The phrase “net operating loss” may bring about feelings of despair to a business person. It may be the case that a business actually lost money in a given year and the owner reported a negative taxable income number on his/her tax return. Net operating losses (NOLs) for tax purposes do not always mean negative business results. In some cases, NOLs arise from accelerated tax deductions through depreciation, resulting in positive cash flow for the business, but a negative bottom line for tax purposes. Regardless of how an NOL was generated, the rules governing their use are changing as a result of the TCJA. We explore a few of the issues at play in this article:
Michael Tota, CPA
As consumers, we are constantly tasked with assigning value to different products/services we encounter on a daily basis. Generally, we have a good sense of how valuable an item is and can make a purchasing decision without much effort. Think about going grocery shopping, we quickly assign value to the food on the shelves and make a decision to put the item in our cart, or not.
1. CORPORATE RATE / PASS-THROUGH DEDUCTION
What is in the bill:
Much has been made about the decline in the corporate income tax rate to a flat 21%, and there are also additional changes to the taxation of pass-through entities including partnerships and S-Corporations. The cuts to pass-through entities include a potential 20% deduction from the partner/shareholder’s allocated income, subject to limitations based on W-2 wages paid and the unadjusted basis of the property used in the production of the income.
1. PASS-THROUGH INCOME DEDUCTION
What is in the bill: It has been widely publicized that the bill provides a substantial drop in the tax rate imposed on corporations to 21%. In order to establish a more even playing field between corporations and pass-through entities, the bill proposes a deduction of a partner/shareholder’s allocation of pass-through income from a partnership or S-Corporation. The deduction is set at 20%, but subject to specific limitations.
Buying or selling a business is a complicated transaction with many tax, legal and financial variables to consider. Although the sale or purchase of a business should never be compelled by tax considerations alone, taxes can have a substantial impact. Questions such as, what are the goals of the buyer and the seller, how should the transaction be structured, what types of entities are involved, should all be well thought out.