MAXIMIZING
After-Tax Cash Flow
UNDER THE
New Tax Law
E
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ntrepreneurs are always thinking about how to maximize
their cash flows and their growth, which is even more
intriguing given the new tax law.
For example, under a new provision of the tax law, owners of
pass-through entities can deduct 20 percent against their taxable
income. While the calculation can be a little tricky, most franchi-
sees are positioned to permanently reduce their top marginal tax
rate from 37 percent to 29.6 percent.
There is a warning, however. The new tax law fast-tracks future
deductions into the present. This includes 100 percent depreciation
of new and used qualified equipment, as well as qualified leasehold
and real property improvements. This looks very tempting, so
tempting, in fact, that it might cause the unsuspecting franchisee
to overextend the use of these deductions, which will ravage other
deductions and graduated tax rates. This misuse of these shelters
should be avoided, and instead, the shelters should be strategi-
cally spread out over many years with the objective of reaching a
constant, year-over-year federal tax rate equal to the capital gains
tax rate of 20 percent.
While on the surface these deductions sound like a great way
to immediately lower the 29.6 percent tax rate even further, I
would caution franchisees to proceed care-
fully and make sure this rush forward with
first-year deductions doesn’t create more
net taxes later on. Consider for a moment,
the economic life of the assets acquired
by a Planet Fitness® franchise entity. That
economic life ranges anywhere from five to
seven years because of contractual commit-
by Carl Famiglietti
ments with the franchisor, so by default,
this becomes the period of time that the
cumulation of the earnings process occurs on
those assets. If the full deduction on those purchased assets is taken
in year one, franchisees could zero out their current year federal
income taxes and be exposing themselves to a higher tax rate in
years two through seven, thus reducing or inadvertently eliminating
the full value of these strategic tax assets.
An unfortunate result of tax reform is that state income
taxes can no longer be federally deducted, other than $10,000.
This can take a real bite out of after-tax cash flow, and it sets up
a scenario where it’s more favorable to be in certain states than in
other states. All is not lost though as there are ways to avoid those