With all of the tax code changes, it’s more important than ever that you make a business tax review an integral part of your planning strategy this year. Here are three areas to focus on:
Re-examine your business structure
Whenever corporate tax rates move in a different direction from individual rates, an evaluation of your business entity may make sense. That’s because when your business is an S corporation or a partnership, the income “flows through” to you and is taxed at your individual rate.
What’s new this year is that C corporation tax rates are now lower. They are reduced to 21 percent.
What to do: Given the dramatic reduction in C corporation tax rates, consider an analysis of the tax benefits of changing your business structure versus the long-term costs of doing so. You may save on income taxes in the short term, but if you plan on distributing corporate income or selling the business in the near future, it may not make sense to change your structure.
Calculate your basis
As an S corporation shareholder, knowing your basis is key to determining whether you can deduct current-year losses. The reason: Losses in excess of basis are generally suspended for use in later years when your business has income.
Basis is also important if you plan to take nontaxable distributions. In cases when distributions exceed your investment in the company, the distributions can easily create a taxable event.
What to do: Perform a basis checkup this summer. Take into account income, distributions, deductions, losses, additional investments and loans – all reasons you may need to adjust your basis.
Consider the loss of the domestic production activities deduction (DPAD)
If you relied on the DPAD in the past, you’re going to need to revise your business’s tax plan for 2018 because it’s been repealed. Luckily, the introduction of the new 20 percent business income deduction should offset some of the impact of the lost DPAD tax benefit.
What to do: Determine if you’ll be able to use the full 20 percent business deduction and how that measures up to the savings you had in the past from the DPAD. Keep in mind, the new business deduction is reduced if your income exceeds certain thresholds. It also depends on the type of business you own and whether or not it provides certain services that the tax code treats differently.
Be proactive with your business tax planning this summer. Call today at (888) 388-1040 to ensure your business does not create any tax surprises with all the new rule changes.
