Now that tax reform has passed, it's time to do what smart business owners and managers do: put aside the politics and make the most of the opportunity.
We are responsible for growing our companies and navigating our businesses to take advantage of whatever legislation comes out of D.C. Tax reform will reduce rates for many businesses. Yes, it's debatable how those savings will be used, but that's up to you. In the meantime, and for at least the next few years, it’s in your business’s best interest to take advantage of the benefits that the new law offers.
How to maximize tax reform opportunity
1. Revisit your corporate structure
Rates are not only significantly lower for corporations (C-corps), but there are large new deductions for pass-through entities (S-corps, LLCs, etc.) that will also bring down tax liabilities. The question you need to ask yourself is what structure will benefit your business most in the coming years? Talk with your accountant and do a pro-forma analysis of your 2017 income statement, using 2018 rates for both corporations and pass-through entities, to see what's best going forward. You may decide to make a change.
2. Use the Work Opportunity Tax Credit
The provision, which allows you to take up to a $9,600 credit when you hire someone who is considered "long-term" unemployed, is included in the law and it's truly a great incentive for you to bring on talent and leverage the government's help to get them trained.
3. Buy equipment
The bill increased, for many, the amount that can be immediately deducted for the purchase of capital equipment, from $500,000 to $1 million per year. No long-term depreciation, no delays, just a big deduction when you buy long-term assets.
4. Clean up your balance sheet
This is one of those things that we should all be doing, regardless of the current tax environment. You can deduct bad debt and bad inventory, as long as you write it off and dispose of it. With a growing economy and more incentives to invest, it makes sense to take these actions, clean up your balance sheet, and make room for more productive assets – and customers.
5. Max out your retirement plans
Again, this is another one of the things you should always be doing, regardless of the tax environment. The new legislation didn't make any significant changes to retirement plan contributions, but that shouldn't stop you from setting up a 401(k) for your employees and contributing the maximum amount possible to that and any other plans you may have.
6. Set up a 529 Plan
One of the many objectives that business owners and managers have is socking away enough savings for retirement and to help their children pay for their education. With a 529 plan you can put after-tax money away, which can then grow tax-free and be withdrawn to pay for tuition, books, and other higher education expenses. The new legislation has expanded the 529 provisions to now allow you to use this money for private and religious schools too.
7. Bring in any overseas cash
Most small businesses have their cash invested here in the U.S. But as companies grow, operations may take place outside of the country where tax rates have historically been lower. With tax reform, it makes sense to bring that money back to the U.S. There's a one-time repatriation tax of 15.5 percent for liquid (cash) assets, with 8 percent for illiquid assets. Then, once here, you can use that cash to invest and expand your operations domestically.
8. Change your accounting method
The new legislation has made it easier to become a cash-basis business. Previously, businesses with more than $5 million in revenues couldn't elect this method, but that provision was raised to $25 million. Being on the cash basis may make it more flexible for businesses to manage their finances.
9. Reinvest in your employees
You may not want to hire or invest in new equipment, but if you do realize savings from tax reform, then one of the best places to put your money is with your people. Use this year to revisit your benefits, and consider helping more with employees’ health insurance costs, increasing paid time off, and creating more flexible compensation plans. It's a tight labor market and good people are hard to find.
10. Finally, meet with your accountant
I'm offering all the tactics above without knowing a thing about your business - the person who does is your accountant. Hopefully, you've got a good CPA or Enrolled Agent working for you. It’s worthwhile for them to pick through your financial statements and take into consideration any potential tax benefits. Do this early in 2018, so you can better plan out the year and take action sooner, rather than endure a last-minute runaround.
Sure, people are debating the costs/benefits of the new tax reform bill – and both supporters and opponents have good reasons for their positions. But the fact is that the law is now reality. There will be tax reform that takes effect in 2018. As a business leader, you must put politics aside and make decisions that can positively impact all those who rely on your business for their – and their families' – livelihoods.
Note: The information contained within is not tax or legal advice. These issues are complex and applicability depends on individual circumstances. Businesses should consult tax or legal counsel before taking action on any of the items identified above.