Episode Details

Recently Dr. Brian Jacobsen and Brian Lamborne discussed implications of the OBBBA on Business Owners. In this episode of Wealthyist, hosted by Brian Jacobsen, Chief Economist at Annex Wealth Management, and featuring Brian Lamborne, Senior Wealth Strategist, the discussion focuses on the implications of the "one big beautiful bill" (likely referring to the Tax Cuts and Jobs Act or a similar tax legislation) for business owners across the lifecycle of a business: starting, running, and selling or winding up. Here's a summary of the key points:

1. Starting a Business

• Choosing the Business Structure: The decision between forming a pass-through entity (e.g., S corporation, LLC) or a C corporation depends on long-term goals. S corporations offer pass-through taxation, avoiding double taxation, and allow deductions like the Qualified Business Income (QBI) deduction, which isn't available for C corporations. C corporations, however, offer benefits like Qualified Small Business Stock (QSBS) exclusions for capital gains upon sale, but face double taxation (corporate tax at 21% plus dividend tax).
• Course Correction: Business owners can change their entity structure (e.g., from LLC to S or C corporation) based on evolving goals, though some changes, like qualifying for QSBS, have strict requirements (e.g., the business must be a C corporation for at least 80% of its life).
• QSBS Considerations: QSBS allows exclusion of capital gains (up to $15 million) if the business is a C corporation from inception, held for at least five years, and meets specific criteria (e.g., under $75 million in assets, not in excluded industries like hospitality or professional services). The bill introduced tiered exclusions: 50% for three years, 75% for four years, and 100% for five years.
• Planning Ahead: Many business owners start without proper tax planning, often defaulting to a C corporation or sole proprietorship. Engaging tax professionals early can optimize tax outcomes.

2. Running a Business

• Deductions and Incentives: The bill expanded key deductions, including:
  • Bonus Depreciation: Allows 100% expensing of certain assets (e.g., equipment, cars) in the year of purchase, incentivizing business investment. However, it applies to entire asset categories, and some businesses may prefer standard depreciation to manage taxable income over time, especially for banking covenants.
  • Research and Experimentation (R&D) Credits/Deductions: These apply broadly to problem-solving activities, not just traditional lab work. Examples include designing custom machinery or solving technical manufacturing challenges. Many businesses are unaware they qualify.
  • QBI Deduction: Offers up to a 20% deduction on business income for pass-through entities. The bill expanded the income threshold from $100,000 to $150,000, benefiting more professional service businesses (e.g., doctors, lawyers), though high earners in these fields may still be excluded unless they lower their adjusted gross income (AGI) via strategies like retirement plan contributions.
• Tax Planning vs. Preparation: Most accountants focus on tax preparation, not proactive planning. Business owners often miss opportunities to optimize deductions due to reluctance to pay for planning services, which are themselves tax-deductible.

3. Selling or Winding Up a Business

• Stock vs. Asset Sales:
  • Sellers Prefer Stock Sales: Selling stock (especially in a C corporation) can qualify for QSBS exclusions, offering capital gains tax relief, and transfers liabilities to the buyer.
  • Buyers Prefer Asset Sales