After months of sometimes raucous debate, the new tax bill passed the U.S. Congress last December. While it’s unclear exactly how some of the major changes made in the tax code will ultimately affect the economy, there are some clear benefits to be had for many body shop owners.
However, those changes may also lead to additional confusion for small business owners down the road, as well as some tough decisions about exactly how to structure their businesses.
Accountants across the country are already being inundated with calls about how to proceed in 2018 – and any body shop owner considering a change in the business structure to take advantage of any perceived benefits should have along talk with their financial advisor before proceeding.
Here are a few key changes that could potentially have the most impact on owners of independent body shops and MSOs:
Corporate tax cut
If you already operate as a C-corp, your top tax rate just got cut from 35 percent to 21 percent. However, C-corps are still subject to double taxation – both on corporate income and on any dividends distributed to shareholders.
Should you convert to a C-corp? That new 21 percent corporate rate looks appealing, but converting to a C-corp is not going to be beneficial for a lot of businesses. According to tax attorney Stuart Sorkin, though, shops and MSOs that are in growth mode – and plan to re-invest in the company rather than pay out dividends – may want to consider it.
“If you are buying equipment or buying other shops, you need to look more carefully at the concept,” Sorkin says. “If you are an S-corp and need to invest money in your company, the tax rate is 37 percent, so you are lending back at 63 cent dollars to the company. With the 21 percent corporate rate, you have 79-cent dollars. It’s more tax efficient.”
For owners that plan to transfer the business to a family member through a stock sale or those selling to a third party, the decision to remain an S-corp or C-corp could impact the tax bill on the sale.
“The choice of business entity is a more significant issue than it was previously,” Sorkin says. “If you run a C-corp like an S-corp and just strip out all the money, then converting to a C-corp provides no savings because of the double tax. If you are accumulating money in the company or paying for things in the company in after-tax dollars, then it might make sense.”
“Nobody should make a rash decision about converting to a C-corp,” says Kevin Kuhlman, senior director of federal government relationship with the National Federation of Independent Businesses (NFIB). “If it looks like it will be beneficial, there are actually some provisions in the law that ease that transition. But there are also increased responsibilities for doing so, in addition to the double taxation.”
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Small business tax cut
The new law also includes a 20 percent deduction on qualified businesses income for pass-through businesses (S-corps, sole proprietorships, and LLCs). There are some limitations on that deduction for individuals that are in service businesses (such as attorneys, accountants, etc.) that phase out the benefit based on income levels, but collision shop owners should qualify. That means 20 percent of the pass-through income to the owner is deducted from their taxable income.
For higher income businesses, the tax deduction is limited to no more than 50 percent of total employee W-2 wages.