Trump Tax Plan and ROBS Solution
Trump & ROBS
The big winner under the 2017 Trump tax plan, Tax Cuts and Jobs Act, were “C” Corporations. Prior to the 2017 Trump Tax Plan, using a “C” Corporation for a small business was tax inefficient because of the 35% maximum corporate tax rate.
However, Trump's Tax Plan lowered the corporate tax rate to 21%. This contributed to the reemergence of the “C” Corporation as a popular business entity choice for small businesses.
In order to use retirement funds to invest in a business that involves yourself and another disqualified person, there is generally one legal way to do so. This involves the purchase of C Corporation stock (qualifying employer securities) by a 401(k) retirement plan.
This structure is known as a Rollover Business Start-up, or ROBS.
Rollover Business Start-Up (ROBS Solution)
When it comes to using retirement funds to invest in a business involving the retirement account holder or any of his or her lineal descendants (“disqualified persons”) there is generally one legal way to do it and it involves the purchase of “C” Corporation stock (qualifying employer securities) by a 401(k) Qualified Retirement Plan. The structure is known as a “Rollover Business Start-up” or “ROBS.”
The Internal Revenue Code permits the purchase of corporate stock by a 401(k) Qualified Plan. Nevertheless, the ROBS structure remains somewhat controversial. Although the Internal Revenue Service (IRS) has repeatedly confirmed its legality, it continues to be on the radar of the IRS and Department of Labor (DOL) due to a lack of compliance in some cases.
The ROBS Advantage
The ROBS arrangement typically involves rolling over a pre-tax IRA or 401(k) Plan account into a newly established 401(k) Plan. The 401(k) Plan is sponsored by a “C” Corporation. You then rollover funds in the stock of the “C” Corporation.
Now, the individual retirement account holder can earn a reasonable salary as an employee of the business.
The advantage of the ROBS solution is that it allows anyone to use all their pre-tax IRA or 401(k) funds to buy a business that they will be involved in personally as an employee without tax or penalty.
The ROBS Disadvantage
The primary downside of the ROBS structure is the use of a “C” Corporation as the business entity. A corporation (sometimes referred to as a “C” corporation) is an independent legal entity owned by shareholders. This means that the corporation itself, not the shareholders that own it, is held legally liable for the actions and debts the business incurs.
Corporations are known to have double tax. First, when the company makes a profit, and then to the shareholder on their personal return when dividends are paid.
The highest corporate income tax rate was 35%, but beginning in 2018, it dropped to 21%. Whereas, a sole proprietorship, LLC, or “S” Corporation is treated as a passthrough entity for tax purposes. In other words, a “C” Corporation would impose two taxes on corporate earnings. First, a corporate level tax and then a shareholder tax on the dividends received.
In comparison, for a passthrough entity, such as an LLC, the profits bypass taxation at the corporate level and are distributed and taxed at the owner’s level.
The use of a “C” Corporation has been a big reason many individuals have walked away from using a ROBS solution to buy a business with retirement funds. Instead, they opted for a taxable distribution.
However, the reduction in the corporate tax rate from 35% to 21% is expected to make “C” Corporations a more attractive form of doing business from a tax standpoint. As a result, it should make the ROBS solution a far more appealing option for people looking to use retirement funds to buy a business.
Do you have questions regarding the Trump Tax Plan and how it affects the ROBS solution that we may not have discussed in this article? Contact IRA Financial Group directly at 800-472-0646. We’ll address all of your questions concerning the Trump Tax Plan and any questions you have about the ROBS solution.
You can also fill out the form to speak with a ROBS specialist today.
Did You Know?
It's important to exit the ROBS structure correctly in the event your business is sold or (unfortunately) goes under. You need to terminate the 401(k) plan associated with the business, ensure all participants get their proper distributions from the plan and file the final IRS Form 5500. Failure to correctly exit the ROBS structure may lead to stiff penalties from the IRS.
We wrote the book on the Rollover Business Start-Up Solution
Turning Retirement Funds into Start-Up Dreams is the next best thing to a private consultation with author and former tax attorney, Adam Bergman. The book details various ways individuals can use their retirement funds to finance a business venture without using personal funds or acquiring a loan