Gary Pittsford, President and CEO, Castle Wealth Advisors, will talk about some of the new income tax changes that will affect each of your businesses at EPIC 2018 in New Orleans on October 16th.
Your personal income tax will be affected by this new law and you should talk to your CPA about what new tax bracket you will be in and what types of deductions will be allowed for you personally under the new law.
Your business taxes will also undoubtedly change. The rules are different in 2018 for C corporations, S corporations and limited liability companies. At EPIC 2018, Gary will bring some example reports that you can read when you get home.
S corporations, LLC’s, and sole proprietorship and partnerships are considered “pass through business entities”. Based upon the new rules your pass through business entity may qualify for a 20% deduction of qualified business income. Here is some basic information about the new law for business income. The deduction for section 199A (which is the new law for businesses) is outlined as follows:
The determination for deductible amounts for each trade or business is the amount determined under this paragraph with respect to any qualified trade or business is the lessor of –
A. 20% of taxpayers qualified business income with respect to the qualified trade or business, or
B. The greater of –
- 50% of the W-2 wages with respect to the qualified trade or business or,
- The sum of 25% of the W-2 wages with respect to the qualified trade or business plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property.
Outlined below is an example of how the new law applies to one business owner.
If Darren operated as a sole proprietorship and his company did not have any W-2 wages, Darren’s deduction would still be the lessor of 50% of W-2 wages (which would be -0-) or 20% of qualified business income of $400,000 ($80,000). In this case, Darren would have no 199A deduction.
However, if Darren, who is married, considered changing his business from Sole Proprietorship to an S Corporation and begin paying himself W-2 salary, he could get a 199A deduction. For example, if Darren’s company was earning $500,000 of income, he could pay himself $200,000 of that income in wages. The remaining $300,000 would be his Qualified Business Income. He would be able to take a 199A deduction of the lessor of 20% of QBI ($60,000) or 50% of W-2 wages ($100,000). His deduction would be $60,000.
Scott owns a manufacturing company and has a net profit of $2,000,000 in 2018 and pays $500,000 in wages to his employees during the year. The stockholders would only be able to take the qualified business income deduction of $250,000 since 50% of total employee wages ($500,000 x 50% = $250,000), are less than 20% of the net income (QBI) of the business ($2,000,000 x 20% = $400,000).
As you can see from the two examples above you have several income tax and corporate tax decisions to consider. Hopefully, you have already talked with your outside accounting firm in order to adjust W-2 wages and corporate profitably to try and qualify for the largest exemption.
Succession/Exit planning for your company can be profitable if you start two or three years early. By working with your outside advisor for the last two or three years before you sell the company they will help you find the best way to minimize income taxes for the sale of your business and protect your net worth for your future retirement years.
At EPIC 2018 in New Orleans, we will have a panel discussion and talk with four of your fellow members about their individual experiences going through this business succession planning process. You won’t want to miss it!
Gary Pittsford, CFP®, is President and CEO of Castle Wealth Advisors, LLC. Castle specializes in helping families and closely-held business owners with valuations, succession planning, estate and income tax analysis and retirement income security. Castle’s senior partners work with clients throughout the country in making logical decisions that help them fulfill their personal and business financial goals. For more information visit www.Castle3.com, call 1-888-849-9559 or e-mail Gary directly at Gary@Castle3.com.