How will the 2018 Tax Reforms Impact Your Small Business? Small Business Show Episode 153

The Small business show episode 153 for Wednesday, January 10, 2018. Greetings, folks and welcome to the Small Business show here at BusinessShow Co the show by, for and about small business. We have two sponsors for today. Our first sponsor is biya@b E-Y-A.com where you can create a free account to both find employees and find jobs. Also sponsoring this episode is smile@smilesoftware.com podcast where you can learn all about the PDF Pen family from them. We'll talk more about both of those shortly here. And here in Durham, New Hampshire, I'm Dave Hamilton.

And in Lafayette, California, I'm Shannon Jean. And I want you to know I always do the little drum thing at the end when our intro music rolls out. Just kind of gets me in the mode. I'm ready to go. I always go kinda da, da, da, da. Here we go.

That's really. You know, it's funny you say that because I don't do that for this show. But for Mac Geek Gab, we actually use a snippet of a song that I recorded back when I was in college. I mean, it's like the song couldn't be any older. And there's a little fill that I played when I recorded and every time I wind up playing like air drumming along with it here. Yeah, I totally get. I totally get.

Get you in the mode.

You gotta get in the mode. Totally. Yeah, yeah, yeah. You gotta have your habits. That's good.

You got it. Got it. Yes. That's it. Hey, so, you know, it's a new year and we've got a lot of changes specifically in the tax policy related to small business. And even though it may not sound very exciting, it could be very exciting for your small business. So we thought we would spend an episode talking about how the two 2018 tax changes may impact your small business.

Yeah. And I'm really happy to be doing this episode because I hadn't done enough research on this. And then you started doing some research, which of course made me feel like I had to up my game. But really, I just read the stuff you told me to read. And so thank you.

Sure.

Yeah. Because I think in this episode, I'm going to be the one that learns the most. So we'll see.

Oh, you never know. You never know. You never know.

That's true.

You never know. The first thing I would tell you, our listeners, is, you know, don't panic, don't get stressed, don't believe all the headlines, whether they're positive or Negative. And, you know, you want to do your own research, talk to your accountant. And of course you want to listen to the show here today, which you already are doing. But you'll want to learn as much as you can as soon as you can because these new rules and laws and things are in place now for the 2018 tax year. And there's some pretty significant things that you may need to get some advice on and you may need to make some changes or it may change some of your habits on the way you do things. And so we're going to talk about that today.

Yeah, yeah. Can we start by talking about this pass through deduction, Shannon?

Yes.

Okay.

Absolutely. Because. Yeah, go ahead.

Well, it's, you know, I think we all, if we don't understand what a pass through entity is. It's an S corp, a C corp, sorry, not a C corp, an S corp, an LLC or a sole proprietorship, although those are treated a little bit differently where the company itself doesn't pay any taxes. All the profits from the company fall through, pass through to you as the owner or owners of the business, and you can divvy up the equity any way you want to, and then you pay taxes on that as part of your personal return. So that's what a pass through entity is. And now we get a weird deduction on this. Yeah, yeah.

It's actually pretty cool. It's not quite as simple as I think some folks wanted it to be, but I think it's a step in the right direction and I'll explain why. Okay, so pass through businesses now will get an immediate 20% deduction on what is pass through income.

So gross profits, not gross profits. Pass through profits.

Yeah, pass through, pass through profits. So if you, if you're pass through business. So your sole proprietorship, which, you know, you really should be moving to an LLC type thing, if you have any kind of, you know, significant income, a partnership or an S corp. If your income is 100 grand, you're going to get to deduct 20,000 from that and you'll be taxed on that 80 grand. Just right off the top.

Right off the top. Now that doesn't mean you, you still get to do the deductions before that happens, right?

Correct.

Where, you know, if, like you have your cell phone expenses as part of your business or, or whatever, you know, your cost of goods sold, all of those deductions still happen first and then whatever's left over that you would call profit.

Correct.

Now you immediately only pay taxes on 80% of what's left?

And the thought process behind it is small businesses are the largest employers in the United States. 95% of small businesses are pass through entities like this. And the thought process is, hey, let's leave 20%, we'll take that 20% off the top. And these small businesses will invest that money back into their company, they'll hire more people and there's some incentives for that that we can, we'll talk about in a few minutes. And the thing I do really like about this, there's, you know, often, you know, politicians, you know, give something and then take something away, you know, with kind of sleight of hand, like, oh.

That'S what I was asking about here is. Yeah, right. What am I missing? Yeah, what's.

Yeah. And there are, there are certainly some limitations. And in this case, I think the key limitation is actually very good because it limits entities or businesses that I personally think have kind of gotten a pass for a number of years. And particularly like a service business like accountants and lawyers, that kind of thing. And they are excluded from the deduction if they make more than $157,500 or $315,000 if married and your spouse works in the business. If you make over that, you can't take this deduction if you' service based business.

So that would also impact, like we talked about in the last show, consultants too. Right? That falls into something.

I believe it would. Yes. But you, this is where, and I'm going to say this over and over on this show, you want to talk to your accountant?

Oh, absolutely.

As soon as you can.

We're amateurs here.

Yeah, yeah, yeah. And because I believe it does. But I also, after talking with my accountant a couple of weeks ago, there are certainly ways to structure your business to take advantage of that, that 20% deduction that even as a service business you may be able to take advantage of. Sure, sure, you definitely want to do that there. You know, the, the goal of this limitation, from what I've read was to make sure there wasn't a loophole that, you know, a sole proprietor lawyer or accountant just said, oh, wow, you know, I'm going to jump into this and get this kind of benefit. They're really trying to, again, at least from what I've read, offer this to kind of the, what I consider our real course listener base is the, you know, bread and butter show up every day small business guys that really don't usually get a break.

Right.

That just doesn't, doesn't usually happen.

And, and to Be fair. You know, if you are a sole proprietor consultant and you're making more than $158,000 a year in profits, again, this isn't just gross reven. No, it's not, you know, profits. And this is, you know, even after. And we'll talk about this, but this is after you pay yourself as an employee if you're going to do that. Right. I mean like that's a lot of money. Sure. You know.

Absolutely, absolutely.

So the deduction is still there for service based businesses up to a certain point, right?

That's right. And there's all kinds of ways you can structure to take advantage of, well, gee, we can do up to X and then maybe we, we need to go spend some money. Spend some money, hire another employee. I mean this kind of thing.

So it's, the goal is, because it's not that does the, the deduction goes away. So if you hit 157,501, do you get no deduction? I think that's true.

I believe that's true as well.

Yeah. So you're really incentivized to get that number down to157.5 or lower because otherwise you're losing a lot of money. So it'd be, it'd be worth. If you're going to be at say 159, it's actually in your best interest to go spend some money somewhere so that you fall below that number and out you go. Assuming we're interpreting it correctly.

That's correct.

Yeah.

Yeah. And that's a conversation that any good accountant is going to have with you. And that's why you should be meeting with them towards the end of the year before which you know, we talked about a few episodes ago.

Yeah.

Kind of our end of year wrap up. Your accountant should be asking you questions based on, well, you know, how was the year, what do you look, what does income look like? What is this? You know, what are we going to pay taxes on? To where when you have some time you have left in the year that you can go maybe expense some of that money, maybe you need to buy a piece of equipment, maybe you need to take a trip, maybe you need to hire another person, maybe you need to do bonuses. So there's lots of ways to manage how this stuff hits your books and you definitely need a good guide to help you.

Yeah, for sure, for sure. Yeah, yeah.

And one of the things that you really will need help with is as a pass through business, you know, you may be taking salary, paying yourself, you know, Just a check every two weeks and you get your taxes out of it and you're just, you know, your employee or you may be taking a draw where you're just like, well, you know, I made 10 grand. I'm going to take five and leave five in the business, whatever it is.

Right.

But there are some important ways that you have to clarify how much salary you've taken versus how much pass through income. You can't take zero salary and only claim all of it as pass through. The IRS has certain guidance and rules about how it works.

Well, you can as long as it's less than 157 5.

I, I guess so. Yeah. Yeah. And right or no, you definitely want to.

No, I guess not. True. That's right.

The IRS wants to see that you're taking some income from your business that you're getting. And you want to do that because on that income, you know, you're gonna have all kinds of important things get, you know, happen when you've got that check and it.

See, cause that's more complicated. I was always, I always like when we started paying ourselves as employees out of Backbeat Media, I remember my accountant was like, why are you doing that? I said, well, you know, it makes this easier and this easier. He's like, yeah, you know, the IRS doesn't. He agreed from a numbers standpoint that it was the right thing for us to do because like you said, some important things happen, like you're paying into Social Security and you're paying all this stuff that you otherwise might or might not be doing. But he's like, yeah, the IRS sort of frowns on that. If you're an llc, they just want to see you taking draws, not salary. And clearly this gives a very different piece of guidance now.

Yep, yep. And you know, so you want to have that conversation be like, look, okay, what should I, what should we be doing? And you know, what can we, you know, manage salary wise, draw wise, or if you need, even, even have to. So you may have a different way and some of these laws may have been changed with this new, you know, tax plan that's, that's rolled out. So you definitely want to get some advice that you can really, really count on. You know, you get some tips here on the show.

Sure.

But you, your accountant is the one that's going to help file your taxes and you'll want to get, you definitely want.

Playing this episode for the IRS isn't going to necessarily help you at audit time and it might hurt us, but, you know, whatever.

Yeah.

We can take it.

Yeah, yeah, we'll handle it. Yeah. And you know, there's some other incentive or rules for really employee driven businesses which kind of the IRS classifies as restaurants, manufacturers, you know, do you have lots of people? You know, the, the amount of the deduction is limited to 50% of your payroll. So the higher your payroll, the higher that deduction can be. So, you know, the new tax law there.

Yeah, yeah.

They want you to hire more people. You know, it's really important for these politicians to be able to go back a year from now to whatever. Oh, gee, look, look how many more.

People have been added to the payrolls. Yeah, yeah, that's good.

You got it. You got it. And you know, but don't think these politicians are doing it just for, well, at all.

Doing it for us. No, no.

They want to get reelected and show that.

My feeling about the tax laws and I think you just encapsulated it there. This is certainly true about these new ones is it's, these rules were not written for my benefit. It is up to me to take the rules that someone wrote for their own benefit to and use them to my benefit. But that's the trick is you got to find your own path through these new rules as you have through the old rules. And it can be kind of fun. You can tell Shannon and I are both really animated here.

Yeah, it's interesting. And when you look at these kinds of things and say, okay, well, how's it going to hit me? I believe that all of us that own pass through small businesses are going to benefit if we get some good advice and we handle it correctly. I also believe that it's very easy to leave money on the table if you don't get some good advice.

That's always been true for sure. I feel like with these new rules that might be doubly true. And perhaps they're new. Yeah, exactly.

That's correct.

That's correct. Hey, I want to take a minute and I want to talk about both of our sponsors. Actually, I want to start with PDF pen from Smile. If you visit Smile software. Yep. Smilesoftware.com podcast. And no, that's not me screwing up and reading the wrong way. It's the link that they want you to use. They change it every month. And so this month you'll see PDF Pen there. PDF Pen is one of my go to apps and I use it on my, on my Mac all the time. I use it on my iPhone all the time. Things work back and forth. But what it is is it's, it's really the ultimate tool for editing PDFs and going paperless. I'm going to use an example. That's actually something I do every year with my accountant. Right. I have all of these things that I need to send to my accountant and I could certainly take pictures of them on my phone, which is a great way to scan things. By the way, Smile has an app called PDF Scan plus that really isn't part of this spot, but should be because it's great. That will let you take a picture with your phone and immediately create a PDF from it. And then you can take that PDF and put it inside of PDF pen. So I scan these things for my accountant because I need to pull them together. And then I use PDF pen. Instead of sending my accountant 15 different PDFs that I know one of them is going to get lost in the shuffle. I use PDF pen to combine all of these PDFs together into one document. And I even type up like my little notes and my navigation for my accountant in pages or whatever word you could use, whatever you like. And I save that as a PDF and then I include that in the master PDF so I can take pages from other PDFs, build them all together and then I can go through and mark up anything on any of those pages, just like I'm drawing on paper. But I get to just email it to my accountant and he gets to see all this stuff.

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Really makes a huge difference.

Yeah, especially your point where the multi page PDF comes in. I mean it dramatically simplifies a lot of this stuff.

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That's great. Just a quick point on both these sponsors. Dave and I work really hard to try to make things useful for you on the show, including our sponsors. Both of these companies smile and should be in your toolbox if you will, because they have just some phenomenal things that will make your small business life easier and we just really appreciate it and, and hope you guys find them useful as well.

Yeah, yeah, we really do. I mean, as you just heard, we try to make this. We know that they're sponsors. We know that you know that they're sponsors. We're not trying to pull the wool over anybody's eyes, but we do try to make it content so that it's valuable to you to listen to these sponsor spots and maybe if you know, then you'll go and visit and maybe it works for you and you buy and then that's great. But yeah, thanks for saying that, Shannon. That's no problem.

So back to our tax stuff and we were talking about using these laws to our benefit. I come back to that. Somebody said it and I don't know who it is, but it's your patriotic duty to pay as little amount or smallest amount of tax dollars as possible. And you want to keep that money flowing in the economy. And we all know the government's not responsible to handle that. So this is what we're trying to do. I just can't get through it without talking about that. I'm not an anti government person, but when I look at where our dollars go, I think it's far more effective when we have this money ourselves to make decisions that will impact our own lives, our families and our communities. We are much better stewards of those funds certainly than the federal government and even the state in many cases. It's true. Another thing that I think is a big deal in the the new tax laws for 2018 is expensing of investments. Oftentimes you make an investment and you have to amortize and depreciate it and, or depreciate it over a long period of time. Vehicles, different things that you can take years and years and years to write off.

It used to be that if I bought a vehicle, say for $40,000, I couldn't take that 40,000 all as a deduction in one year. I had to spread it out over usually the useful life of the vehicle. And the IRS has formulas for that.

So now you can immediately expense those what they consider short lived capital investments. So there may be a vehicle, a piece of equipment, tools, stuff that typically kind of wears out. Not things like buildings or land, so real estate?

No, but yeah, the things that, yeah, like you said, you're going to burn a vehicle out. Yeah, yeah.

You want to buy a robot, now may be a good time, that kind of stuff on your assembly line. And now you can immediately expense those short lived capital investments. And this window is available for the next five years. You can expense up to a million dollars. If you're a construction company or whatever and you need that big massive truck or tractor piece of equipment, you've got this five year window where if you have a great year and you say, wow, you're talking to your accountant in the last quarter of the year and say, boy, we're going to have a really great year. May want to think, hey, maybe we need to buy a new excavator. Maybe I need to buy a new vehicle. Maybe I need to buy an iPhone X and spend that cash that you've made this year and lower that taxable income. So consider that.

Huh. So this is like the Section 179 deduction that we used to or we still have on our personal taxes. Now we get it for business stuff.

Yeah, exactly. Exactly.

That's pretty good.

Yeah, I think it's pretty good. And one of the things that also changed that, depending how you look at it, can be good or. Or bad. I'm not really sure yet. The new laws, they eliminate what is called a net operating loss carryback and they limit the carry forward loss to 80% of taxable income. You want to talk about what a loss, carryback or carry forward is?

You're making my brain hurt, man.

Yeah, so do it. Do it.

Well, yeah, I mean, I probably get it wrong, but a loss carry forward is when you have a loss this year or say you had a loss in 2017, you can apply that against profits in, say, 2018 if you do it the right way. Right, that's right. Okay.

Yep. You got it.

A carry back loss is. Is that where you can count it against profits that you had in the past?

Yeah. So you can go back and restate your earnings if you, let's say. Oh, yeah, yeah. There's all kinds of rules about it. But I can imagine.

Because that sounds pretty, pretty sketchy, man. Yeah.

Yeah. And there were limits to it as well. You couldn't claim 100% of it, but you, you could. I think it was maybe 75% you had. If you.

I've never done a carry back. I've done carry forward for sure, you know.

Yeah. And you know, it's just. Again, it's all tax planning. And when you talk to. If you had a great. Let's say you had an awesome 2016 and you did your civil duty and you paid a lot of taxes, but 2017 wasn't quite so good or you had to. That's a big expense. You weren't, you know, you didn't know about or something happened and you have a big loss. Well, you can. You used to be able to go back and restate your previous year's earnings and take that and the IRS would send you back a check that is eliminated now.

Okay, so I can. So I've lost My opportunity to do.

Carry back losses as of 2018. As of today, yeah.

Oh, that's right. So I could do them for 2017 though.

Yes, you can.

If it makes. All right, that's good to know. Okay, cool.

Yeah, you can even jump back. It doesn't even have to be the previous year. You can jump back a few years to look at it. Yeah. Again, there's all kinds of rules. It's complicated, but sometimes when the dollar amounts are significant, it can definitely.

I was just going to say yeah, because I had a business, one of the businesses in 2017 had a loss. That's not insignificant. Everything's okay, folks. But it just.

Losses are strategic as well. Right. Total. When you're planning things out and especially if you have a business that has inventory and maybe you have some dead inventory or one of your buyers made a not great buy and you want to get some stuff off your books, it can. Again, for tax planning, we talked about inventory write downs a couple of shows ago. As you get towards the end of the year, it's perfectly legitimate. And if you keep that product and you sell it later, then you have to declare 100%. You recapture that. So it can come in handy. And you know, and then now on the flip side, if you have, you know, let's say you had a loss in 2018, but 2019 was a, you know, a bang up year, you'll only be able to carry forward about 80% of that, that loss in, you know, moving forward. So. Okay, got it. You know, I mean for most people it's, it doesn't impact it, it gets kind of complicated and you're, you know, certainly your accountant is the one to give you the, the complete details, but it's out there.

This is, this is. I bet I'm not the only one scratching their head right now thinking, hey, yeah, I gotta ask my accountant about that. Yeah, yeah.

And we'll put some links in the show notes today where you can kind of dig a little deeper. It may cause more questions, but those are good questions. When you, when you do get to, to talk to your accountant.

Yeah, for sure.

And then finally just a couple of, you know, the corporate taxes like C. Corporate C. Corporations. Big companies. Taxes cut from 35 to 21. Which is a, it is a big, big deal.

That's a big deal. I've got, I've got a C corp because I had a stupid accountant 20 years ago. The Mac observer is actually set up as a C corp. But, but you know, so there you go. But we always Try to make sure it doesn't make any money because then it well have to pay that tax.

That's right. And you know all that money that Mac observer has sitting in their foreign accounts, they've been waiting to repatriate Dutch.

Sandwich with a knife.

You got it. All that money, there's been a drop down to 15 and a half percent if you bring that cash back, or Even down to 8% if you reinvest those earnings in, like, real estate. It's a big deal. And I believe we will see some significant moves on some of these big corporations, like Apple.

Yeah, Apple is one of the big ones that's bringing.

Yeah, I think there's trillion dollars sitting offshore somewhere. So I think some things will happen. Now, there's a ton of other corporate tax stuff, but you're not listening to the corporate business show. You're listening to the small business show, and I think we've scratched the tip of it pretty well. And I'll just leave you again with get, you know, get on the phone, schedule a call with your accountant. If you don't have an accountant, now's a great time to get one before they get busy with, with tax season. This can be a very busy year for them. So you do not want to make that phone call in March. No, you want to make that call like tomorrow, or if you reach someone, say, hey, I want to file an extension, and then you can work with them after taxes are due, you know, corporate taxes.

Have you ever filed your corporate taxes on time, if you don't mind me asking?

Never.

Never. Me neither. Okay.

No, we file our taxes basically in October. I mean, we always take it because, you know, stuff happens and, you know, you certainly have to pay whatever's your expected amount due. You don't get a pass on paying what's due, but what you do get a pass on is getting all the paperwork and, you know, all the final detail. And as long as you're close with what you think is due, you're fine.

Yeah, you got to pay your taxes by the time they're due. Yeah, yeah, yeah. No, that's extensions. Be your friend and, and you're. Anybody that's already working with an accountant already knows this. But if you're not.

But just make sure you make sure you file it because if you don't, it's very expensive and you get whacked.

Oh, yeah, it's awful.

Yeah, yeah.

They are not like, if you say, oh, I swore I did, you didn't get it. Like, the answer is no, there is sympathy there. At least not.

I've had it. Yeah, I've had it happen once.

Really?

And where an accountant failed to file the paperwork and we were not aware of it. And we then started getting letters like, wait, what is this? You know, we, we filed this thing. So there is a form that you file that you do a one time request to kind of overlook this oversight, if you will.

Sure.

And what the IRS does though, is they look back and they base it. At least the letter I got back said that we are, number one, this is one time don't ever ask us again. And number two, we're basing it on your history of paying on time filing extension. They know you're this type of taxpayer, if you will. And so they go, okay, it looks like there is a pattern, that they have done things right and this year there was a problem. We're going to go ahead and give them a pass.

Okay, that's good to know.

Yeah, it just happened to us.

Add one thing to that. There's lots of times where especially government agencies will say, this is a one time. Banks are good at this too. I know they're not government agencies, but they, you know, when you need a fee waiver or anything like that, they'll always come back and say, this is a one time thing over the life of your account with us. You can never ask for this again. Always. Always. Feel free to ask for it again.

Always.

They might say, no. Remember we told you, I've never had that happen. Now, I haven't tried it with the irs. That might be different. But with my bank, you know, you screw up or something, there's a fee that one time we're going to. Okay, yep, understood. But whatever. A year later, same thing happens. Oh, sorry. Okay, we'll do this. But it's just a one time thing. They don't even know. They're not even looking at their records. Like I said, the irs, the worst.

They can say is no. No. Right.

Let's just say no. Yeah, exactly. No. You're abusing our generosity. Yeah. If banks were ever generous.

You got it. That's good stuff. A lot of great information. We'd certainly like your input and to hear you share your stories and what your thoughts on the new tax changes are for 2018. You can join the conversation at BusinessShow Co Facebook and it'll take you into the small business support group and you can get us directly at feedbackusinessshow co.

Absolutely. Thanks so much for everything, folks. We love doing this and we love your feedback. We love that you support our sponsors. In fact, we want to thank mile@smilesoftware.com podcast and PDF pin there. And also BIA B E-E-Y-A dot com. Please go visit both of those sites, figure out if what they have is.

Going to work for you.

Hopefully it does, but. But we'd love it if you would go visit them. Really appreciate it. That's. That's all I got this time, man.

Yeah, me too. Thanks, everybody. Appreciate you listening.

Yeah. See you next time. Keep living that charmed life.