Planning Your Tax Strategies? What To Consider Under the New Tax Reform

With all the talk around the new Tax Cut and Job Act (TCJA) legislation, you might be a little anxious and wondering how the changes will affect your construction company. Many construction firms are set up as S-corps, so maybe you’re thinking you should switch to a C-corporation, to take advantage of the lower corporate tax rates and the other potential benefits.

Whatever the reason the TCJA is on your mind, your heart beats a bit faster each time it comes up. And, we get it. Having helped construction companies with their tax and business planning for more than 45 years, we see how personally invested you are in the organization you built and how you want to be sure you’re making the best decisions on its behalf. This includes always keeping an eye out for ways to reduce your tax bill.

For some construction firms, changing designations will be the right conclusion, as they’ll save in a few different ways, including a lower tax rate, avoiding double taxation in certain circumstances, and fully deducting state and local taxes. However, for other companies, staying as they are will make more sense. (By the way, if you’re looking for an explanation of the major changes that will happen with the new legislation, we’ve got a short post on the subject at KatzAbosch.com under the “Thought Leadership” section.)

Here’s what we’ll say right off the bat – don’t make any rash decisions. Do your research, run the numbers, and gather all the information you need to make an informed decision.

How to decide
Your choice should be based on a number of factors, one of which must be calculating your tax liabilities under the different structures to assess which is best for your firm. You, and your trusted advisors, should also ask the following questions to gather the additional data you need and make a decision you feel comfortable with:

1. Do you distribute earnings? If so, how much?
2. Do you currently use the cash method or accrual method? How will that change if you switch to a C-corp?
3. Do you earn any income outside of the U.S?
4. Will you continue to qualify for the pass-through deduction?
5. How much do you pay in state and federal taxes?
6. How soon are you considering exiting the business, either through a sale or leaving it to the next generation? Do you have any estate planning considerations?

Keep in mind that you could lose money moving to a C-corp
One of the drawbacks to C-corps is the possibility of paying taxes twice. As a C-corp, you could be taxed once on earnings and once on dividends, so it’s important to understand your potential for income loss. If you don’t pay dividends, and don’t plan to use the cash you have on hand for a good while, moving to a C-corp could make sense.

Did you realize there’s a chance the change might not be permanent?
If Democrats regain a senate majority, they could vote to change or repeal the law. If that happens, it could be extremely complicated to go back to being an S-corp.

One thing is clear
If you’re the owner of a construction or real estate firm that is currently an S-corp, it’s important to clearly understand all the aspects around how moving to a C-corp could affect the amount of taxes you pay. The TCJA is complex and full of intricacies. You want to be sure you have all the information you need and are comfortable with your decision, before you make it, whether you’re been in business for a year or for 50 years.

If you would like to discuss how these changes affect your particular situation, and any planning moves you should consider in light of them, please contact your KatzAbosch representative; or contact us by clicking here.

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