Which Entity Has the Advantage? A Tax Reform Discussion Guide for Business Owners

Now that the TCJA is in place, business owners should schedule discussions with their CPA or tax professional about the potential advantages of entity structure changes, relative to their future goals. The following is a guide to begin that journey.

Paul Simons June 1, 2018

The Tax Cuts and Jobs Act (TCJA) that was enacted December 20, 2017 provides businesses and business owners with potentially significant tax reductions for 2018 and forward. Subchapter C Corporations and the owners of Sole Proprietorships, Partnerships, and Subchapter S Corporations need to evaluate the tax implications of their current versus potential changed operating structures. Business growth plans, succession planning, owner cash flow needs, plans for potential sale and other factors need to be considered in evaluating potential business changes.

After the TCJA, Which Entity Has the Advantage?

Entity selection, after tax reform, still comes down to your needs and goals. Several factors should be included in the evaluation process, including:

  • Do earnings need to be distributed to owners, or can they be invested in the business to fund future growth?
  • What is the business cash flow impact?
  • Does the business hold appreciating assets, such as real estate or intangibles? Do you know their value?
  • What is the business exit strategy and succession timeline for owners?
  • Given various sunset provisions of pass-through tax benefits after 2025 – any structure change contemplated needs to take potential detrimental sunset changes into account.

Discussion Guide: Key Entity Structure Considerations

Because the TCJA is complex, most business owners need a starting point for discussions. Our tax team would start with this example agenda to understand your business, and future goals, in order to provide recommendations.

  1. Needs for usage of business operating cash flow
    • Business growth needs
    • Owner cash needs
    • Importance of double-tax avoidance/deferral
  2. Exit timing and strategy to avoid exit double-taxation
  3. Maximizing benefits of 20% pass-through deductions
  4. Reductions in payroll taxation while balancing needs for required wage base
  5. Related party entity income optimization to maximize 20% pass-through deductions given wage and depreciable property base requirements
  6. Current 2018 tax law with its sunset provisions – consider detrimental effects if strategy needs to be reversed after future sunsets
  7. Effects of structure change possibilities on existing succession plans in place or being planned
  8. State income tax considerations
  9. Fringe benefit implications and considerations
  10. Tax administration/tax funding implications of pass-through entities

Where to Begin? We Can Help. Our No-Cost, One-Hour Offer

The DS+B tax team can assist business owners with the evaluation of existing operating structures and possible favorable alternatives. We offer business owners a one-hour, no-charge consultation to provide insight into current structures and determine whether alternatives may be more favorable. Please contact Paul Simons to schedule your initial consultation.