By: Michael Cirangle
The stock market has been bullish, public company profits are soaring and tax reform bonuses have been paid out. However, outside of the public company landscape, most privately-held business owners are still weighing the ultimate benefits of the recent Tax Cuts and Jobs Act (TCJA) on their businesses and themselves. While there are many aspects of the TCJA that owners should evaluate, the most common question we have been asked by our clients is whether their current entity structure yields the most tax benefits and efficiency under the new rules.
There is no one size fits all answer to this question. However, there are several basic considerations, both tax oriented and not, that companies should evaluate when contemplating an entity structure change. While several of the considerations that existed pre-TCJA still remain today, many others are new.
Before the enactment of the TCJA, pass-through entities (S-Corps, LLC’s, or partnerships) were the go-to entity structure choice for most privately-held businesses and their owners. This was mostly due to the double taxation that inherently exists with a C-Corp structure, but not pass-through entities. However, with the reduction of the C-Corp tax rate from 35 to 21 percent, the C-Corp structure had the potential to be more advantageous.
Congress and their lobbyists recognized this political and economic conundrum and quickly wanted to establish equality between pass-through entities and C-Corps. To accomplish this goal, what’s known as the “Pass-through Deduction” was created to level the playing field between C-Corps and pass-through owner’s effective tax rates. The complexity and applicability of this new deduction for business owners has yet to be fully explained by the IRS, but its intent is to make pass-through structures just as, if not more, tax efficient as their C-Corp cousins on a day-to-day operating basis. For a breakdown of this new deduction see here: Pass-Through Deduction: An Introduction.
Questions you must ask yourself are:
- How much capital do you reinvest into your company for growth?
- How much capital is required to be taken out of the company?
- How do you envision the exit or succession plan for your business?
- When do you envision the exit or succession plan being enacted?
- What is the current appreciated value of your business?
- What is your estimate of the appreciated value of your business when your exit or succession plan is enacted?
The TCJA has changed the landscape of how advisors and business owners should think about entity selection and structuring. Even though pass-through entities make up a majority of U.S. businesses and seem to remain the go-to choice, in certain situations, a C-Corp structure might be more advantageous now that the disparity has closed.
What is most critical is that business owners, in tandem with their advisors, reflect on why the business is structured the way it is, how that structure is utilized and how the structure accomplishes the owner’s long-term goals. At Ellin & Tucker, we’re ready to help guide you through this new landscape and always just a phone call away.
MICHAEL G. CIRANGLE, CPA, a Principal in the Tax Department of Ellin & Tucker, brings a wealth of national and international tax planning and compliance expertise spanning more than a decade. His extensive experience and inside knowledge of privately owned companies enable him to provide the highest level of practical and technical tax compliance and consultation. He can be reached at email@example.com.