Recently, The Orange County Business Journal sought the opinion of Hardesty Founder and CEO, Karl Hardesty, on the new tax reform, which President Donald Trump signed on Dec. 22.
Karl was asked to discuss whether the tax reform gives him confidence about his company and the market’s direction; about his favorite and least favorite parts of the law; how the new tax rates will affect his business; and the most important questions he’s asking tax experts.
Here are edited excerpts of his response:
It’s really interesting being queried on tax planning at this time of year with the new legislation just being passed. Obviously, this is the biggest tax reform since 1986. I have been monitoring the legislation as it affects my business, as well as every Hardesty client’s business in a major way. Hardesty, which is an executive recruiter of CFOs and other C-level executives, is a pass-through entity, as many small businesses are.
The gift we were given was relative clarity and eventual passage prior to the end of the calendar year. That gave every CFO, business owner, and individual a few days to make some critical decisions. So, we at least have some clarity on the new tax rates for both individuals and corporations. The good news is they are all down. The big news is the dramatic drop in corporate tax rates from 35% to 21%.
Many of our clients are cash-basis taxpayers versus accrual basis taxpayers. That allows some flexibility to accelerate certain deductions that companies would normally pay in 2018 and some flexibility on recognizing revenues. Since tax rates are generally going down, basic logic would be to accelerate expenses and defer revenues, since the value of a deduction was higher in 2017 than in 2018 and revenues will be taxed at a lower rate in 2018.
If you run a business that renders services and operates on a cash basis, the income you earn isn’t taxed until you are paid. You may have considered waiting to bill until this year or until a time when there is no chance you will receive the cash for 2017.
As for expenses, we looked hard at everything related to 2017 and attempted to have them paid prior to Dec. 31. Those included:
- Pension matching contributions normally paid in March.
- Certain bonus payments; even if the final numbers can’t be finalized, an estimate is made and paid to the employee.
- Certain prepaid rents could be deductible.
- Certain fixed assets purchased after Sept. 27, 2017, can be fully deducted rather than depreciated in 2017. That rule is good through Jan. 1, 2023. I just took advantage of this by purchasing some assets last month, so I get the 100% write off in 2017.
- Certain bonus payments we make to our staff are contingent on collections. In some cases, we made those payments in 2017, even though collections are expected in 2018.
I would highly recommend that all CFOs spend some time early this year with their tax advisers to fully understand the implications of the new law. There are some complex items that will require interpretation from professionals.