Geared Up Issue 1 2018 | Page 44

MAXIMIZING After-Tax Cash Flow UNDER THE New Tax Law E 42 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