18 KEY ISSUES NEGOTIATING M&A AGREEMENTS

Whether negotiating to sell your company, merge with another company, or to acquire another company, each and every business transaction is different. But, there are Key Elements that must be addressed and included in the process to increase the likelihood of success and to reduce the risks of a lengthy, stressful, and expensive transaction.  I thought this recent article I found in allBusiness.com listed the high points very well.  And while focused on technology companies, the deal points listed herein are common to all deals and being aware of them and the purpose of each is important.  And this article lists them succinctly so I thiought it worth sharing.  Please let me know if you agree and if there is any other topics of interest you would like me to comment on.  Thanks for taking a look.  I hope you find it useful.

https://www.allbusiness.com/18-key-issues-negotiating-merger-acquisition-agreements-technology-companies-113435-1.html

Did You Know About Our Other Services?

When you think of a financial services firm, your mind probably goes straight to financial planning and investment management. Oftentimes, that’s exactly what you’ll get.

At SC Financial Services we go beyond what you’d expect. In fact, we went so far as to open a sister company to serve the specialized needs of our business owner clients.  Optimized Business Transitions, LLC was created to help business owners be more successful, however that may be defined.  This article highlights some of these services.

Everything A Business Owner Needs 

Owning your own business can give you great freedom and power in life, but it also comes with a heavy load of responsibility. You have employees to think about, a family to provide for, retirement to plan for, and daily operations to tend to, not to mention planning for succession and your eventual exit. With so many important daily responsibilities, it can be difficult to work on your business and personal planning issues in a cohesive manner.

That’s why our goal at SC Financial Services, in partnership with Optimized Business Transitions, is to call attention to and provide innovative solutions for addressing the many planning needs specific to business owners.

Business Valuation

Whether you are getting ready to sell your business or wanting to get an estimate of enterprise value to gauge your company’s growth, we start with a no-cost assessment that will give you high-level insights into your business’s current operational health and value. These insights will help you make decisions about how to best increase value, fix problems, as well as understand how your business compares to others in your industry.

Business Transition and Coaching Services

You spend the majority of your waking hours investing your time and resources into your business. Not only is it scary to think about leaving it behind, but you also don’t have the time or energy to map out the most strategic plan for your situation. Thankfully, you don’t have to do this alone.

We specialize in assisting business owners by increasing their opportunities for success, ensuring that their goals and priorities are being recognized while maximizing the financial outcome to themselves and their family. We will coach you through a dynamic, actionable plan that will guide you through implementing best practices, strengthening operations, and building value.

Tax Planning and Coordination

Taxes may feel like the bane of your existence, but they can’t be ignored. In order to keep as much of your hard-earned money in your pockets as possible, you’ll need to maximize tax deductions, minimize your taxes now and in retirement, and have a tax-efficient estate plan in place. If you are planning to sell your business, you’ll need to carefully consider the effects taxes and understand your tax options. We can work through the myriad of tax considerations, alongside your tax professional so you position yourself with the best possible outcome.

Personal Planning

The business and personal planning needs of business owners are unavoidably intertwined. We carry over all the elements of our Personal CFO™ services to your business in order to support all aspects of your financial life, ensuring that everything is working together for your benefit.

We Don’t Stop There

Since we want you to love running your business, we also provide technology consulting, bookkeeping oversight, and retirement plan and employee benefits package analysis. For more details about our specialized services, visit our website. And if your business needs high-touch, personalized planning support, contact us today at 480-214-9596 or email us at info@scfinancialservices.com

Five Steps To A Successful Transition Part 3: Assembling Your “A Team”

In part 1 of this 4 part series, we covered the importance of planning ahead (Step 1) and the value of selecting an experienced “quarterback” advisor (step 2) to leverage against and the impact these initial steps will have on the successful outcome of any transition.  Then in Part 2 we talked about Knowing Your Numbers and the importance this has on the success of any transition.  Knowing what your business is worth is only half the equation.  Knowing what you need from a personal financial planning perspective is equally important to having the confidence and peace of mind to execute a transition plan aimed at the owner’s retirement.

So let’s assume we have a strategic transition plan, with a lead advisor to assist with the coordination and execution of the transition.  We know the value of the business and it will meet or exceed the outcome required for you to reach your financial freedom.  Now what?  The answer is simple, we assemble to A team to bring all the different practice expertise to the table in a coordinated effort to execute the plan.  There are many roles that need to be brought together.  We started with a valuation expert to know with confidence what the business is worth.  We added in the financial planner / advisor to define what was needed to achieve the personal financial objectives of the owner.  And let’s assume one or more of these was provided via Optimized Business Transitions as the coordinator / Quarterback.  Who else do we need to have our bases covered?

From the smallest main street business to larger complex merger and acquisition efforts, having an experienced Business Contract attorney on the team is nothing less than a requirement.  Often a business owner has his trusted legal advisor and many may be properly equipped to assist in the transition documentation generation and review.  If not, they may know someone who is or we can work with those familiar with Optimized Business Transitions who have a proven track record of success.  We leave that choice to the owner and circumstance but often encourage at least a review with the transition specialist attorneys we partner with.  It allows us specific confidence the contractual agreements will be well written, will protect our client’s specific goals and interests, and will be provided in a timely and cost effective manner.

In conjunction with the Business Contract attorney we will need a CPA who specializes in transaction work and preferably one who has worked with the attorney above to collaborate on the “deal structure”.  Often times the deal structure is key to optimizing the outcome for the owner based simply on finding the right measure of classifying sale proceeds in a favorable yet entirely legal manner to minimize the tax obligation generated through the windfall of a business sale.  I would suggest there is a tremendous differentiation between a tax accountant who prepares tax returns and a tax strategist CPA who can model the various outcome scenarios and lend value to the conversation on how the deal can be structured to keep more of the proceeds of any transition in the hands of the owner and out of the hands of Uncle Sam.  Optimized Transitions works with several accountants that specialize in transaction or transition work and would gladly introduce them to the team if this seat is not taken.

 

Next comes the Estate Planning attorney.  Again, if a relationship is in place, we welcome their familiarity with the client and potentially the business.  From an asset preservation and liability mitigating standpoint, having the owner’s estate work properly crafted and funded will lend itself to the success of any transition.  Plus it puts the 3 “C’s” in play…Control while living, Control in the event of Disability, and Control in the event of the owner’s passing.  A well-crafted estate plan guarantees the goals of the owner are properly defined and will be managed and implemented in all foreseeable scenarios.

I would suggest there are other very valuable members of a transition team such as business value growth strategists, succession planning experts, leadership development specialists, and industrial and/or personal psychologists to contribute to the human element involved with the changes being faced by the owner and the employees of any company going through such dramatic change.  These specialists are well known to the OBT team and are readily available to be added on a case by case basis.

Who on your current advisory team would fit into the roles necessary to develop and execute your transition plan?  If you would like to talk about how Optimized Business Transitions can assist in bringing together your “A” team and coordinating their efforts to efficiently execute a personalized transition plan for you, please visit our website www.optimizedtransitions.com and click on the Contact Us tab.  We would enjoy discussing your plans and discovering if our fully vetted team of professional advisors would bring you tremendous value in the process of planning the optimized transitions plan for your and your business.

The Numbers Game: Why All Entrepreneurs Must Learn The Rules Of This Game

This is the golden age of entrepreneurship. From a college dropout with a brilliant business idea, to an excellent home baker starting an online bakery, entrepreneurs in the new millennium are changing the tides of traditional businesses. But with 50% of start-ups shutting their doors even before they hit the 5 year mark, the one thing that seems to deter some budding entrepreneurs is taking stock of the numbers that matter. Because numbers are the building blocks of a successful business.

The art of reading numbers and understanding what they are trying to tell you is at the core of a successful business. If you can’t make the numbers work for you, then no matter how great the idea, you will just not hit its maximum potential. Here are some of the numbers that you need to evaluate to create a strong, viable and successful business.

1. Seed Capital.
As you sow, so shall you reap. You need to carefully consider the capital you need to invest in your business because this is what is going to initiate the chain reaction for everything that follows. Weigh your marketing plan, competitors’ positioning, potential risks and profitability factors to understand exactly how much money you can safely invest. A great way to gauge the market, while raising capital, is to test crowdfunding on one of the many crowdfunding platforms, such as Kickstarter.

2. Projection.
This translates into the yearly budget and estimated profit. The important factors to be considered while calculating this are the raw materials or capital costs, labor charges, buffer, taxes, rent, maintenance, other unaccounted costs as well as input and outflow of both workforce and finances. Many of these factors will change based on the nature of your business. Remember that although you may estimate that the business will generate a certain rate of revenue growth going forward or that certain expenses will be fixed or can be controlled, these are only estimates and not set in stone. They will however act as guiding lights as you try to navigate your way forward and grow your business.

3. Debt.
Maintaining a steady cash flow requires substantial amount of reliance on debt, at least for a majority of new businesses. The debt you owe the bank, investors or any other institution will be the loans taken by your business that must be repaid, usually with interest, over a period of time. However you may have taken a loan from an alternate source including accountants, credit unions or others. Calculating a tentative inflow or outflow of money from these sources is important. It is usually advised to split your loan amount between two or more sources so that no single lender can overpower your business.

4. Assurance.
You have set up a successful and profitable business but imagine one day there is a spark in the motor room of your factory. The spark that started in a corner burned down a huge part of your factory before someone could put that fire out. Now as hypothetical as this is, there are many smaller damages to your business that can occur, however if your business is insured correctly, they will never result in more than a minor setback. Hence, as a growing business, it’s not only important to know exactly how much your business is worth in order to arrive at the right insurance amount, but also monitor your valuation over time and keep updating your insurance accordingly. With the help of Optimized Business Transitions you can learn exactly how much your business is worth and even monitor it overtime. This means that you know exactly what kind of insurance cover your business needs

5. Let’s sum up the numbers, shall we?
None of these numbers can be analyzed without the exact number of your business, this is the value or worth of your enterprise. Business valuation is the basis of any future transaction or estimation. It is used to set the fair market value of the shares of a business, to estimate and follow up on the budget and profits, taxation, insurance, loans and almost any other function of the company, be it qualitative or quantitative. Now this is THE number and you cannot go wrong with it because it will have a domino effect on the rest of your business. We recognized this need to continuously monitor and optimize a business’s worth and put real time Business Valuation within the reach of all business owners with Optimized Business Transition’s valuation platform. This platform aims to help business owners make more informed decisions by having access to real time valuation numbers and trends.

So while you get all your pieces in place and formulate a strategy, don’t forget that your product/services, the marketing plan, your financers, insurers etc. are the various working parts, but what you are eventually trying to build and protect is enterprise business value.

Let’s get started today with for a complimentary initial consultation by reaching out to us via phone at 480-518-3911, or via the Contact Us page. You are also welcome to jump right in and start your Discover Valuation.

If there is ever a particular topic you would like us to research for you, please do not hesitate to let us know. We look forward to hearing from you.

Five Steps To A Successful Transition Part 2: Know Your Numbers

In part 1 of this 5 Step Series, we highlighted the importance of Planning Ahead and the benefits of Choosing a Quarterback to help you, the business owner, manage the transition process.  In this edition, let’s take a look at the importance of Knowing Your Numbers.  Let’s start with some industry specified statistics to set the stage:

  1. It is estimated that over 95% of privately held business owners do not know with confidence what their business is actually worth
  2. Less than 10% of business owners have a written succession plan
  3. More than 10 Million businesses will be sold or liquidated in the next 10 years with the proceeds earmarked to fund retirement
  4. 75% or more of the “Baby Boomers” are not confident they have saved enough to fund their retirement
  5. 80% of business owners are uncertain if the sale of their business will be sufficient to provide for their goals and needs in retirement.
  6. 90+% of business owners largest asset is their business itself. It is almost always the business owners most valuable asset.

Now I don’t know about you, but as a business owner myself I cannot imagine adding to the stress of my day to day activities the uncertainty of not knowing if I can retire and if I am going to be able to sell or transition my business.  Being able to remove the uncertainty and stress is not complicated. All you need is a business valuation and a personal financial plan.  The most common objections we hear are that business valuations are expensive, and complicated, and time consuming.  Depending upon the purpose of the valuation, that can be entirely correct.

Yet, for the purposes of strategic planning and business optimization, it does not have to be any of those things.  We specialize in simplifying the valuation process and deriving a true, accurate value of what the business is worth today at a very fair price.  Furthermore, we look at what the potential value of the business would be if over the next few years some of its strengths were enhanced and its weaknesses improved.  Along the way, the business owner can see the improvements and the business value increasing as steps are taken toward optimization.

“Knowing Your Numbers” as far as what the business is worth today, and what it can be worth at it’s full potential is powerful information.  Yet having an accurate business valuation in hand only solves half of the equation.  The real value to that number comes from applying that information to “Knowing Your Numbers” on the personal financial planning side.  It is critical that we define what your financial needs will be in retirement so we can determine with confidence whether the value of the business in combination with all the other assets in your overall portfolio are sufficient to meet and exceed your goals and dreams in retirement.

This is where Optimized Business Transitions really shines.  In partnership with SC Financial Services, we provide business valuation, operational assessment and optimization, transition planning, and personal financial planning.  Through the combination of these services, we help our business owner clients “Know Their Numbers” on the business and personal side and provide confidence that whatever the owners transition plan looks like, he or she can execute on the plan with peace of mind.

In our next segment, we will look beyond the numbers at Assembling the “A” team.  Who, When, and Why it is important and what is the impact to the bottom-line.  Thanks for reviewing this and by all means let me know if there is anything in particular you would like to discuss by going to www.optimizedtransitions.com and selecting the Contact Us tab.

Succession Planning: It’s Time To Make A Plan

Ever feel like you’re constantly putting out fires? Do you wish you could get back to a place where running your business was fun again?

Wish no more! OBT can show you how to get there. Let’s start with a no-cost assessment that delivers fast, high-level insights into your company’s current operational health and value. The assessment is called Discover; and that’s what it does for you…you’ll ‘discover’ the major opportunities within your business.

FIVE STEPS TO A SUCCESSFUL TRANSITION: PART 1

When successful business owners are getting started, they know they need to put together an advisory team of professionals to help them navigate the things they do not know. A CPA and attorney are the first to come to mind in forming as reporting are the natural first steps.  Then comes the insurance, what needs to be covered, how much is too much etc.  Having their team of experts in place allows them to have confidence they can focus on what they know better than anyone else, running and growing their business.

Fast-forward 20 – 30 years…as a business owner you have given it your all and the business has grown and become a huge success.  In fact, as the owner you are now starting to want to at least slow down a little and have more time to enjoy with your family. Ultimately you might like to try something new or at least have more time for yourself.  Either by backing away from the day-to-day operations or potentially selling the business outright can accomplish this transition. But what seemed simple in the beginning is now much more complex and the stakes much higher than you had ever imagined.  What can you do to be confident you are making all the right moves to make this transition work for yourself, your family and your company?

Below are five key steps to a successful transition.  In this article we address the first two.  Later, we will dive into the other three as they require more detail and we like to keep these articles short for our busy entrepreneurs.

The 5 Steps Are:

  • Plan Ahead – Give yourself the time to make it work
  • Choose a “Quarterback” – Select someone to lead the charge on your behalf
  • Know Your Numbers – Understand how the transition will impact your plans, financially as well as personally
  • Assemble the “A” Team – Bring all of the expert advisory resources together
  • Communicate – Let your employees and clients in on the plan and how it will or will not affect them once implemented

Transitions under duress never work well for anyone.  We recommend giving yourself 3-5 years to plan and execute the transition.  History tells us that the more time we allow for both the business and person to plan and implement the more valuable it will be.  It starts with assessing what you will need and who you will need to make it a smooth and profitable transition.

Time is the one resource that is impossible to control given you cannot increase or decrease the amount given to you.  If you are like most business owners, time is a scarce and precious resource.  We encourage you to leverage a trusted resource to assist you with this process.  At Optimized Business Transitions we become the proverbial “quarterback” of these transitions for our clients.  Helping them coordinate the plan and its implementation, allowing our clients to continue working on the areas of the business that need their attention.  We have yet to meet a business owner that has sufficient time and/or capacity to manage their business while also optimizing their transition.

BUSINESS OWNERS: WHAT IS YOUR NUMBER?

Business Owners:  What Is Your Number?

Do You Truly Understand What Your Business Is Worth, and Why Knowing That Is Important?

There are around 29 million businesses with fewer than 500 employees in the US, representing almost half of total private sector employment.  No wonder small business owners like us feel like Atlas carrying the world on their backs.  “Baby Boomers” own the vast majority of these businesses and the facts are simple:  Boomers are aging and will be transitioning their businesses in the coming years.  The question is, will they be proactive and control the transition to optimize the outcome for themselves, their families, and their employees?  Or will they wait and see how nature forces the issue for them.  My view? Let’s start with a plan.  Where should we start?  A business valuation.

Traditionally, the value of a privately held company represents upwards of 75% of the owner’s overall net worth.  And this is where a misunderstanding of business value is often uncovered.  The majority of business owners do not really know with confidence the actual value of their company.  Furthermore, business owners tend to be emotionally attached to the business they have worked so hard to build for so many years.  Their perceived value of the business is often vastly inflated in comparison to what an actual buyer (Strategic, External, or Internal) of the business would be willing to pay.  The reality of the actual value not meeting expectations and yet representing the majority of the owner’s wealth will have far reaching consequences on the personal financial goals and those of his family and legacy beneficiaries.

To avoid the risk of anchoring your financial planning around a perceived value of your largest asset that may be potentially far from accurate, we recommend obtaining an objective, accurate business valuation.  Once this value has been obtained, we can apply it as a base line for planning purposes to achieve the financial freedom and security the owner is seeking.  Timing is everything.  With a few years advance planning, Optimized Business Transitions will integrate the business valuation, an operational assessment process to develop and implement business growth and transition strategies, and personal financial planning to uncover opportunities to secure and grow the business value, put the control over the transition process squarely in the hands of the business owner, and secure long-term financial freedom for the owner and his/her family and beneficiaries.

BUSINESS SUCCESSION PLANNING BASICS

Business Succession Planning

When developing a succession plan for your business, you must make many decisions. Should you sell your business or give it away? Should you structure your plan to go into effect during your lifetime or at your death? Should you transfer your ownership interest to family members, co-owners, employees, or an outside party? The key is to develop a succession plan that integrates your personal financial planning objectives, your estate plan, your business plan, and your overall business transition plan.  When these factors are all working together, your “Success in Succession” is optimized.  We recommend you work with a coordinated, qualified team of advisors to develop and execute such a strategy.

Selling your business

Selling your business outright

You can sell your business outright, choosing the right time to sell — now, at your retirement, at your death, or anytime in between. The sale proceeds can be used to maintain your lifestyle, or to pay estate taxes and other final expenses. As long as the price is at least equal to the full fair market value of the business, the sale will not be subject to gift taxes. But, if the sale occurs before your death, it may result in capital gains tax.

Transferring your business with a buy-sell agreement

A buy-sell is a legally binding contract that establishes when, to whom, and at what price you can sell your interest in a business. A typical buy-sell allows the business itself or any co-owners the opportunity to purchase your interest in the business at a predetermined price. This can help avoid future adverse consequences, such as disruption of operations, entity dissolution, or business liquidation that might result in the event of your sudden incapacity or death. A buy-sell can also minimize the possibility that the business will fall into the hands of outsiders.

The ability to fix the purchase price as the taxable value of your business interest makes a buy-sell agreement especially useful in estate planning. Agreeing to a purchase price can minimize the possibility of unfair treatment to your heirs. And, if your death is the triggering event, the IRS’ acceptance of this price as the taxable value can help minimize estate taxes.

Additionally, because funding for a buy-sell is typically arranged when the buy-sell is executed, you’re able to ensure that funds will be available when needed, providing your estate with liquidity that may be needed for expenses and taxes.

Private annuity

With a private annuity, you transfer your ownership interest in the business to family members or another party (the buyer). The buyer in turn makes a promise to make periodic payments to you for the rest of your life (a single life annuity) or for your life and the life of a second person (a joint and survivor annuity). Again, because a private annuity is a sale and not a gift, it allows you to remove assets from your estate without incurring gift or estate taxes.

Until 2006, exchanging property for an unsecured private annuity allowed you to spread out any gain realized, deferring capital gains tax. IRS regulations proposed that year have effectively eliminated this benefit for most exchanges, however. If you’re considering a private annuity, be sure to talk to a tax professional.

Self-canceling installment note

A self-canceling installment note (SCIN) allows you to transfer your interest in the business to a buyer in exchange for a promissory note. The buyer must make a series of payments to you under that note, and a provision in the note states that at your death, the remaining payments will be canceled. Like private annuities, SCINs provide for a lifetime income stream and they avoid gift and estate taxes. But unlike private annuities, SCINs give you a security interest in the transferred business.

Gifting your business

If you’re like many business owners, you’d prefer to have your children inherit the result of all your years of hard work and success. Of course, you can bequeath your business in your will, but transferring your business during your lifetime has many additional personal and tax benefits. By gifting the business over time, you can hand over the reins gradually as your offspring become better able to control and manage the business on their own, and you can minimize gift and estate taxes.

Gifting your business interests can minimize gift and estate taxes because:

  • It transfers the value of any future appreciation in the business out of your estate to your heirs. This can be especially valuable if business growth is expected.
  • Gifts of $15,000 (in 2018) per recipient are tax free under the annual gift tax exclusion.
  • Aggregate gifts up to $11,180,00 (in 2018, $5,490,000 in 2017) are tax free under your lifetime exclusion.
  • Partial interest gifts, as with GRATs, GRUTs, and FLPs, may be valued at a discount for lack of marketability or restrictions on transferability.

Gifting your business using trusts

You can make gifts outright or use a trust. You can even structure a trust so that you keep control of the business for as long as you want. You can establish a revocable trust, which will bypass probate and allow you to change your mind and end the trust, or an irrevocable trust, such as a grantor retained annuity trust (GRAT) or a grantor retained unitrust (GRUT) that can provide you with income for a specified period of time and move your business out of your estate at a discount.

Gifting your business using a family limited partnership

You can transfer your business interest using another entity, such as a family limited partnership (FLP). An FLP is a limited partnership formed to manage and control a family business. You (and your spouse) can be the general partners, retaining control of the business itself and receiving income from the business, while your children can be limited partners. By transferring the business to an FLP, you may be able to use valuation discounts and substantially reduce the value of the business for tax purposes by making annual gifts to the limited partners.

The key is to pick the best plan for your circumstances and objectives, and to seek help from a qualified team of advisors to help you execute the plan.

Common business succession planning objectives

  • Ensure smooth, seamless transfer of ownership
  • Transfer business to next generation
  • Ensure business continuity
  • Retire with income source
  • Minimize gift and estate taxes

 

DID YOU KNOW SOME OF THE TAX LAW PROVISIONS ARE TEMPORARY, OTHERS PERMANENT?

The Tax Cuts and Jobs Act (TCJA): Which Provisions are Temporary and Which are Permanent?

The Tax Cuts and Jobs Act (TCJA) includes a number of important tax changes for individuals and businesses. However, it’s often difficult for advisors and investors to keep track of which changes are permanent and which are scheduled to expire at the end of 2025 – unless Congress extends them.

Here’s summary to help you keep track of the permanent vs. temporary changes as the tax law stands today.

Permanent Provisions

These changes take effect for tax years beginning in 2018 unless otherwise noted:

For Individuals

  • No deductions for alimony payments required by post-2019 divorce agreements.
  • No more reversals of Roth IRA conversions.
  • Repeal of the penalty for failure to have “minimum essential coverage” under the Affordable Care Act for months beginning in 2019 and beyond.
  • Tax-free distributions of up to $10,000 annually from Section 529 accounts to cover qualified K-12 school expenses at public, private or religious schools.
  • Elimination of favorable treatment under Section 1031 for exchanges of personal property.
  • No more charitable write-offs for a payment to a college if the payment entitles you to buy tickets to athletic events of the college.

For Businesses

  • Flat 21% federal income tax rate on corporations.
  • Elimination of the corporate alternative minimum tax (AMT).
  • More-generous rules for first-year Section 179 depreciation write-offs.
  • More-generous depreciation deductions for passenger vehicles used for business (cars, light trucks and light vans).
  • Faster depreciation for some real property and farming machinery and equipment.
  • Expanded eligibility to use cash-method accounting and simplified inventory accounting procedures.
  • Favorable accounting method change for eligible construction companies with long-term contracts.
  • Elimination of favorable treatment under Section 1031 for exchanges of personal property.
  • Reduced or eliminated deductions for business entertainment and some employee fringe benefits.
  • Stricter rules on deducting net operating losses (NOLs).
  • Several provisions affecting S corporations, partnerships, and LLCs treated as partnerships for tax purposes, excluding the new deduction of up to 20% of qualified business income (QBI).
  • Self-created intangible assets no longer treated as capital gains assets. Applies to inventions; models and designs; secret formulas; and certain processes.
  • New three-year holding period rule before long-term capital gains treatment is allowed for partnership carried interests.
  • New $1 million annual limit on compensation deductions for amounts paid to principal executive officers.
  • New requirement, for tax years beginning after Dec. 31, 2021, for specified R&D expenses to be capitalized and amortized over five years, or 15 years if the R&D is conducted outside the United States.

Temporary Provisions

These changes take effect for tax years beginning in 2018, and expire at the end of 2025, unless otherwise noted:

For Individuals

  • Reduced federal income tax rates.
  • More-favorable alternative minimum tax (AMT) rules.
  • Expanded standard deductions.
  • Increased child tax credit (up to $2,000 per qualifying child, with up to $1,400 that can be refundable), and higher income thresholds for the child credit phaseout.
  • Credit of up to $500 for dependents who aren’t qualifying children.
  • Lower income threshold for itemized medical expense deductions (scheduled to expire at the end of 2018).
  • Elimination of the phaseout rule that can reduce some itemized deductions for higher-income individuals.
  • 60% adjusted-gross-income limit for itemized deductions for cash donations to public charities.
  • Tax-free treatment for forgiven student loans due to death or disability.
  • Increased federal gift and estate tax exemptions ($11.18 million or effectively $22.36 million for married couples for 2018).
  • Deduction for up to 20% of qualified business income (QBI) from pass-through entities for noncorporate owners.
  • Elimination of personal and dependent exemption deductions.
  • Limitations on itemized deductions for home mortgage interest.
  • Limitation on itemized deductions for state and local income and property taxes.
  • Elimination of itemized deductions for miscellaneous expenses.
  • Elimination of itemized deductions and tax-free employer reimbursements for moving expenses (except for certain military personnel).
  • Elimination of itemized deductions for personal casualty and theft losses (except for losses incurred in federally declared disasters).
  • Elimination of itemized deductions for hobby expenses.*
  • Revised kiddie tax rate structure.*
  • Stricter deduction rule for nonwagering expenses incurred by professional gamblers (such as for travel and lodging).
  • Limitation on deducting large business losses recognized by individual taxpayers.

For Businesses

  • 100% bonus depreciation for qualified business assets (expires after 2022).*
  • Bonus depreciation with declining percentages for 2023 through 2026.*
  • New tax credit for employer-paid family and medical leave for payments made in tax years beginning in 2018 and 2019.*

* Indicates that this provision is not included in the “Protecting Family and Small Business Tax Cuts Act.”

In September, the House Ways and Means Committee introduced the “Protecting Family and Small Business Tax Cuts Act of 2018.” This bill would make the many temporary TCJA provisions permanent. House Republican leaders are expected to have trouble mustering the 216 votes needed to pass the measure. However, even if the measure passes the House, the Senate isn’t expected to take up the legislation before the November elections.

Talk with Your Tax Professional 

These lists contain only the most widely applicable TCJA provisions; some changes are not included in the two lists. Optimized Business Transitions, LLC. is not a CPA or accountant. You should consult your tax professional who can provide details about the temporary and permanent TCJA changes that could affect your specific personal and business situation.