Making tax reform work for California businesses

While it might feel like you just finished your last filing, tax season is upon us again. It’s no one’s favorite task, but there’s no better time to plan and take advantage of the new tax laws. It’s not too late to make some smart moves on this year’s filing, nor to be proactive and find out what changes can benefit you when it comes time — too soon — to file again next year.

Why and how tax reform is fueling the economy

The 2017 Tax Cuts and Jobs Act was the first comprehensive makeover to the tax code in over 30 years. It eliminated $1.5 trillion in federal taxes, which lowered personal and business tax rates for millions of American individual taxpayers and small businesses while making corporate tax rates more competitive globally.

The law had several major aspects offering enormous savings for Americans and their businesses:

• Certain small business owners, including entrepreneurs and sole proprietors, may be eligible for a 20 percent deduction on business income. (It permanently established a significantly lower flat tax rate of 21 percent for corporations.)
  
• It included provisions to encourage companies to invest in capital projects through immediate expensing.
• It incented companies to bring overseas profits back to the U.S. (known as repatriation).
• It brought down rates for individuals in the highest tax brackets.
• It temporarily eliminated the estate and gift taxes for 99.8 percent of Americans.
• It significantly altered the Alternative Minimum Tax (AMT), a parallel tax system applicable to taxpayers with high income. The AMT sets a limit on the amount of deductions these taxpayers are eligible to claim, thus establishing a “minimum of tax.” While Congress has eliminated the AMT for corporations and raised exemption levels, some 200,000 individuals may remain affected.

“The tax cut is not a one-off for 2018 and will continue to benefit both businesses and consumers in 2019. Following the 2003 tax cut, economic growth accelerated in both 2004 and 2005 as benefits of the tax cut legislation continued to accrue,” said Anthony Valeri, Investment Management Director of Wealth and Fiduciary Services at California Bank & Trust.

Extracting the greatest benefit when you file your taxes

Each business’s financial situation is unique. The first step is to sit down with your tax advisor to make sure that your goals are clear and to see how the reforms might benefit your business.

Here are a few factors you may want to discuss in particular:

• 20 percent tax cut for small-business owners: certain qualified business income — such as sole proprietorships, S-corporations and partnerships — may be able to avoid 20 percent when filing 2018 taxes with what’s referred to as a pass-through deduction. Entrepreneurs with taxable income below $157, 500 (single) or $315,000 (married/filing jointly) may qualify. Individuals whose organizations do not fall into the category of "specified service trade or business," with taxable income over the $207,500/$415,000 threshold, will find their deduction capped as a percentage of W-2 wages paid to their employees.
  
• New tax management strategies to consider: the reforms create several possibilities for tax management. Increased flexibility in accounting methods (switching from accrual to cash), accelerated deductions for larger immediate savings on expenditures (such as software, equipment, non-residential property and more), limits on interest expense (which is redefined under the new law) all provide opportunity for substantial tax relief if properly applied.
  
• 100% bonus depreciation and retroactive refunds: Two important benefits that many business owners wouldn’t think to claim are bonus depreciation — a deduction on property used for business purposes — which was increased from 50 to 100 percent until 2023. Also consider retroactive refunds, which allow business owners to review their returns from up to three previous years with the ability to collect on unrealized tax savings that they may have missed. These benefits may represent a significant reduction in your total tax bill.
  

Today, more than ever, businesses rely on trusted advisors to navigate ever-growing variables in a competitive environment. Be sure to ask your tax professional about gaining the maximum advantage for your business through these lower tax rates and new provisions. There are implications related to cashflow, capital expenditures, hiring, reinvestment, restructuring, succession planning, estate taxes, wealth transfer and more. Your tax advisor can help you assess the law’s impact and help you make smart choices with your future tax filings in mind.

"While the economy may slow in 2019, lower corporate and personal tax rates, business’s ability to expense more and 100% bonus depreciation are likely to provide key ongoing support,” Valeri added.

Help for your overall financial strategy is important, too. The business banking professionals at California Bank & Trust pride themselves on working shoulder-to-shoulder, need-by-need with each and every client to come up with solutions backed with guidance, experience, top-tier banking and business loan products and more. Learn more at www.calbanktrust.com/campaigns/in-your-corner/[cite::171::cite] [cite::172::cite]