Businesses Should Sit Down With Advisors To Review Portfpolios And Examine Strategies

By Jill Nagy

“More than in recent years, there is a need to take a look at the tax impact” when making investment decisions, said Dale Mullin, a certified financial planner with WDR Financial LLC, and a certified public accountant with the accounting firm of Whittemore, Dowen & Ricciardelli LLP, both located in Queensbury. 

New, mostly lower, tax rates and new provisions for tax deductions and credits will have an impact on investments in a business, decisions about taking distributions from taxable retirement accounts and decisions about allocating business proceeds between salary, pass-through income and investment in equities. 

Mullin said interest rates are beginning to rise and inflation is becoming a possibility. Those factors might indicate that this is a good time to make investments in equipment in order to lock in lower prices and lower interest rates. 

Paul Dowen, a partner in Whittemore, Dowen & Ricciardelli LLP, agreed. He said the cost of purchasing equipment can be deducted in the year it is purchased, even if the purchase is financed over several years. That can give a business a big tax deduction in the year of purchase but no deductions other than their interest payments in the  later years. 

“If you are financing the purchase, you have to be very careful,” he said.

The changes in the tax code also dictate a review of the legal form of a business and how each owner’s receipts from that business are split between salary and business income or dividends.  The revised law requires an owner to take a reasonable salary from the business but does not define “reasonable,” Dowen said.

A traditional corporation (a C Corporation) distributes profits to owners in the form of dividends. Those corporations also benefit from the reduced corporate income tax rates. Other types of businesses—such as sole proprietorships, partnerships, limited liability companies, and small business (S) corporations—allow those funds to “flow through” directly to the owners. Only 80 percent of the flow-through income is taxed. If, however, the owner also takes a salary, 100 percent of that income is taxed. 

“The biggest thing holding business owners back is the uncertainty” about how much must be taken as salary and how much can be taken as flow-through income, Mullin said. “Everybody is kind of on hold,” waiting for Congress to clear up that uncertainty.

“What’s been in the newspapers [about the impact of the new tax law] is very misleading,” Dowen said. For many people, the amount of their taxable income will increase because of changes in deductions but their tax rates will go down. 

“Everybody’s situation is different,” Mullin said, urging that business owners re-evaluate their investment strategies in view of the new tax provisions. 

Dowen said that the situation is made very complicated by new tax provisions that no one yet understands completely. More than ever, this seems to be a year to sit down with one’s tax accountant and financial advisor and review portfolios and strategies.