Family-owned businesses have a few new items to sort through after the passage last year of the federal Tax Cuts & Jobs Act. Here is a look at some of the key considerations.
- GIFT MORE NOW? The federal tax reform law doubled the exemption possible under the estate and gift tax to $11.18 million for individuals and $22.36 million for married couples through the end of 2025.
Why it matters: Family business owners can shelter more substantial gifts of business interests to the next generation.
- RECLASSIFY? The new law drops the tax rate for C Corps to 21 percent, which has many family business owners considering moving away from S Corps, which are pass-through entities taxed on owners’ individual tax returns. S Corps got a 20-percent deduction that sunsets at the end of 2025, but the law placed income restrictions on owners to get the full deduction.
Why it matters: The law limits the S Corp deduction for individuals with taxable income below $157,500 or $315,000 for married couples. As well, changing a business tax classification also places certain decade-long limits on a company.
- WILL IT LAST? The Republican-controlled Congress passed the Tax Cuts & Jobs Act without bipartisan support, and it was signed by Republican President Donald Trump. Additionally, the gift and estate tax exemptions and the S Corp deduction will sunset at the end of 2025.
Why it matters: If Congress flips in the midterm elections and Democrats regain the presidency in 2020, they are likely to target the tax law — which none of them supported — for changes. Combined with the sunset provisions, the lack of long-term certainty could affect business owners’ planning.