Is a Rollover for Business Startup Right for You? The Case for ROBS
There are several funding alternatives available for those looking to start or acquire a business. Mainstream sources generally included the use of personal funds, debt, funds from an outside investor, or any combination of the three. Another less-known, less utilized source was utilizing retirement assets for funding purposes: Rollover for Business Startups, also known as ROBS. This allows a potential business owner to utilize funds set aside for retirement as opposed to the other three sources previously mentioned.
ROBS requires that new business operations be in the form of a C corporation. In the past, the tax ramifications of a C corporation were less favorable than other forms of entity types. However, the Tax Cuts and Jobs Act of 2017 (“TCJA”) has leveled the playing field from a tax perspective when it comes to entity choice.
Prior to TCJA, generally C corporations were taxed at graduated rates between 15% on the first $50,000 of taxable income, 25% on the next $25,000 of taxable income and 34% on taxable income in excess of $75,000, with a maximum tax rate of 35% in certain cases. Under TCJA, taxable income in C corporations is taxed at a flat 21%. While the tax rate is higher under the new tax law for the first $50,000 of income, they are lower for taxable income in excess of $50,000.
In addition, the Alternative Minimum Tax previously imposed on C corporations has been repealed effective December 31, 2017. AMT provided a surtax on the regular federal income tax if the circumstances warranted. It is no longer a factor to be considered for C corporations.
TCJA also provides for several other tax reforms at the business and personal level intended to stimulate economic growth in the private sector. A careful coordination of opportunities provided under the new tax law along with assistance in navigating the potential pitfalls specifically applied to business organized utilizing ROBS provides the structure for a person committed to becoming a business owner, particularly one who may not have access to alternative sources of funding.
It is important to make sure you are being properly advised of the tax laws pertaining to your ROBS business, as each should be taken into consideration during the initial set-up stages as well as the day-to-day operations of your business. Designating assets to be used for funding your new business and the transfer of those funds into an account specifically designated for those funds is critical; care must be taken to ensure all transactions are done in strict accordance with applicable laws and regulations. Other items include appropriate levels of compensation, distinction of corporate ownership and distribution of earnings, related party arrangements and transactions, capitalization policies and depreciation, and establishment of a retirement plan.
Utilizing ROBS requires careful planning and attention to detail, especially when it comes to compliance with Internal Revenue Service laws and regulations. A team of trusted advisors, including an accredited facilitator and a knowledgeable CPA, can provide a wealth of knowledge and invaluable support. Benetrends Financial has been on a mission to help visionary entrepreneurs successfully launch their dreams of business ownership since 1983. Herbein + Company, a Pennsylvania-based CPA firm, has an expertise with ROBS for over 10 years. As a team, we are ready to help you realize your dreams of business ownership.
For additional information, contact the author Ken Frebowitz at firstname.lastname@example.org.