The passage of the Tax Cuts and Jobs Act has changed the playing field for U.S. businesses – and systems integrators are poised to benefit. From reduced rates for corporations and pass-throughs to new rules regarding popular incentives, the tax reform bill has created a host of new opportunities, and systems integrators should be planning now to best leverage these changes.
With tax season in full swing, here are a few highlights from the tax reform bill that you should consider in your immediate and future business planning.
Benefits for Pass-Throughs: Lower Rates, AMT Relief, and a New Deduction
Through three key changes, the new legislation provides relief for systems integrators organized as pass-throughs:
- The new law maintains the seven-tax-bracket structure for individual tax rates and reduces the rates for several brackets while setting a new top rate of 37%. These changes were obviously made in part to benefit pass-through entities as they are taxed at the owner’s individual rate.
- The new law curbs who is hit by AMT (alternative minimum tax) on the individual side by raising income exemption levels: $70,300 for single filers and $109,400 for joint filers. Much like the elimination of AMT for C corps, this modification opens the door for more businesses to use specific incentives to lower their effective tax rate.
- For businesses organized as pass-through entities, the legislation provides for a 20% deduction of qualified business income (it should be noted that the deduction is subject to several limitations, including those related to W-2 wages).
Benefits for C Corps: Reduced Tax Rates & Removal of AMT
The new law slashes the corporate tax rate from 35% to 21% and completely eliminates the corporate AMT.
If you’re organized as a C corp, the reduction in tax rates is obviously excellent news. The reduced rate will add tremendous value, giving your executives more leverage in their ability to hire and retain technical talent, to invest in enhancing products or services, or in placing more competitive bids for future projects.
Furthermore, the elimination of corporate AMT removes the largest hurdle that has prevented businesses from utilizing valuable credits and incentives to further reduce tax liability. Overall, the legislation is a big win for C corps.
The R&D Tax Credit: Still in Place and Open to Systems Integrators
While the above changes are indeed extremely beneficial for systems integrators, perhaps the most important aspect of the bill is the vital incentive that the legislation kept in place: the Research & Development (R&D) Tax Credit. The credit has already gone a long way toward bringing immense value back to the industry. (alliantgroup has helped NSCA members claim more than $50 million in federal and state R&D tax credits.) Due to the loosening of AMT restrictions, the R&D Tax Credit has become an even more valuable proposition.
Background and New Opportunities
For those unfamiliar with the R&D Tax Credit, this incentive is designed to reward companies for making technical enhancements to products or processes. In the case of systems integrators, this can be the technical work done to ensure that multiple systems communicate with each other, whether to enhance facility security or efficiency and AV experiences or to solve some other technical challenge. Work like this will traditionally qualify you for the credit.
In short, it is your work that makes your firm an excellent candidate for the R&D Tax Credit – and it’s the reason why the rollback of AMT restrictions on C corps and pass-throughs could be the most impactful change of all for the industry.
In the past, the AMT barrier has been the main reason why so many qualifying companies have been unable to use the credit. Now, depending on your entity type, those restrictions have either been eliminated or curbed for the benefit of qualifying businesses.
Considering all of these tax law changes, and the anticipated extended impact of the R&D Tax Credit, systems integrators should be able to count on future tax savings this year and down the line, opening up multiple avenues for reinvestment. -Tracy Lustyan, Managing Director at alliantgroup, an NSCA Business Accelerator