Investment Considerations in Light of the 2017 Tax Act

On February 27, Timothy Speiss of EisnerAmper LLP presented to family office members, representatives, and industry leaders at LIDO Consulting’s 13th Annual Family Office Symposium and provided an update on the Tax Cuts and Jobs Act of 2017.  The legislative intent of this reform, Mr. Speiss informed the crowd, was threefold – raising capital, controlling spending, and providing revenue in order to fund infrastructure. Focusing on legislative intent, a significant portion of the new tax act relates to personal income taxation with attention on a reduction in tax rates, disallowance of certain itemized deductions, wealth transfer and estate taxes. This reform also addresses public policy concepts, such as child care credits and the qualified business deduction (QBI), with the intent of assisting families and improving the economy.

Mr. Speiss specifically spoke to the case of Lender Management v. Commissioner, addressing the current debate of what defines a trade or business. The Lender case provided opinion on when third parties are permitted to invest in a currently closed, family managed entity and if this allowance changes the status from an investment vehicle to a qualified trade or business. The U.S. Tax Court held that when conditions are met relating to non-family members, the entity is deemed to be a trade or business, further allowing qualified business expenses to be deducted under Section 162 of the IRC.

The Tax Cuts and Jobs Act not only provided benefits to individuals and small business owners, but to corporations as well. Beginning in 2018, while C corporations are not permitted to obtain the 20% QBI deduction, entities structured as C corporations will be subject to a federal tax rate of 21%, as opposed to the previously imposed 35% corporate tax rate. There are other provisions within this reform providing relief to C corporations, such as the repeal of the corporate alternative minimum tax, revised bonus depreciation to 100% of eligible property placed in-service, and taxation of only U.S. income vs. worldwide income, as historically done.

As during any time of change, the wise will use the opportunity to review their current structure and assess the potential benefits surrounding topics such as income taxes, asset accumulation or wealth transfer.  The question that remains is: What is the correct answer?

Stephanie Hines, Partner in EisnerAmper Personal Wealth Advisors Group, provides expertise in planning and compliance for ultra-high and high net worth individuals in the areas of personal and fiduciary income taxation, succession and estate taxes.

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