How tax reform could affect your small or mid-sized firm
The way the law is organized may tempt many businesses to change their entity structure.
Since the new tax reform law lowered the corporate tax rate from 35 percent to 21 percent, a common misconception for pass-through entity owners is that they should become a C corporation.
Although the change in taxation may sound favorable to many business owners, Amsden said it may not make sense for many companies to change their business structure.
“There’s a whole laundry list of things you have to think about today, as well as what you’re going to do in the next five to 10 years, to really be able to say whether or not it makes sense to change your entity structure,” she said.
Although C corporations are taxed at a 21 percent rate, Amsden said many business owners forget C corporations are taxed twice. When C corporations generate income, they are required to file their tax return with the Internal Revenue Service, and profits are taxed at both the corporation’s tax rate and if those earning are paid out to shareholders.
“C corporations aren’t necessarily going to give you a lower tax rate,” Amsden said.
However, Amsden said companies looking to reinvest profits inside the business will have the second layer of taxation deferred, so it may make sense for them to be a C corporation depending on what a company wants to do with their earnings.
“If I can expense 100 percent of what it costs me to invest in new equipment, then I’m going to be able to defer any taxes I have to pay,” Amsden said. “Which means I have more cash flow today to invest in my business.”
Many members of SBAM, which has more than 25,000 members countywide, have also expressed confusion given the new tax structure, Fowler said.
Before the law had passed, Fowler said SBAM was advocating for parity, in hopes that C corporations and S corporations would have the same rate.
“The simplest way would have been parity so you wouldn’t have companies trying to decide whether they’re organized properly or not,” Fowler said. “There would be no disadvantage one way or the other.”
Regardless, Fowler said the majority of SBAM’s members are excited about the tax reform law, and he believes it will help stimulate the economy.
“I think it will be very positive for everyone,” Fowler said. “If you’re planning on growing your business, you can’t put (profits) in your pocket and just take a bigger cut — you really have to invest it in your company and in your workforce in particular, because everybody else is going to.”
Business owners looking to make sense of the law and questioning whether or not they want to restructure their business should make an appointment with their CPA or other financial advisers.
Amsden said financial statement disclosures may be different, so small and mid-sized businesses that have reviewed or audited financial statements should look at how it impacts their balance sheet. There are provisions in the law that can impact what needs to be recorded on the balance sheet.
“Slow down, talk to your accountant, consider how it’s going to impact you, and then make decisions on how to go forward,” Amsden said.