
Key Takeaway: Whether you use all cash to take your business to the next level, or you learn that your financing options are attractive and can extend your buying power even further, what’s important is that you explore what is possible. Then make a plan that suits your business goals.
3. Your Business Structure: Does the New Law Favor It?
Many taxpayers who claim pass-through income through such business structures as sole proprietorships, LLCs, partnerships or S corporations will benefit under the new tax law. Taxpayers who file under one of these categories, which encompass a wide range of income earners, can deduct 20% of qualified business income from their personal income tax. In other words, your tax entity type may make it so that you’re taxed on only 80% of pass-through income.
Independent contractors, freelancers and self-employed people may claim pass-through income. This is true even if you work for yourself and don’t have any employees. For example, a graphic designer who works for a corporation on a 1099 contract basis and operates through a sole proprietorship generates pass-through income, as does a self-employed electrician who files taxes as an LLC.
There is a cap on how much pass-through income high earners working in what are deemed “professional services” can deduct. For the purposes of the new tax law, this category includes those in the accounting, athletics, performing arts, consulting, health and financial services fields, or any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners.
In practical terms, this provision means that high-earning business owners, like partners in large law or accounting firms, likely won’t be able to deduct their pass-through income, but those operating in smaller firms and earning lower incomes may be able to.
For 2018, couples earning less than $315,000 or singles earning less than $157,500 generally qualify for the full 20% deduction, while couples earning more than $415,000 or singles earning more than $207,500 do not qualify. (Married couples earning between $315,000 and $415,000 and singles earning between $157,500 and $207,500 will see their deduction phased out in proportion to their income – consult the IRS or your CPA for details.)
Key Takeaway: Your business entity type matters under the new tax law. A good CPA can work with you to understand the costs versus the benefits that changing your legal entity could entail. While you’re at it, your business banker can take a fresh look at your loan terms and any lines of credit you may already have in place. They can make sure you’re in the best loan products available to you and also guide you through the paperwork to document a change from one type of business structure to another.DIS-398*-DIS
