How Will Tax Reform Impact Selling a Business
Just days before Christmas 2017, the U.S. Congress passed the Tax Cuts and Jobs Act, the most sweeping tax reform legislation since the 1980s. This bill contains major changes to the tax code, and many of these changes are permanent. Overall, most Americans will pay lower taxes under this reform, and a much larger percentage of taxpayers will take the standard deduction rather than itemizing, making it much simpler to prepare their taxes. If, however, you are in a higher income bracket and live in a state with high income and property taxes, you might end up paying more under this reform. How does this impact your decision to sell your business?
The biggest changes to the tax code under the Tax Cuts and Jobs Act occur on the business side. Some of the highlights include:
Corporate Tax Rate Reduction
Under the tax reform bill, the largest prize goes to corporations, who will see their tax rate reduced from 35% to 21%. This permanent change in the corporate rate is the centerpiece of the legislation, and it is designed to keep more companies from moving abroad, spur corporate investment, create jobs, and grow the economy. Critics of the bill are highly skeptical that this cut will have that kind of impact, but if it does, we could see 4% to 5% GDP growth, which should translate into greater economic opportunities for everyone.
Tax Deduction for “Pass-Through” Entities
About 95% of American businesses are “pass-through” entities, such as sole proprietorships, partnerships, limited liability companies (LLCs), and S Corporations, where the income of the business passes directly to the business owners and is taxed at their individual rate. In order to make the bill fairer to small business, Congress included a 20% deduction on income from these types of entities. There are some limitations, however. For service-based professional businesses such as accounting and legal firms, the deduction is only available if the owner earns under $157,500 as an individual filer, or under $315,000 if married filing jointly.
Schedule C Deductions for Small Business Owners are Mostly Unchanged
Small business owners are able to take advantage of numerous deductions on their Schedule C, including home office, vehicle mileage, travel and lodging, advertising and marketing, and many others. When this bill was being negotiated, there was fear that many of these deductions would go away. Thankfully, the final bill left Schedule C deductions mostly in place, with a couple exceptions, such as the elimination of the entertainment expense deduction.
Both large and small businesses receive some benefits under the Tax and Jobs Act, with C Corporations being the big winners. For smaller businesses, however, the impact on the economy could provide the biggest gain. If we experience the economic growth that the bill’s proponents expect, it should raise the fortunes of businesses across all industries.
If you have been thinking about getting into business, the tax reform bill could make 2018 a great year to act on this idea. And if you have the capital to invest, the quickest road to profitability is to purchase an existing business. A reputable business broker can help you with this process by providing access to numerous attractive listings and helping narrow your choices to those that best suit your passion, skills, and budget.