Although the Tax Cuts and Jobs Act (TCJA) might seem corporate-focused, it’s important for small business owners and individuals to know how to make the most out of the reform.
Signed into law in December 2017, the TCJA provides a reduction in tax rates for many C corporations with a new flat tax rate of 21 percent on corporate taxable income. The TCJA also provides sole proprietorships, partnerships and a variety of pass-through businesses with a deduction of up to 20 percent of “qualified business income” in determining taxable income. While the related calculations may be complicated, the potential tax savings are lucrative.
It’s vital that business owners look not just at the cash-flow opportunities created by the TCJA for their companies, but that they also consider the implications on their personal financial planning. Especially in the cases of closely held, privately owned businesses, the owner’s personal and professional tax scenarios are inherently intertwined. Business owners will likely need to review their personal financial plans and underlying assumptions relating to their personal tax and savings rates. Individuals should be reviewing their personal portfolios to ensure that the investment allocations and time horizons are still accurate and consistent with their goals.
Understanding the opportunities
Many companies are already seeing an increase in cash flow following the passage of TCJA. Although a stronger economy and other market forces have contributed to this increase, this tax reform has formalized many of the opportunities that companies are now experiencing.
Improved cash flow, along with improving economic conditions, mean something different for everyone and every company. For some, it means better debt-service coverage. As tax expenses are lowered, companies will need to decide how best to deploy these additional funds. There also may be a second wave of optimism when many qualifying business owners fully understand and exploit the new potential 20 percent income deduction.
Long story short: The full impact of tax reform is yet to be seen and it could be quite significant. Given these opportunities, business owners should plan accordingly.
Making smart decisions
As a business owner, your fiscal actions have measurable repercussions in many areas. Follow these strategies to ensure you are treating the tax benefits like the valuable assets they can be.
1. Enlist a team of trustworthy professionals
The TCJA was passed rapidly at year-end, so many of the details remain unexplored. Business owners need to talk with their accountants, bankers, attorneys, wealth managers and other trusted advisors who can help to translate the potential impact of the TCJA on their cash and capital.
With the many nuances and opportunities in both the business and personal tax processes, you’ll want to find people who can work both sides of the coin — a team who works toward bringing your personal and business taxes into a cohesive picture.
It won’t be enough to get each of these people involved or working toward your goals on an individual basis; you’ll want to make sure this team is talking to each other on your behalf. At Enterprise Bank & Trust, we often act as a liaison between business owners and their other advisors to coordinate the often complex decisions surrounding the business planning and the owner’s personal planning. In doing so, we streamline the process so as to make the most efficient use of everyone’s time.
2. Think through the implications for your business
With your team of professional advisors in place, you’ll want to take a hard look at how your business operates. There might be opportunities where small changes could lead to increased tax savings. Here are some areas to consider:
- How the business is organized: Some businesses are exploring the possibility of changing to C corporation status to enjoy the lower corporate tax rates. Generally, however, there are still double taxation issues, which are difficult to overcome.
- Capital expenditures: The impact of the expanded bonus depreciation can be significant, with some businesses spending aggressively on larger capital items.
- Qualification for the 20 percent pass-through deduction: If your business is not currently meeting these qualifications, ask your advisors if there are steps which you could take to do so. What can a business owner be doing now to help qualify for the benefits, given the new income limitations and the type of business?
- Elimination of the entertainment deduction: Although some businesses might seek further clarification, business owners need to be prepared to find other ways to make up for the elimination of the entertainment deduction.
3. Decide how best to deploy excess cash
Once you have an understanding of the potential impact of the TCJA on the cash flow of your business, you will need to decide the best use for those funds. Discussing the company’s plans — both short-term and long-term — with your team of advisors will help them to provide you with the best possible solutions for your business. For example, you may need to discuss the impact of any proposed structural changes to your organization on your existing banking agreements and covenants. Or perhaps you may need to review different financing alternatives so as to maximize the timing of your capital investments.
Larger businesses might buy back stock; repatriate money to the U.S.; invest in property, plant, and equipment; and/or pass some of the savings on to employees via increased compensation and other benefits. Smaller businesses are enjoying some similar trickle-down and corresponding decisions.
4. Focus not only on your business balance sheet but on your personal balance sheet
In our experience, it is not uncommon for business owners to be so focused on managing and growing their businesses that their personal planning takes a back seat. However, given the changes in the tax laws under the TCJA, the potential impact on their personal balance sheets can be equally significant.
As a business owner, you’re always looking for competitive advantages and to maximize the resources you have at your disposal. Make sure to do the same thing with your personal planning as well.
The TCJA provides an opportunity for businesses to have increased cash flow, potentially giving companies more purchasing power, a chance to alleviate debt and offer increased benefits to their employees. Smart companies will take advantage of this opportunity in strategic, sustainable ways so that the money saved on taxes will result in a greater windfall down the line. Smart business owners will take advantage of this opportunity to align their personal tax situation with their goals, their values and their short- and long-term plans.
Each person’s situation is unique. Therefore please consult with your advisors — including your accountant, your wealth manager and your estate planning attorney — to determine whether any of these planning considerations will benefit you.
John Tiffin is President and Chief Fiduciary Officer of Enterprise Trust, a division of Enterprise Bank & Trust. Tiffin has more than 25 years of experience in estate planning, financial management and trust administration. Prior to joining Enterprise, he was a Partner and Executive Family Advisor at Greenway Family Office LLC. He previously served J.P. Morgan as a Client Wealth Advisor and Bank of America as a Senior Trust Officer.