2024 Tax Implications

The number of tax changes scheduled or possible for 2024 and the years beyond is creating a bewildering landscape of what-if scenarios that would confound the most seasoned business owner. These 2024 tax implications could mean a bigger tax bill for your business which, in turn, could impact your plans for business acquisition funding, the sale of your business, or succession.

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If you’re considering a partner buyout or you’re in the market for a succession loan, there has never been a better time to work with a tax professional who specializes in your industry to help you navigate the challenges ahead. Our partner, Steve Blake at CBIZ Somerset CPAs, recently shared his insights on many of the planned and potential changes ahead. Here’s a summary of the conversation to help you as you work with your tax advisor.

Sunsetting of TCJA

The Tax Cut and Jobs Act (TCJA) of 2018 was the first major update to the tax code since 1986. Its provisions offered a number of business-friendly benefits in its early years, but because the Senate requires all tax legislation to be revenue-neutral over 10 years, many of those benefits are now going away, or sunsetting. Two of the biggest benefits expiring are:

Bonus depreciation

This benefit allowed an additional first-year depreciation on qualifying asset purchases. The additional amount was 100% for items purchased from 2018 to 2022 and dropped to 80% for those purchased in 2023. This will expire (unless extended) in 2027. Businesses may still be able to expense some otherwise depreciable assets in the first year through Section 179, but changes to this rule may be on the horizon as well.

Reduced capital gains taxation – The TCJA did not change capital gains rates, but it altered the levels of income to which they’re applied. When this element of TCJA sunsets in 2026, the pre-TCJA levels will go back into effect, and people will be paying more tax on their capital gains because of the brackets being applied.

What else is on the table?

Without a crystal ball, it’s impossible to know what tax changes lie ahead, but both Republicans and Democrats have made clear what they would like to see happen. Depending on the results of the 2024 elections, taxes could change in many ways. Here are some of the priorities they’re pushing for:

Corporate tax rate

One of the provisions of TCJA that does not sunset is the corporate tax rate that it set at 21%. Republicans want to keep the rate at that level, while Democrats would like to move it to 26.5%. No one knows exactly where the corporate tax rate will settle, but business owners need to be prepared for tax liabilities that may be larger than what they’ve paid in the past.

Interest expense deduction

The TCJA imposed lower limits on how much interest could be deducted, effectively increasing the cost of borrowing. Republicans hope to see a return to higher levels of interest deduction. If you’re taking out a loan for a business acquisition, being able to deduct the interest on the loan reduces the actual interest rate/cost of borrowing because there is a tax benefit. Without that deduction, the cost of borrowing is higher than the stated interest rate.

Why are tax changes such a big deal?

Say you’re a Registered Investment Advisor considering a working capital loan, or you’re an agency owner looking for an insurance agency loan. Having your tax liability increase significantly could impact your ability to be approved for financing.

When lenders evaluate borrowers, they look for a current ratio of at least 1.5. The current ratio is current assets (cash plus assets that can be quickly converted to cash) divided by current liabilities. Lenders want to see that borrowers have 1.5 times the ability to pay their obligations.

If your company has operated in the past with a current ratio in the range of 1.5 but now faces much larger tax obligations, your current ratio may fall to a point where lenders will be hesitant to approve you for a loan.

How might tax changes impact sales and acquisitions?

Tax changes can also impact price negotiations in a business sale. Traditionally, buyers looked to EBITDA (earnings before interest, taxes, depreciation, and amortization) to predict cash flow, and cash flow helped determine the sale price of a business. With the potential for large tax liabilities in the future, however, buyers may be hesitant to rely on EBITDA, expecting that increasing tax burdens will reduce cash flow.

If you’re planning on selling your business, it’s important to think about your goal and ask questions. Is there is a purchase price you need to be able to comfortably retire? Can you get to that number with your current business structure and the cash flows under some of the more challenging tax scenarios? Do you need to make changes in your operations or restructure your business to make that happen? If the tax implications are going to force your sale price lower, are there other things you can do to increase the value of your business to push that number back up? If your deal requires a succession loan, is the cash flow adequate to support the debt service on that loan?

If you’re acquiring a business or considering a partner buy-in, and you intend to use business acquisition financing, having a clear picture of the target’s cash flow, including worst-case tax scenarios, is key. Business acquisition lenders want to be confident cash flow will allow you to pay back the loan. In addition, your offering price may be affected by the potential for large future tax liabilities. You may need to be creative in structuring your deal, using different multiples and/or longer payouts than you have in the past.

With all these tax changes in the air, planning is vital. Whether you’re buying or selling, it’s wise to project cash flows out three to five years under various scenarios. Working with a tax specialist familiar with your industry can help you make sense of this ever-changing landscape.