By: John P. Napolitano, CFP®, CPA, PFS, MST

The new tax act once again puts tax planning at the epicenter of financial planning.

hile most high income taxpayers have always considered tax planning to be a core part of their financial plan and economic well-being, the Tax Cuts and Jobs Act makes a planning conversation between Certified Public Accountants (CPA’s) and clients even more natural than it already was.

Over the course of the diverse conversations that you’ll have with clients regarding tax planning, there are follow up questions regarding other parts of their financial life that may also help your clients make sound financial decisions. At this early stage of passage, making permanent moves to save taxes under the new act this year may not be in your clients’ longer term interests. But ignoring your clients during this early stage of passage may also be a mistake as this tax act is top of mind for them.

The biggest conversation piece for CPAs with high end and/or business owner clients is the rate reduction for businesses.  This discussion starts out with an assessment of whether this provision will apply to you.  If yes, the second conversation could be about how to best deploy your newfound resources.  If no, the conversation may drift to what you can do in order to benefit from the rate drop.

Starting in reverse order, there are lots of theories spinning regarding how to restructure your business to qualify for the lower rate.  One way, or course, is for your successful small business clients to abandon their strategy as Subchapter S corporations.  Since 1986, the S Corp has been the preferred structure for small business.  Converting back to a C Corporation may indeed tax the businesses income at a lower rate, but don’t forget that you’ll again be taxed on the dividend if you take dividends.  You will also raise the possibility of double taxation should this business ever get sold. 

Other professional tax planners have bantered around idea about splitting up the business so that certain parts may qualify for the deduction. Whether you segregate your vehicles, payroll or some other part of your business so that this new entity or division may benefit from the favorable tax treatment is a bit more palatable than losing a qualified S election. In the event that this tax law gets changed or goes away as fast as it arrived, at least this plan may be easily unwound.

For your clients with family businesses, perhaps the splitting up of the entities may facilitate a succession conversation, where the elder generation can begin to divest their interests and begin to include the next generation in ownership. It is possible that a recent unwinding or segregation of the business divisions may help lower your valuation, making it even easier to transition ownership.

If your client does qualify for the lower tax rate on their pass through entity, look to what that surplus can accomplish. Most CPA’s are simply going to gloat and tell their client how much extra net income they’ll have under the new tax act.  The savvy CPA will talk about the smart money moves that can be made with this windfall.

If the company wants to share the wealth with everyone, consider beefing up the company’s benefit and retirement plans.  Many small companies could use help in this area.  Your clients can beef up the group benefits, alter the retirement plan to allow for richer contributions or add benefits that were too expensive in the past.

If the company has too many employees, and can’t materially improve the benefits package, consider some sort of top hat plan. In a top hat plan, selective benefits are given to key employees and those who are adding the most to the company’s success.  In order for this to work, you’ll probably have to include these top hat benefits in their compensation.  Whether it is a life policy, disability or simply bonuses, your key employees will feel rewarded. If you discover that a personal, non-cancellable own occupation disability income insurance policy is what is needed, be careful.  If you pay for that corporately, and do not add this to the employees’ compensation, the benefits may be taxable to the employee upon receipt.

Your owner can fix their succession issue.  I suppose it is possible that this successful small business owner has a succession plan that is buttoned down and funded… but that is almost never the case.  Chances are more likely that your client has no succession plan or a plan that is so old that its utilization may be disastrous for either the decedent’s heirs or partners.

Every business owner has a list of things that they would do if they ever had the time or the money.  For our successful small business owners, this is the time to ask them what is on that list.  It may be an upgrade to your manufacturing equipment to create less waste or to scale efficiency. This tax cut could be the nudge that your clients’ need to make their next hire.  Help them decide if the personnel addition is to free up time for the owner to enjoy personally, or whether it is a strategic position within the company to help it grow and prosper. Maybe it is time to upgrade technology or the company’s internet footprint.  Whatever it is that your clients feels could or should be done, help them make thoughtful decisions focused on outcomes and what they would like to see in return for their new investments. Ironically, the more your clients chooses to invest in their business, their total tax burden will fall even further.

The Mergers & Acquisition world is very excited for the business tax cuts.  Most professionals in the M & A world expect 2018 to produce a lot of transactions – both large and small.  This could be the time for your client to test either side of that pond.  For older owners without a succession plan, this could be the time to entertain a sale.  The only factor working against you is higher interest rates – and it doesn’t look like that is going to slow down for the remainder of this year.  If selling is not in the cards, perhaps it is your client’s chance to approach some of the competitors or synergistic companies in their marketplace and see who would entertain a sale.  These are great conversations to have with a client, but these in particular a hard to get going.  You may have to assist your client by identifying intermediaries who can help.

Perhaps the last idea with excess cash from a lower tax bill is simply to save and invest it.  For some, this is more important than others.  Many baby boomers haven’t saved as much as the prior generation, and this could be the push that your client needs to start an aggressive savings plan. This is also a good time to do a financial independence forecast.  For your saver clients, this should illustrate that their financial independence is likely to happen sooner.  For the non-savers, use this opportunity to show them how much they need to earn and save over the next XX years in order to become financially independent. 

For Individuals

Your high net worth clients are probably unhappy with the State and Local Tax deduction limitation.  This limitation on your clients’ state income and property taxes is more of an annoyance than anything else.  It may propel some to move to a no income tax state, but there isn’t much else you can do. While preparing your clients’ 2017 taxes, run the 2018 forecast to show them how they are impacted by tax reform.  Frankly, for all of your tax clients this is probably a good move and they are all wondering how the law will impact them, in dollars and cents.

The limitation on home mortgage interest is another annoyance for some clients.  For mortgages taken after 12/15/17, clients are limited to deducting the interest only up to $750,000 of debt, down from $1 Million.  For the client with excess cash, this begs the question about paying down some of the debt where you receive no tax benefit for the interest payment. This will raise the issue as to whether your client is better off with the debt and investing excess cash or paying down the mortgage.  There is no definitive answer, but for your clients with a very low tolerance for risk, a pay down may make sense.  For those comfortable with risk, they may decide that having non-deductible debt at a rate of X% is a great deal because they feel that their investments may outpace that cost of funds.

This could also call for a debt restructuring.  For your client with over $750,000 in home mortgage interest, perhaps there is another way.  Some of the quick thoughts that come to mind are taking a loan out against your investments.  Of course, this may also not be deductible.  But if your client can deduct it against investment income, this strategy may make sense. 

Another alternative may be to get some debt in the business.  While it may be comforting to be debt free, here we are simply talking about borrowing for your business, which is tax deductible.  Your client can then in turn either raise their income or take a distribution from the company to retire their home mortgage.  Of course, there are a lot of moving parts here, but this too is something worth investigating.

With the mortgage and SALT limitations, that leaves charitable as another area to look at. With the new standard deduction at $20K for married, it is possible that some of your high net worth clients won’t have enough deductions to itemize.  This raises the issue of bunching of deductions, particularly those which are discretionary such as charitable contributions.  Your client can go from being a regular contributor to being a spotty contributor to maximize the tax benefit. The use of a charitable foundation or a gift trust account can help your client accomplish both benefits.  They can get the deduction for making a larger than normal contribution in any given year to the entity of choice.  Then that entity must contribute 5% of the principal in that account to qualified charities each year, effectively restoring your clients’ ability to make small annual gifts that would benefit from a tax deduction.   

However you choose to serve clients in the face of this tax change is your decision.  Ignoring what is on your clients’ minds and the opportunity to be of greater service can be a fatal flaw.  They are thinking about it, and ultimately will find someone to work with that can address their concerns.

*Published on April 3, 2018 in Accounting Today

 John P. Napolitano CFP®, CPA is President and CEO of U. S. Wealth Management in Braintree, MA.  Visit JohnPNapolitano on LinkedIn or The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. US Wealth Management, US Financial Advisors and LPL Financial do not offer tax advice.