Invest: Greater Fort Lauderdale/Broward County teams up with Cherry Bekaert to shed some light on the new(ish) tax legislation
By staff writer
August 2018 – 2 min. read
Death, taxes and childbirth! There’s never any convenient time for any of them. ― Margaret Mitchell, Gone with the Wind
Last December, Congress passed a hard-fought piece of legislation that has fundamentally changed the national tax structure and dropped the corporate tax rate from 35 to 21 percent. Businesses throughout the U.S. are working to understand what this reform will mean for them and their employees. Small businesses, which constitute the vast majority of businesses in Broward County, are especially eager to learn what the new legislation means.
To help out with this search for knowledge, we sat down with David Appel, managing partner of Cherry Bekaert’s South Florida office, to talk tax. See below for some of his insights:
David Appel of Cherry Bekaert, South Florida.
How will the new tax legislation affect individuals in Florida?
Almost every tax bracket is going to be favorably impacted by the tax bill. However, there will be particular groups that might see their taxes rise. For example, reductions to the amount of taxes (real estate and income taxes) that can be claimed as itemized deductions will negatively affect those who live in the Northeast or other states with high state income tax rates. These individuals might see their tax bills rise due to the loss of certain types of deductions just mentioned and others that they previously were allowed to claim. In Florida, we don’t have a personal income tax, so it’s not going to affect us that much. The rate reductions are going to help, which ultimately puts more cash in our pockets
What do you expect companies will do with the savings they receive?
Many companies have said they will reinvest in IT, company infrastructure and staffing, which is what we want to hear. Higher wages are a good thing for the economy. We don’t want to hear about additional dividend distributions for the owners. Others might decide to use the extra funds to reduce their debt and build more equity within the company. Most taxpayers that I’ve talked to are going to reinvest in talent, increase wages and put money into IT. As technology shifts by the hour, companies have to stay competitive on the IT side.
How will the tax legislation affect startups in South Florida?
For startups, it’s about structuring operations from formation and determining what changes need to be made to those existing entities. If a startup isn’t going to be a pass-through (where the tax is borne by the owners and not the business entity), it will be a C-corporation. Many new companies lose money in the initial years before they become profitable. Therefore, the type of entity they select to be taxed as at their inception is not always an easy decision. In 2017, the maximum federal tax rate for C-corps was 35 percent. Under the new law, the federal corporate rate is now reduced to 21 percent. That’s a big difference. For some of these companies, it’s a decision based on which rate will serve them better. Are they better served by taking advantage of losses in the early stages of the company passing through to their personal returns or by the lower corporate rate on income as they become profitable?
These startup companies are new, and they can potentially benefit from setting themselves up as C-corps and then selling stock as their exit strategy to take advantage of the capital gain rate, thus paying one layer of tax. However, many buyers don’t want to buy stock but instead are interested in the assets of the company. This option results in a C-corp layer tax on any gain and a second layer of tax when the remaining cash proceeds are distributed to the owners. Therefore, modeling must be performed before changes are made to current entity structures.
There are certain provisions that allow for some stock sales to be deferred or exempt if the selling shareholders roll the proceeds into other similar-type investments. However, if the companies lose money, owners would want to be able to take the pass-through benefit and run those losses through to their personal returns. Unfortunately, it is one choice or the other. What’s better for a particular company or its owners? These are just a small sample of the type of decisions that need to be made.
For more from David Appel and other experts on how the tax legislation will affect you and your business, look for the tax section in this year’s edition of Invest: Greater Fort Lauderdale.