Like all things generated by the federal government, the new tax laws are complicated. On the face of the law, this looks like a good thing for businesses, including insurance agencies.
- Federal C-Corp tax rates reduced to a flat rate 21%
- S-Corp and LLC owners (Pass-Through Entities) have been given a 20% of income deduction (with some limitations).
- Individual tax rates are reduced but with new limits on deductions that will positively affect low and medium income households.
- Employer sponsored healthcare are still fully deductible
- Home mortgages are still deductible, but with “caps”
But there are so many “hooks” that our Enrolled Agent (our tax professional, licensed by the IRS to represent taxpayers) is doing a lot of “What If” projections for her clients to determine the impact of the new law on individuals and companies.
For Instance;
S-Corporations and LLC’s are still taxable at individual income tax rates. The new 20% deduction for ‘Pass Through Business Income’ are based on every owner’s INDIVIDUAL TAX RATE so it will probably have a positive effect on smaller businesses in states with lower income tax rates but may not significantly benefit larger agents and agents in high-tax states (like NY, Cal, NJ).
Some people will even consider conversion from S to C Corporations considering the decrease in corporate tax rates. However, consider the double taxation on corporations followed by another round of taxation on distribution to the business owners. Long term determination of the best corporate structure for you must still take personal financial and tax position in consideration. Remember, Congress changed the law recently, but they could also change it back in the future. Restrictions do apply to how and how often you will be permitted to change corporate structure. Unless you are considering selling your Company or closing it in the near future conversion from S to C might be premature.
Conservative C Corporations, large and small – the ones with little leverage, debt and strong balance sheets and profit levels, will see a significant rise in their values because of the reduction in tax rates from 35% to 21% for corporations. However, agencies that make a lot of acquisitions and are highly leveraged may see less benefit and may even see an increase in taxation because some deductions are disappearing (like imposition of limits on interest deductibility).
We are offering all of our clients who received valuations in 2017 a low cost re-iteration of their Valuations under the new laws tax rate (call us 856 779 2430 for more information).
TWILIGHT TAX LAW CHANGES – As we suggested, the tax law changes are far from fixed in place. During the week of Feb 5 we saw the first reversal in a “Twilight Tax Change” in Congress. Many things were reversed, the principal ones that affect most taxpayers is the PMI (Premium Mortgage Interest), Residential COD (Cancellation of Debt), Tuition and Fees, and Energy Credits were returned to deductibility when they had been eliminated in the original tax bill. Watch for more such changes as the key sections of the tax law are analyzed.