Looking to Capitalize on Tax Reforms?

If you own a business you pay taxes. And, if you haven’t consulted with a tax attorney and created a plan for how to deal with the Internal Revenue Service (IRS), you are doing a disservice to yourself and your small business. Every business owner “definitely needs to think about compliance often and early,” says attorney Jason Navarino. “New Jersey just passed a budget this year, and taxes were raised—which will have all sorts of implications for business owners.”

It doesn’t do much good to only call your tax attorney the week your taxes are due, nor does it make good business sense to do so, especially because the tax laws and codes change at an alarming rate. Every few years, taxes change. And this tax year is no different.

“Many business owners will see a reduction in their overall taxes under the new tax reforms,” says Navarino. “But, in many areas, specifically if they engage in any cross-border activity, they will find that the rules are much more complicated than they have been in the past. Particularly, the international sections of the code are much more complex.”

Navarino claims he’s seeing a lot of mergers and acquisitions these days, thanks in part to the tax reforms. “Under the new tax reforms, the overall rates have come down, particularly the corporate rates,” he says. “A lot of companies now have more money to invest in their businesses, and owners that are looking to make an exit from their business may get out more cheaply than they have in the past.”

He does, however, warn taxpayer clients to be careful about making structural changes due to the tax reform. “For example, because the corporate rate came down so low, a lot of LLC clients think they should switch to a corporation,” Navarino says. “There are a lot of short term tax savings to be had from doing that, but I tell people, ‘Think about the long term, because, although it’s generally not a taxable transaction to switch from an LLC to a corporation for tax purposes, going the other way is a taxable transaction. And the costs usually do not exceed the benefits. You may save the money for a few years, but if there’s a change in Washington, and the corporate rates go back up, getting out of that LLC structure could be completely unaffordable.’”

Further, if a client is looking to get out of business in the next couple years, and the tax reforms won’t affect them, it may make more sense to make the move. However, says Navarino, “if you’re hanging onto the business for 10, 15, 20 years to come, perhaps these drastic short-term tax benefits should be considered more cautiously.”

While the very phrase “Tax Day” can cause business owners to roll their eyes, with the proper tax planning and compliance, dealing with the event may go smoother than they think. Business owners should check in with an experienced and reputable tax attorney; if not, they’re doing a disservice to themselves and their business.

If you want more information on this area of law, see our tax overview.