President Trump signed the Tax Cuts and Jobs Act (“TCJA”) on December 22, 2017.  This $1.4 trillion tax cut was expected to lower taxes for middle-class Americans, and bring back jobs to the United States.  The jury is still out on the effectiveness of this Act.  However, since this act was signed, US GDP has increased from a rate of 2.3% in Q4’17 to 3.5% in Q3’18.  Furthermore, the US Unemployment Rate has decreased from 4.1% in December of 2017 to a low of 3.7% in October of 2018.  There are many provisions in this legislation that will impact businesses and individuals in 2018. Here are a few of the key provisions you will want to be aware of:

Businesses
C Corporation Tax Rate – the C Corporation tax rates will change to a flat rate of 21% for taxable years after December 31, 2017. This includes personal service corporations.
Taxable Income                          Tax Rate 2017      Tax Rate 2018
<$50,0000                                  15%                         21%
$50,000 – $75,000                    25%                         21%
$75,000 – $10,000,000            34%                        21%
>10,000,000                               35%                         21%

Qualified Business Income Deduction –beginning after December 31, 2017, in the case of a taxpayer other than a C Corporation there shall be a deduction with respect to any qualified trade of business of an amount equal to the lessor of:
1) 20% of the taxpayers qualified business income
2) The greater of:
a. 50% of the w-2 wages of the qualified business
b. The sum of 25% of the w-2 wages of the qualified business plus 2.5% of the unadjusted basis immediately after acquisition of qualified property
Please note that the w-2 limitation (2 above) does not apply to any taxpayer whose taxable income for the year does not exceed $315,000 MFJ and $157,500 single. The w-2 limit applies fully for a taxpayer whose taxable income is in excess of the threshold amount by $100,000 MFJ, $50,000 single.

Section 179 Expense Limitations and Modifications – beginning after December 31, 2017, the maximum amount a taxpayer can elect to expense under sections 179 is increased from $510,000 in 2017 to $1,000,000. Furthermore, the deduction limit or phase out begins at $2,030,000 in 2017, this limit is increased to $2,500,000 in 2018.

Bonus Depreciation – taxpayers are required to take and additional first year special depreciation allowance for certain qualified property. This deduction is calculated after taking any Section 179 and before any regular depreciation deduction. This additional depreciation taken on new property increased from 50% prior September 28, 2017 to 100% between September 28, 2017 and December 31, 2022. This increased deduction also applies to Longer Production Period Property and Certain Aircraft. After 2022, the deduction is reduced 20 percentage points each year until it reaches 0% for qualified property and 20% for Longer Production Period Property and Certain Aircraft in 2027.

Limitation of Business Interest Deduction – beginning after December 31, 2017, the deduction of business interest will be limited to the sum of:
1) Business interest income of the taxpayer for the tax year
2) 30% of the adjusted taxable income of the taxpayer for the tax year
3) The floor plan financing interest of the taxpayer for the tax year

The amount of any business interest not allowed as a deduction for any taxable year shall be treated as business interest paid or accrued in the succeeding taxable year. There is an exemption from this provision for certain small businesses with average annual gross receipts of less than $25 million for the proceeding 3 tax years.

Repeal of 2 Year Net Operating Loss Carryback and Limit of Carryovers – For losses arising in taxable years after December 31, 2017, the NOL deduction is limited to 80% of taxable income. Furthermore, the TCJA repeals the 2-year carryback provision except for farming businesses and property and casualty insurance companies.

Limitation of Excess Business Losses of Non-Corporate Taxpayer – beginning after December 31, 2017, any excess business losses of the taxpayer shall not be allowed. Where “excess business Loss” means the excess of aggregate deductions attributable to the business of the taxpayer over the sum of:
1) The aggregate business income/gain of the taxpayer
2) $250,000 single and $500,000 MFJ

Domestic Production Activities Deduction Repealed – beginning after December 31, 2017, for non-corporate taxpayers and after December 31, 2018 for C corporations, the deduction of an amount equal to 9% of the lessor of the following has been repealed:
1) Qualified production activities income of the taxpayer for the tax year or
2) Taxable Income for the taxable year

Research and Development Expenditures – currently taxpayers may elect to deduct certain expenses for research and development in the current year. Effective after December 31, 2021, research and development expenses will be required to be capitalized and amortized ratably over a 5-year period.

Business Meals and Entertainment Expenses – beginning after December 31, 2017, businesses may no longer deduct expenses generally considered to be entertainment, amusement or recreation, membership dues with respect to any club organized for business, pleasure, recreation or other social purpose or a facility used in connection with any of the above. Prior to December 31, 2017, these expenses were limited to a 50% deduction. There are specific exceptions to this provision including:

1. Business meals with “Business Connection” 50% deduction
2. Food and beverages for employees 50% deduction
3. Recreational expenses for employee 100% deduction
4. Employee, stockholder, agents, directors, business meetings 50% deduction
5. Meetings of business leagues (501(c)(6) 100% deduction

Individuals

Individual Income Tax Brackets – The seven individual income tax brackets will remain, however, beginning after December 31, 2017, individual income tax brackets will be changed as follows:

Income Tax Brackets for 2017                                                                    Income Tax Brackets for 2018
Beginning of the 15% Bracket                                                                              Beginning of the 12% Bracket
(10% Below)                                                                                                            (10% Below)
Married Filing Jointly  $18,650                                                                          $19,050
Single                               $9,325                                                                            $9,525

Beginning of the 25% Bracket                                                                             Beginning of the 22% Bracket
Married Filing Jointly  $75,900                                                                          $77,400
Single                               $37,950                                                                          $38,700

Beginning of the 28% Bracket                                                                             Beginning of the 24% Bracket
Married Filing Jointly  $153,100                                                                        $165,000
Single                               $91,900                                                                         $82,500

Beginning of the 33% Bracket                                                                              Beginning of the 32% Bracket
Married Filing Jointly  $233,350                                                                       $315,000
Single                               $191,650                                                                        $157,500

Beginning of the 35% Bracket                                                                              Beginning of the 35% Bracket
Married Filing Jointly  $416,700                                                                        $400,000
Single                               $416,700                                                                        $200,000

Beginning of the 39.6% Bracket                                                                          Beginning of the 37% Bracket
Married Filing Jointly  $470,700                                                                        $600,000
Single                               $418,400                                                                        $500,000

The marriage penalty is removed in every bracket except 37% for 2018 – 2025.

Standard Deduction/Personal Exemption – beginning after December 31, 2017 through 2025, the standard deduction and personal exemption will change as follows:

                                                     2017          2018
Standard Deduction (Single)   $6,350       $12,000
Standard Deduction (MFJ)      $12,700     $24,000
Personal Exemption                  $4.050       $0

State and Local Taxes – beginning after December 31, 2017, an itemized deduction is allowed up to $10,000 for state and local income and property taxes, prior to this date this deduction was not limited.

Qualified Residence Interest – beginning after December 31, 2017 through 2025, the qualified residence interest deduction and home equity indebtedness deduction are limited as follows:
                                                                          2017                   2018
Acquisition Indebtedness Limit (MFJ)        $1,000,000        $750,000
Home Equity Indebtedness Limit (MFJ)    $100,000            $0

Miscellaneous Itemized Deductions – beginning after December 31, 2017 through 2025 these deductions are suspended.

Alternative Minimum Tax (“AMT”) – beginning after December 31, 2017, the AMT exemption amount increases from $84,500 to $109,400 MFJ, $54,300 to $70,300 Single. Furthermore, the phase out threshold for the exemption is increased from $160,900 to $1,000,000 MFJ, $120,700 to $500,000 Single.

Shared Responsibility Payment – beginning after December 31, 2017, the shared responsibility payment enacted as part of the Affordable Care Act is reduced from $272 per month (Single), $1,360 per month (family of five), to $0 for both categories.

Child Tax Credit Enhanced – beginning after December 31, 2017, this credit is increased from $1,000 per child to $2,000 per child. Furthermore, the phase out for the credit is increased from AGI of $110,000 MFJ, $75,000 Single, to AGI of $400,000 MFJ and $200,000 Single. There is also a $500 credit for qualifying dependents other than qualifying children.

President Trump signed the Tax Cuts and Jobs Act (“TCJA”) on December 22, 2017. This $1.4 trillion tax cut is one of the largest tax cuts in the history of the United States. There are many provisions in this legislation that will impact businesses and individuals in 2018. It is in your best interest to understand these changes in the tax law as they could impact both your business and personal bottom lines!

Please let us know if you have questions concerning the 2018 federal tax law changes or any other tax compliance or planning issues, we can be reached at (480) 980-3977!

Paul J. Beckert MBA, CPA

In today’s competitive business environment, more than ever, is it important to know the value of your business today and focus your efforts on those activities that increase its value in the future. However, determining a businesses value can be a challenging task for some. In general, there are three key ways in which businesses are valued: liquidation value, market value and future cash flow value. Each of these valuation techniques has its strengths and weaknesses. The valuation technique or techniques used to value a particular business are based on such things as: business size, industry, and stage of business life-cycle.

Liquidation Value

Liquidation value is the total worth of a company’s physical assets when it goes out of business or if it were to go out of business. Liquidation value is determined by assets such as buildings, furniture and fixtures, equipment and inventory. Intangible assets are not included in a company’s liquidation value.  Market value is generally the highest value of assets, though it could be lower than book value if the value of the assets has gone down in value due to market demand rather than business use. The book value is the value of the assets listed on the balance sheet. The balance sheet lists assets at their purchase price less accumulated depreciation, so the value of assets may be higher or lower than market prices. Finally, the salvage value is the value given to an asset at the end of its useful life; in other words, this is the scrap value.

Liquidation value is usually lower than book value but greater than salvage value.  The assets continue to have value but, due to the limited time frame in which they must be sold, they are often  sold at a loss to book value.  Liquidation value does not include intangible assets. Intangible assets include a business’s intellectual property, goodwill, and brand recognition. However, if a company is sold rather than liquidated, both liquidation value and intangible assets are considered to determine the company’s going-concern value.

The Liquidation Value of a business can be very useful for a business that is going out of business.  In these cases, a businesses assets are sold for cash relatively quickly and the proceeds from these asset sales are used to pay off the businesses liabilities.  Any remaining cash would be the companies Liquidation Value.  However, in most cases the Liquidation Value of a business results in the lowest value of the business, as it does not consider the future prospects of the business such as its ability to continue as an on-going concern and generate future cash flow.

Market Value

The Market Value approach to business valuation is rooted in the economic principle of competition: that in a free market the supply and demand forces will drive the price of business assets to a certain equilibrium. Buyers would not pay more for the business, and the sellers will not accept less, than the price of a comparable business enterprise. The buyers and sellers are assumed to be equally well informed and acting in their own interests to conclude a transaction. It is similar in many respects to the “comparable sales” method that is commonly used in real estate appraisal. The market price of the stocks of publicly traded companies engaged in the same or a similar line of business, whose shares are actively traded in a free and open market, can be a valid indicator of value when the transactions in which stocks are traded are sufficiently similar to permit meaningful comparison.  The difficulty lies in identifying public companies that are sufficiently comparable to the subject company for this purpose. Also, for a private company, the equity is less liquid (in other words its stocks are less easy to buy or sell) than for a public company, its value is considered to be slightly lower than such a market-based valuation would give.  For some private companies, valuation experts may look to other similar private companies that have recently sold in the marketplace. They will use various financial metrics such as multiples of prior years: annual revenue, annual earnings before interest, tax, depreciation and amortization “EBITDA”, or net cash flow, to value a similar business.  They will apply these financial metrics to the financial performance of the business they are valuing.  The advantage of these market based assessments, is that they do take into consideration current market conditions when valuing a business.   Furthermore, they can be calculated relatively quickly.  The disadvantage of these market based assessments, is that they may not take into consideration the historical trend of a business or the future opportunities of the business and as a result, the business valuation can be inaccurate.  For example, consider two businesses, business A had increasing revenue over the last three years $100M, $200M, $300M, while business B had decreasing revenue over the past three years $500M, $400M, $300M.  Using a market value approach to assess these businesses based on a multiple of prior years revenue, would result in the same valuation for these businesses.  Which business would you rather buy?

Future Cash Flow Value

The Future Cash Flow Value approach relies upon the economic principle of expectation: the value of business is based on the expected economic benefit and level of risk associated with the investment. Future Cash Flow based valuation methods determine fair market value by dividing the benefit stream  (i.e. future cash flow) generated by the subject company times a discount or capitalization rate. The discount or capitalization rate converts the stream of cash flow into a net present value.  The result of a the value calculation under the Future Cash Flow value approach is generally the fair market value of a controlling, marketable interest in the subject company, since the entire benefit stream of the subject company is most often valued, and the capitalization and discount rates are derived from statistics concerning public companies.  The advantage of the Future Cash Flow valuation technique is that it values the business as an on-going concern and takes into consideration the future prospects of the business.  This valuation technique also takes into consideration the risk associated with the business with its use of the company’s weighted average cost of capital, which varies by business.  The disadvantage of the Future Cash Flow Valuation technique is that it is based on a forecast of the future, which may or may not be accurate.

Assessing the Value of Your Business

As you can see from the above mentioned discussion, there are strengths and weaknesses to each of the three valuation techniques. The key is to understand where your business is today, what industry do you compete in?  What is the size of your business relative to other competitors in your industry?  At what stage of the business life-cycle is your company?  Is your business a startup that is just entering the market?  Have you been in business for a while and are reaching the peak of your business life-cycle and highest output?  Is your business and industry declining in size and growth and at the end of the business life-cycle?  Answers to these questions can have an impact on the business valuation technique that is most applicable to your business.  In some cases, all three methods of valuation may be used to value a particular business. These valuations can then be used to triangulate on the true value of the business.   As a business owner, the key is to be assessing the value of your business on a regular basis.  Once you know the value, then you can develop business strategies to increase this value over time such as increasing revenue growth, improving profitability, liquidity and solvency and getting a greater return on investment.  As they say, you can’t improve what you don’t measure!  Measurement is the first step that leads to control and eventually to improvement. If you can’t measure something, you can’t understand it. If you can’t understand it, you can’t control it. If you can’t control it, you can’t improve it!

Don’t get surprised by your business valuation when your are looking to exit! It is in a business owners best interest to have their business valued on an annual basis.  This way they can they have an accurate assessment of their current business value and they can work on creating more value over time. Furthermore, business owners can quickly modify their business strategy to accelerate this value creation. They can also position their business for a successful merger or acquisition at the highest business valuation!

If you have any questions regarding business valuations or would like to discuss your business value, please give us a call today at (480) 980-3977!

Paul J. Beckert MBA, CPA