How Maximizing the Small Business Deduction Saved One Company $200K

And the savings add up, year after year.

Proactive thinking, in-depth industry expertise, and a laser focus on the finer points of tax law changes combined to help Barnes Dennig’s tax team save a privately-held company $200,000 a year in taxes.

The challenge

Tax law changes brought about by the Tax Cuts and Jobs Act (TCJA) of 2017 made a major difference for C corporations, cutting the tax rate from 37% down to 21%. But that didn’t help S corporations or LLCs. To head off a flood of conversions to C corporation status, the law also created the Small Business Deduction (SBD), effectively cutting the tax rate to 29.6% for those entities.

How could a hugely successful, highly specialized private S corporation take full advantage of the reduced rate? They knew there had to be additional things they could be doing to maximize their tax savings – and their cash flow.

The strategy

The Tax Cuts and Jobs Act is highly detailed and contains many “hidden gems” of opportunity for significant tax savings. The trick is knowing those gems, and when and how they can apply. Bringing those details and what they mean to a client’s attention is part of what the Barnes Dennig tax team does, with proactive solutions and thought leadership that help clients thrive. They have a well-earned reputation for knowing even the finest of the fine details of tax law, and how to apply them to help clients make the most of their opportunities.

Because they knew the industry so well and had invested the time to understand the client’s unique goals and challenges, the Barnes Dennig team quickly identified a new strategy that could save the client thousands every year and brought it to the table. They started evaluating ways to maximize the SBD, including testing different compensation structures.

Barnes Dennig knew the privately-held organization had some diverse ownership, having distributed shares to members of its management team over the years. Historically, this highly successful company was going through huge year-end bonus calculations – with bonuses of a million dollars or more to some of its key leaders. Barnes Dennig asked “What if we don’t do that? What if we scale back the bonus plan and trade that out as a distribution instead?” If the numbers played out, this would mean they’d be doing a distribution of profits instead of a bonus on a paycheck. Since the SBD means that only 80% of S corporation and LLC profits are subject to tax, it might mean big savings.

The challenge there was that distributions must be pro-rata, meaning they have to be equally based depending on whatever percentage of ownership an individual holds. (So, if one person holds 98% and another holds 2%, for every dollar taken out of the company profits, the 98% shareholder gets 98 cents and the 2% shareholder gets 2 cents.)

It was time to run the numbers.

The results

The numbers played out beautifully. Barnes Dennig’s strategy enabled the company to “haircut” more than 50% of the bonus pool and convert it to distributions, resulting in $175,000 in tax savings in the first year, while keeping total compensation for the shareholders still at or above market. The following year, the company performed even better and the benefit was close to $200,000. The Barnes Dennig team leader points out that the more successful the company, the more opportunities for savings.

The Barnes Dennig team’s deep understanding of the industry, the tax code, and how they can apply it to minimize a company’s tax burden and enhance cash flow meant they delivered far more value than the cost of their services – and it’s the gift that keeps on giving because the company reaps the benefits of the maximized deduction each year.

Optimize your tax picture

Looking for ways to maximize your tax savings opportunities and optimize your cash flow? Contact the Barnes Dennig tax team. We’re here to help.

About Barnes Dennig

Barnes Dennig is a Certified Public Accounting and consulting firm serving businesses and organizations in Ohio, Indiana, and Kentucky. We offer tax, accounting, auditing, business consulting, and business advisory services to help our clients make the most of every financial opportunity.

Learn more about Barnes Dennig and the industries we serve.