Tax Tip Tuesday E. 8 – Tax Reform

I’m sure you have heard that tax reform is upon us.

Exactly what, when, or how is yet to be determined, but I am certain it is happening.

I will dedicate the next two Tax Tips to explain how the changes will affect your business and personal taxes.

This week I will share my thoughts on two proposed business tax changes that may affect your brewery.

Change – The top corporate tax rate will go from 35% to 20%

What does this mean – If you are a C-Corp, you pay tax at the corporate level. This change could result in C-Corp’s paying less tax. Currently the top tax rate for C-Corp is 35% Not all Corporations pay this rate. Corporate taxes act like personal taxes in the way that there are tax brackets. There are marginal tax brackets which start at 15% and go all the way up to 35% This change would mean the most a C-Corporation would pay in tax is 20% of the net income reported.

What does this mean for your brewery – Some of you may be changing to a C-Corp. Since the majority of breweries out there are LLC’s taxed as Partnerships, the C-Corp may offer some tax relief. I personally love the forgotten C-Corp. It’s old-school, straight forward yet complex, and makes a “transaction” so easy to complete.

Change – The passthrough tax rate will be capped at 25%

What does this mean – All Sole Proprietors, S-Corps, Partnerships are considered pass-through entities. Reason is, the net income passes through to the individual owner to be taxed at their individual tax rate. Currently the top individual tax rate is 39.6%. Yes, some small business owners pay 39.6% in taxes on the profits of their business. This would cap all passthrough entities to a 25% rate.

What does this mean for your brewery – As mentioned earlier, most breweries are structured as LLC’s taxed as a Partnership. The Partnership does not pay tax, the individual partners are taxed on their personal returns. Personal returns have marginal tax brackets which go up to 39.6% This cap would hold the tax on business net income to 25%. This would be a tax savings for high performing breweries.

While it’s too early to tell what changes will pass and weather they will be made retroactive or proactive, tax reform is happening. The changes are designed for business owners to pay less tax, therefore accumulating more cash. The plan is for business to use this cash to reinvest, hire more people, and grow. Most breweries won’t feel a huge savings immediately, however over time and hopefully business growth, the savings will be felt.

If you have a tax question, let me know here.

-cf

Tax Tip Tuesday E. 1-7

 

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