Weighing options: How companies can take advantage of tax reform
The Tax Cuts and Jobs Act contains substantive changes that will impact businesses of all sizes across industries.
The legislation includes a reduction in the tax rate for corporations from 35 percent to 21 percent, and within days of the legislation's passage, businesses such as Bank of America, AT&T and Disney announced that they would be paying bonuses to their employees.
Many companies are wondering what to do with the expected tax savings and how to communicate any changes to their employees. Should they fall in step with highly publicized businesses and pay bonuses? Or, should they hire more employees or reinvest the savings into equipment? Or, if possible, do both?
First, a business should assess what its tax position will be once the new tax law takes full effect. It should also evaluate tax planning strategies that may enhance its savings further, such as changing entity status from an S corporation to a C corporation, or restructuring the business to capitalize on the new 20 percent deduction for pass-throughs. Once a business understands the impact of the new legislation, it has many options on how to invest its tax savings.
Many companies have chosen to pay bonuses or higher wages to their employees with their tax savings. But there are other compensation alternatives that might be worth exploring.
For instance, making additional contributions to a company's 401(k) or other qualified retirement plan would provide added retirement benefits for employees.
While a bonus will likely boost morale in the near-term, enhanced retirement benefits could help a company retain employees.
It's important to note that a business could choose to implement a combination of immediate compensation-related benefits like bonuses and longer-term benefits related to retirement plans.
Grow the business
Beyond compensation-related benefits, management can also use these projected tax savings to grow their businesses.
Options could include hiring new employees, purchasing new equipment, acquiring another company or expanding into a new geographic area. These strategies can also be used in combination with a bonus or another compensation-related benefit.
Additionally, companies may consider making financial-oriented moves with their tax savings, such as paying down outstanding debt.
The law's new limitations on deducting interest expense make this a particularly valuable option for highly-leveraged companies. Companies could also direct some of their tax savings toward completing a buyout that wasn't previously affordable, or increase distributions to its stakeholders.
Communicate to employees
In addition to the tax savings for businesses, individuals will likely also see tax relief from the new law, and management should inform its employees of the expected savings.
Many employees may want to update their withholdings to realize tax savings earlier, and management can help them by proactively explaining the process for updating their Form W-4.
It can also direct employees to the IRS's Form W-4 calculator to help them determine any changes to make.
Additionally, with high-profile media coverage of bonuses, many employees are curious what their own employers plan to do.
So, once a company has determined what impact tax reform will have on its business and what it plans to do with any savings, management should inform its employees of its planned actions.
Even before the company makes final decisions, a simple message to employees that states that the firm is in the process of evaluating the impact of the tax law can address employee curiosity.
Most of the tax changes in the tax law have now taken effect, and many businesses should soon realize some tax savings.
A company's management should determine how the tax law will impact the business, enhance its savings where possible, develop a strategy that fits the business, and communicate this strategy with its employees.
Companies that do all of this will take a step toward forging stronger employee relations as they enjoy the bottom-line benefits of the new law.
• Jim Brandenburg, CPA, MST, is a tax partner at Sikich, a professional services firm.