CW 931 - First Deep Look at GOP Tax Reform, Broad Economic Impact, New & Changed Deductions, Corporate Repatriation of Wealth with a CPA

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Welcome to the Creating wealth show with Jason Hartman. You're about to learn a new slant on investing, some exciting techniques and fresh new approaches to the world's most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine, self made multimillionaire who's actually been there and done it. He's a successful investor, lender, developer and entrepreneur who's owned properties in 11 states, had hundreds of tenants, and been involved in thousands of real estate transactions. This program will help you follow in Jason's footsteps on the road to your Financial Independence Day. You really can do it. And now, here's your host, Jason Hartman with the complete solution for real estate investors.

Welcome to the Creating Wealth show, episode number 931. Merry Christmas to all around the world. And this is your host, Jason Hartman. And of course I am here with you, but in an odd location. I wanted to do this podcast from a very odd location. I am actually at the bottom of the Grand Canyon, of all places. We just landed here in a helicopter and our pilot is Jared. Jared, how you doing? I'm doing very well today. We've got beautif 60 degrees here in.

The Grand Canyon on December 26th.

Where are we exactly? So we're about 70 miles east of.

Las Vegas and about 10 miles into the Grand Canyon.

Awesome. Awesome. And so that is the Colorado river right down there, folks, if you could see this, I will post a picture on the website@jasonartman.com or several pictures. Maybe if you could see where we are. It's quite the amazing view. Tell us a little bit about your amazing helicopter. And one of the things that really was incredible to me is, is how much fuel this puppy uses.

Yeah, so it's the EC130 or Eurocopter. Now Airbus. It holds 143 gallons, but it also burns a gallon a minute. So it's not. Not your Tesla as well, I'll tell people.

So you can stay in the air for 143 minutes in this guy?

Approximately.

Yes. Yeah. And this helicopter is about what, two and a half million dollars? Yep, two and a half million dollars. The starting price. That is amazing. Holds seven passengers. Yep, seven passengers. And then the pilot as well. Yeah, yeah. So good, good. We're glad you're along. And we've got one of our clients who's been on the podcast several times before. And that is Mr. Drew Baker. He actually came out to Las Vegas last night and gave me a call as he was driving in and said, hey, I'm gonna be there. I want to go see Rich Little. And so I said, drew, you know what we should do today? We should go take a helicopter to the Grand Canyon. And what did you say, Drew?

I said, let's do it, and let's make sure we land the base so we can see it from the bottom up.

So I got an interesting thing for you guys and listeners. I've talked about this before. A great read many years ago is a book by the late Richard Nixon, our former president, and it's called in the Arena. And he talked about his life and how he had, you know, very hard times, and, you know, he had highs and lows. And he talked about his first visit to the Grand Canyon. He said that when he first visited the Grand Canyon as a child, he thought nothing could be more incredible than looking down from, I think, the Southwest Rim or something. He said, looking down until he hiked it down and looked back up. And he ends his book this way, this book in the arena, which is fantastic, by the way. I read it many years ago, and he said, the poet Sophocles said, one must wait until evening to see how splendid the day has been. And, you know, you can't appreciate the highs until you've had the lows. And that's the story of everybody's life. But most of us find it very tough to appreciate the lows. But.

Life is about breadth. And, you know, I just remember that. And now this is the first time I've been down in the Grand Canyon, looking up and. Jared, you do this just about every day as a pilot here, don't you?

Yes, I do. I've been here two years now.

Yeah. So it's pretty amazing, though. I mean, you know, I don't know which view is better from the rim looking down in or looking up from below. It's pretty incredible. How high are those peaks from where we are, Jared?

So from the river, it's about 4,000ft up to the rim at this location.

So that's almost a mile.

Almost a mile?

Yep. Jeez.

Wow.

That's crazy. I had no idea. It doesn't seem that high. Oh, yeah, yeah, yeah. See, if people come out here, they. They'll see a helicopter flying by, and.

They'Re like, wow, it's super small. It's really hard to take in the perspective because it is so massive, so grand.

Incredible. Well, that gives It. Its name. The Grand Canyon. Right, the Grand Canyon. Drew, what do you say? Yeah.

I remember the first time I came here. I went to the gate and they said, oh, pay your admission. And I was a bit flummoxed because I just wanted to come in for 10 minutes and see it before sunset. And I remember coming in and being so blown away that I just remember jumping up and down because it looked like a painted canvas. It just looked so unreal.

It looks fake. Yeah, it looked fake.

You know, like Bugs Bunny or something. It just.

It's like a cartoon.

Yeah, exactly.

I agree. I agree. It's pretty darn amazing. So, Drew, you know, this is a real estate investing show. We better say something about that. Are you excited about seeing Ron Paul and all the other great speakers at Meet the Masters coming up in just a. Of weeks? Couple, two and a half weeks or so?

I am excited. I got to see ron Paul in 2007 when he was campaigning and have been a fan ever since. And I remember the first time I met you, you did a little presentation.

Yep. That was at my Newport beach office way back in the day. What was that like? We met in maybe 2007, I want to say. Yeah.

Early 2007, probably, something like that. So. Yeah, But I remember you saying, I don't really like any of the people running for president except Ron Paul. And I said, all right, we're going to be.

What made you become a client, Right. Yeah.

Well, you know, if you remember, we were friends probably for five years or so before I even bought anything, so.

Yeah. Yeah. You were slow coming around.

Yeah. But it's funny when you mentioned Richard Nixon, because actually had the opportunity of meeting his son, Rand Paul, at the. Nixon.

That's not Nixon's son, but that's Ron Paul's son. Yes.

No, I went to the Nixon Library.

Sorry, Nixon Library. Rand Paul. Yeah.

There's a lot of names to keep track here. But what's neat is Nixon is actually buried in front of his home, which.

In Yorba Linda.

In Yorba Linda. And they. In order to do that, because you have to. In order to be buried, you have to have a church on. On site. And so they actually have a church there in order to have him be buried there legally.

Oh.

Little technicality I never knew about. That's very interesting.

What's crazy is, you know, you look at his house and how it's just this quaint little house, and then if you go in Orange County, I believe his estate. Estate in San Clemente, where. Which was like The Southern, the western White House is for sale. And I think it's like something like 55 or 65 million dollars.

Oh my gosh. That's crazy. That's crazy. So I guess this is how you tie it back to real estate. Yes.

Yeah, that's. I was getting somewhere.

Good stuff. Good stuff. Well, hey, I better, we better wrap it up. Today we are going to talk about the GOP tax plan or the Trump tax plan, the watered down version of it, which I have, as I have said many times, I think is very, very good for the economy. Not everybody's going to win with it. Most people will love or hate Trump. I think this plan is going to be really good for the economy. And I interviewed Danielle DiMartino Booth this morning and she's going to be on the show again. Of course. She will be speaking at Meet the Masters. She had a lot to say about the GOP tax plan. I take it she's not a fan from her remarks, but we will see. And she got a standing ovation at the last conference I saw her at, which was Porter Stansberry's conference. I think it's going to be a great time at Meet the Masters. Thank you to all of you who entered the five year plan contest. And we are wrapping that one up. Oh today or tomorrow. So Jason hartman.com contest and we're going to put another contest on there, a little raffle, not even a contest, but just go to jasonhartman.com contest and we're going to give away a few general admission tickets for Meet the Masters. Also you can upgrade to vip. We do not have any more elite access upgrades. They have completely sold out. And you know what that says. It's the old thing about supply and demand. We should have made them more expensive. Darn it. Oh well, anyway, yeah, we're going to have an awesome event coming up. So we look forward to seeing you there. And enter to win two free tickets, general admission tickets for Meet the Masters by going to jasonhartman.com contest. And if the five year plan stuff is still up there when you go, it'll change in about a day. So if not, upload your five year plan video and enter that contest. You know we're right. One of these, these are butting up against each other. So they will change momentarily. But let's go, let's talk to Ryan Shellhouse, a fantastic, very bright CPA talking about the GOP tax plan. We are doing this in two parts. This is a very in depth interview. It's a First look, deep interview on the tax plan again. It's brand new. It just happened. It just became the law of the land. So we're going to explore that today and tomorrow for you two days in a row. And let's get to that. Now remember, the links are jasonhartman.com masters for tickets jasonhartman.com contest for the contest. I'm here at the bottom of the Grand Canyon signing out. Let's go over to the interview with Ryan and talk about the tax plan.

It's my pleasure to welcome Ryan Schellhouse. He is the founder and principal of Indigo Spire CPAs and advisors. And he's here to talk to us about a very, very, very important topic that affects everybody in the US Very directly, but also all of you around the world. Of course, we have listeners in 165 countries worldwide and this will trickle throughout the entire planet what we're about to talk about. And that is the first real tax reform we've had in about three decades. This is extremely significant. I think it's very good for most people listening. You're going to benefit by this. I think everybody ultimately will probably benefit through the trickle up down and all around effect. But let's see what Ryan Sundays. He's a CPA and he knows his stuff. Ryan, welcome. How are you?

Great, Jason, thanks. Thanks for having me on.

It's good to have you on about this.

This is good stuff.

This is a big, big deal, folks. Everybody's got to realize that the single largest expense in any of our lives are taxes. So we've got to be good at this. We cannot be bored by taxes. We cannot lay it off on somebody else. We have got to have some degree of knowledge. Of course we want to get experts like Ryan on board to help us prepare our tax returns. But we've got to have some level of our own knowledge to bring to the table. Ryan, give our listeners a sense of geography. Where are you located?

I'm in San Jose, California. Firm's been here for about three years now. A little bit about me. I spent my most of my career at Ernst Young and Deloitte and Touche as a, as a tax guy. So it's been my pleasure to kind of strike out on my own a little bit. And our firm here has got a bunch of people helping out and working for us. We primarily do tax and tax advisory, but we also have a small audit practice, some advisory, kind of the traditional CPA services that you'd come to expect.

Fantastic. Well, when I was introduced to you through a mutual friend a few, well, several months ago now. I was just always very impressed with your level of knowledge. And of course you've got that big firm background, so that's great too. But you know, without the big firm invoices and bureaucracy.

So I'm working on that part. I'm working on the invoice.

You try to get those invoices in bureaucracy up, right? Yeah, exactly. Yeah, that's, that's what happens ultimately with everything. But hey, Ryan, can we sort of take a high level view and then we'll kind of go down the funnel, if you will, on the GOP or formerly Trump Tax Reform act, what are sort of some of the big nuggets that we want to know about and then we'll drill down.

Yeah, absolutely, Jason. And I think that's a great approach to kind of help get our minds around this. Like you said, this is the biggest reform in over 30 years, since 1986. It's the biggest changes to the tax code in terms of complexity. The bill itself coming out of conference was over 1100 pages. And in terms of money, this is the biggest bill that we've perhaps ever had in terms of tax from a high level perspective. There's the way I like to think about is how did these things get rated in terms of revenue either up or down? Did these things cost the government or did these things raising money? And when you look at that from that perspective, the biggest items are and principally what's been celebrated on the floor of Congress is the lowering of the corporate tax rate from 35% for most companies down to 21%. Now this achieved a couple of different aims, right? It was a goal of the GOP to get it to there. But maybe more importantly in kind of the big picture is it puts us more in line with all of our trading partners. This is a corporate tax rate that for a long time we kind of stood out as being much, much higher tax rate to corporations than almost any other country in the world. And this kind of puts us in line.

It was just an incentive for these companies to go offshore and do all kinds of crazy things. There are a couple of documentaries on this. I watched one of them. I think the technique that Apple and Google use to evade essentially taxes or avoid them maybe is the better word is the, the double Irish twist or something like that. You know, where they set up this entity in Ireland and Microsoft does it too. They license the software and the pre intellectual price. Just a big, big bunch of crap. And you know, this will make it so we're not penalizing these companies to keep more of this money onshore. So are we going to see a repatriation of wealth back to the us?

Well, yeah, and perhaps the, some of the most complex parts of this new bill deal with international taxation. So aside from the lowering of the rate, we're moving to a territorial income system for corporations. What that really means is that under old rules, companies could be taxed on their income wherever they earned it, and all their subsidiaries would be subject to U.S. tax. And generally we would defer that tax until that money was brought back to the US we'd create these structures and you know, this is what I did at Ernst and Young. I'm guilty as charged. Right. We used to set these structures up and we had kind of a playbook of places and strategies we use, whether it was Ireland, Netherlands, the UK became in vogue kind of towards the end with some of their tax reform. Whole idea is that we would transfer certain types of intellectual property from big US companies to these low tax or no tax jurisdictions and then they would exploit that IP outside the US and earn a ton of money. So famously, and it's even mentioned in the conference report of this bill, Apple has some more close to $250 billion sitting offshore in all these entities in cash because it can't bring that money back to the US without incurring tax and maybe even more importantly accruing the tax for their financial statements. So this bill also provides a transition period whereby Apple and all the other companies that have money stashed offshore are going to pay a one time tax of between 15 and a half and eight of their stashed earnings. Once they pay that tax, which is payable over eight years, they're free to bring that money back to the US completely tax free. So Apple for example, with their 250 billion, they pay $20 billion, which is a huge bill, but now they've got 230 billion that they can bring back to the US and do whatever they want with.

Wow. If that doesn't trickle through the economy, I can't imagine it can do anything else. You know, I heard this one commentator, you know, a CEO, and I didn't catch the name because I came into the interview partway in, but you know, I was listening to CNN in the car. He was talking about how, I mean he was obviously a liberal, so he didn't know what he was talking about. Little sarcasm there folks, but not really.

You know, he was saying, well, all this is going to do is make the rich richer, it's just a tax cut for the rich, etc. We don't really, really need to hire any more people. So with all the money we save, I think, you know, it's not going to help the economy. He says, I'm just going to go out and buy more real estate and stocks. And I'm thinking, what a moron. I mean, he thinks that doesn't help the economy. That doesn't trickle through. I mean, every time I buy a property, I look at how much more money I'm spending. You know, I'm hiring people to improve it, to fix it up. You know, the painters, the flooring people. I mean, trickle down economics, man. How do you, how do you not understand that? And, and this is not a poor person, this is a wealthy CEO who actually thinks this way. I, I just couldn't believe it. So lower taxes will trickle through. You know, it'll cause more investment. Investment is capital formation. Capital formation creates employment. It creates wealth. You know, this is how the thing, this is how it works, folks. It's good, right?

And I think the Wall Street Journal, they've. One of the key aspects of this tax reform bill that we haven't even touched on yet is how quickly it came together. I was literally in a conference maybe six weeks ago outlining to the participants at that conference that, oh, yeah, tax reform, something everybody talks about but never can get done.

Right? They got it done.

Pull together these tough decisions and then. And honestly, it all kind of started when Senator McCain walked into the vote for Obamacare repeal, put his thumb down and handed the GOP a defeat on Obamacare repeal. And that just mobilized the forces. And that's how we ended up with the tax bill we did today. I think there was so much political pressure to deliver a signature win by the end of 2017. This is where we're at.

Yeah, they did their workaround, they did it through tax policy rather than through the Affordable Care act or otherwise known as Obamacare. That has been obviously.

Yeah, we'll talk about that as one of the provisions in there.

Yeah, okay, good, we'll talk about that. Now why don't you talk about the, the mandate requirement? I guess it's been lifted. Right.

So one of the principal aspects of Obamacare was required everyone to get insured either through an employer or through the individual exchanges or through Medicaid. And what this bill does, interestingly, it's not even one of the highest scoring revenue losers to the pill. The penalty for not purchasing insurance now is statutorily Set to zero. So like you said, it's using tax policy to repeal certain parts of Obamacare. Now, if you do not go get insurance like you're supposed to, under Obamacare, you still have a penalty. It's still calculated on your tax returns. The penalty will never be more than zero.

I love it. That's awesome. It's like getting a traffic ticket from one of those unconstitutional constitutional speeding cameras or red light cameras. Right? You get your ticket in the mail and instead of saying, you know, yo, 300 bucks, it says, yo, zero, you know, you got a ticket, but you don't owe us anything. So, yeah, that said, all intents and purposes is nothing. Okay, good. Let's get back to the big chunks. I'll shut up about my political views because I'm getting some hate mail. I can tell people are already writing it. So go ahead again.

The biggest one was lowering the corporate tax rate to 21%. The next biggest one right after that was there was a substantial widening of tax brackets and lowering of rates for individuals. So the top rate used to be 39.4%. Now that the top rate's 37% and that trickles all the way through the rate tables, both for single people, heads of household, married, filing jointly. All the rates are down and all the brackets are wider. So you have to earn a lot more money in order to move up into the next tax bracket. Now, that was a big one.

So that's a tax cut. That right there is a tax cut for everybody or only most people?

Everybody. So there are certain tax brackets that overlap a little bit from the old law. So you may not necessarily see a tax rate decrease at your exact level of income, but it's $1.2 trillion worth of tax cuts just scored within this rate table expansion and rate decrease. So it's a tax cut across the board for almost everybody in terms of rate. Okay. Now obviously there's two parts to taxes. One is the rate and the other is the base upon which that rate is applied. And almost all these other provisions we're going to be talking about the base. Either it's broadening the base by eliminating deductions, or it's narrowing the base by including other things that can be deducted from your income before those rates, which are now across the board lower, are applied.

Okay, go ahead just a little bit.

For your real estate investors out there who may be using their self directed IRA and incurring ubit, we'll talk a little bit about that now.

Now, further down the road is what's that stand for again? You know, like unrelated business income tax? Yeah, right.

Yeah, yeah. And I don't necessarily want to get into all the details about what UBIT is on this interview, but for those who are subject to ubit, they know who they are. The rates that are applied on unrelated business income are now just slightly lower as well. So even those guys are winning a little bit.

All right, good.

Perhaps most famous as it relates to the. For individual taxpayers, what we used to do is you would go through and you'd calculate all your items of income and then you take certain above the line deductions and then you apply either the standard deduction or your itemized deductions, whichever one was higher. Okay. So one of the things that is in this bill is the increase of the standard deduction. So more people will just use the standard deduction and will no longer be incentivized to itemize their deductions.

So that's a simplification, right?

You could call it a simplification. There are some underlying policy things, right. If some people may not be quite as incentivized to donate to charity, for example, because they're still in the standard, this higher standard deduction, so they wouldn't actually see a tax benefit from a contribution to charity or something like that. But yeah, it's a simplification. And there will be a lot more people who can file these simpler 1040 forms now because they are not necessarily going to be itemizing their deductions on Schedule A.

Okay. Now, one of the promises that I think got ratcheted out in, in the political infighting and lobbying is the idea that you could file your taxes on a postcard. That's not going to happen, right?

No, hopefully not.

Okay, but, but it was a goal and we did move in that direction. Right. Granted, you're going to make a lot of money and people in your business are going to make a lot of money because we've got a new thing, you know, that's the first new big thing in three decades. So, you know, you're going to be explaining it, adjusting strategies for people, etc. Etc. But overall, this is a simplification, isn't it?

For some people, for a lot of individuals, it may be a simplification. There just be a little less paperwork they've got to keep track of. On the international side, it's more complex times four of what it used to be.

If someone's got stuff going on overseas, you mean.

Right, yeah. Right. So for like the apples and Facebooks, That I'm sure no one is feeling necessarily.

Sorry. Who cares? Hey, listen, Apple, Apple, Apple, the company I used to love and trust, I'm now really mad at them. They're throttling back everybody's old phone. Real scam scandal finally broke. I'm glad they got nailed. Okay, so yeah, I hope to see some litigation on that one. Class action law.

Yeah, I'm holding one of those, I'm holding one of those right now.

Those throttled back phone.

I wonder why it started going so much slower.

As soon as the upgrade comes out, they just kill everybody's old phone. It's what a disgusting, disgusting shame on Apple. But you know, no one listening is an Apple executive that's working in their tax department. Right. So you know, nobody cares about that. Very few people listening will have international affairs that they need to worry about. Most people are strictly domestic. Their tax life is simple. Yeah.

Yes. Skip a lot of that stuff. Nobody needs to know the new definition of globally low taxed intangible. I don't think that's interesting for anyone.

Okay, we'll see if listening right now.

Maybe some of the more interesting things is so kind of like I'd mentioned before, you start with income and then you get rid of your above the line deductions and then you take a standard deduction or an itemized deduction. Then you used to take a personal exemption amount for the number of people in your household, that personal exemption amount is gone. And that's actually the largest revenue raiser in the whole bill is the elimination of this personal exemption amount. And it's being replaced by this higher standard deduction as well as for the people that that exemption amount was benefiting or people had a lot of people in their household most of the time that exemption that means you had several children that offset that revenue increase is being offset by an enhanced child tax credit. So for those with kids under the age of 18, your child tax credit is going from 1,000 to $2,000 and that's a credit instead of a deduction. Again, a credit is better than a deduction because it reduces your tax dollar for dollar. And maybe more importantly for a lot of the people that might be listening, the phase out income level is moving up. So a lot more people will have a chance to take the child tax credit. And that's part of the reason they introduced that into the bill was to kind of offset the problems or the increase of tax that comes about by having no more personal exemptions.

Okay, so is this an encouragement to have kids Then it's a better deal, right?

In some respects, yeah, in some respects.

Okay, go ahead. What else?

A few more things on the individual side, then we'll kind of shift to some more of the headlines of the bill. You know, famously the mortgage interest deduction remains, but the amount of interest you can take is capped to $750,000 of acquisition debt.

Down from a million?

Yeah, down from a million.

Okay.

There'd been a lot of haggling over that and so that's kind of where they landed. It's important to note this is for new debt. Anybody who had, you know, a million dollar loan before and was paying, oh, they're grandfather expense deductions. Those are grandfathers and even refis of grandfathered acquisition debt, as long as the new refinanced amount is not more than the amount you owed on your old mortgage, that those are grandfathered as well.

Right, Right. Okay. So purchase money or refi, so long as it's not above what original acquisition cost. Right. And so yeah, anyway, whatever. It doesn't even matter because you're grandfathered. It's just the old law. But this is going to have, now this is going to have an interesting effect. I believe, Ryan, that overall this tax reform act is going to be massively good for the economy. I think it's a huge stimulus. Okay. Overall. But you know, okay, so say you're winning and life's going to be better, you're going to be more prosperous under this and the whole economy will. But, but if you're going to go out and buy a 1.5 million dollar house and live in it and have a 1 million dollar mortgage, you're going to be a little less motivated to do that. Now I did some math on this and you know, feel free to jump in on this. I was doing it this morning, talked about it on another episode, just briefly. But basically a payment on a $250,000 mortgage at four and a half percent, I think I did it is about 1,270 bucks a month. And so we'll assume that maybe $1,100 of that is interest in the beginning of the loan. Right. Amortized loan. That's the deduction. You would lose that delta, that $250,000. So this could put some dampening downward pressure on the high end market, right?

I would expect so, yeah.

Okay.

This is noted as a revenue raiser in the bill. So obviously the CBO guys, the Congressional Budget Office guys, they anticipate it to have an effect as well.

Yeah, Interesting okay, folks, go rent your high end home just like I've always told you to do, and then buy a bunch of lower priced rental properties you rent to other people. Go ahead, Ryan, what else?

Right. There's a limit on deductibility of taxes paid. This one's gonna hurt for a lot of folks.

It's gonna hurt the items in the expensive places.

Yeah, yeah. So your state income tax, property taxes, all taxes together, some together is capped at $10,000. Wow, that's going to hurt some folks.

If you're in New York or California or Boston or New Jersey, you're going to get. That's going to hurt.

Yeah, that is going to hurt. Some smaller bits that may be of interest to some folks. There's a repeal of all the miscellaneous deductions that used to be in there kind of towards the bottom of Schedule A. I know that's just tax geek language, but there were a number of deductions such as union dues, tax prep fees, hobby losses, loss on IRAs, stuff like that that we're all subject to 2% for. Those are all. Those are all taken out.

Okay, good.

One of the things that people were excited about about some of the drafts of the bill is the repeal of the Individual Alternative Minimum Tax.

The amt.

Yeah, AMT is back and is going to stick around. However, and this is a huge revenue loser in the bill. The exemption amount is much higher than it used to be. So fewer people are going to inadvertently just bump into the amt. And something that the GOP has been trying to do forever with AMT is get this exemption amount scaled with inflation. So fewer people are going to accidentally look up at their tax return at the end in April and be like, what does add back here in amt? That's going to happen to fewer people.

Okay, so that's good news. Right, because fewer people will have to pay alternative Minimum tax or amt. Right.

It's not as good as what was initially sold.

Right.

To the American public, but it's not too bad.

Okay.

One of the signature pieces of this legislation, people are gonna have to bear with me because there's a little bit of detail here is a special 20% deduction for all flow through income. Okay. Now there's gonna be some exceptions to this and I'll kind of get into it here in a minute, Jason. But the idea is since the corporate rate is coming down to 21%, a majority of American small businesses are operated as pass throughs and therefore wouldn't benefit at all from this reduction in the corporate rate. So what Congress decided to do was enact this 20% deduction for flow through income. So for the tax geeks out there like me, this is box one on the K1s ordinary business income, you get a 20% deduction of whatever that amount is that flows straight into your tax return. It's a below the line deduction. So it's kind of taken into account right before the calculation of taxable income. This is a huge piece of the legislation. A couple key caveats here. This amount of qualified business income that gets this 20% deduction, everybody gets it up to $315,000 of total taxable income for a married person or half of that for a single person, 157,500. Okay? So if all you do is have an S corporation or a partnership and you earn $315,000 as a married person through that partnership, as ordinary business taxable income, you get a 20% deduction and that's the end of it. It acts funny as we move above that threshold amount of 315,000 for married people and 157,000 for single people. It acts funny in two ways. That deduction goes away very quickly. And hang, hang with me here that companies that are in the performance of services in the fields of health law, accounting, consulting, financial services, brokerage services, or any other business where the principal asset is the reputation or skill of the employees or owners.

Oh my gosh. That is a, that is a tricky. I can imagine all kinds of arguments on this one and in tax court. Wow.

Oh yeah. That's where this is headed. So if you are one of those businesses that I just described and your pass through company as a married person causes you to have more than $415,000, that that 20% deduction is all gone. Okay? So between 315 and 415 it phases. But once you go above 415, the deduction, if you're in one of those businesses operating as a pass through, it's all gone. So employers and accountants, doctors, they're going to have issues using this deduction the way they think they might get it.

Okay, so let me. I might be mixing up two things here, so forgive me if I am, but one of the things that people are very excited about is the reduction in the corporate tax rate from 35% to 21%. That's huge, right? Hugely significant, correct?

Yes, absolutely.

The next part of that is, is that if you have an S Corp, which is a flow through entity or an LLC treated it as an S corp and you use the example of a partnership. I'm not too knowledgeable about partnerships because I don't do those. Maybe I have in the past, but can't think of it with this. What if you have the small business owner who has an S corp or an llc, or the real estate investor who owns a property or several properties inside an LLC with maybe an S corp election. I don't know if that matters or not. I think it does. How are they going to be taxed? Is this good for them or bad for question?

So it depends. First of all, let me start by saying the individual tax rates are lower. So even without this provision, if you have a profitable business, you're going to save money. What this provision does is tries to get the people that operate an S corp, any entity that's even treated as an S corp or an LLC that doesn't have an S corp election schedule C businesses. This also applies. What it does is if you had, for example, after all the, all the income and all the deductions, your real estate portfolio in an LLC made 100 grand and all of your other income doesn't push you over this $315,000 limit. That 100 grand only comes onto your tax return as 80 grand. And then you apply the appropriate tax rate.

Okay, so that's.

Yeah, it's good. Yeah, it's good. What we're going to see a lot of, just like you said, is, you know, people that are doctors, lawyers, accountants, athletes, consultants, brokers, they're going to have a problem using this deduction at the higher income levels.

So in other words, it may not be great for me for my real estate business. Right?

That's right. Depending on your total taxable income at the end of the day, you may not see a benefit from this provision. The other kind of quirky thing that happens at this same income level, the 315, is if it's not one of those businesses, then you have a different limitation that kicks in based on, and I won't get into the actual formula, but based on wages that your company pays and assets that that company has. What they're trying to do here because they anticipated guys like us sitting around thinking, well, how can we avail ourselves of this?

Right?

They were worried about the doctor who makes way more than 315, so ordinarily wouldn't be able to use this hive off part of his medical practice that's maybe related to, you know, maybe puts all of the equipment into a different company and that equipment is leased back to his practice that isn't available to use this particular deduction. So there's limitations on this that they're trying to prevent people from working around it. Moral of the story, Jason, is that if you make less than $315,000 as a small business owner in one of these pass through companies, you're going to see a benefit above that. If you're in one of these personal services fields or in a company that doesn't pay a lot of wages or doesn't have a lot of assets, then you're going to see limitations.

Yeah, they're always trying to engineer things through the tax code. You know, this is it totally affects people's behavior, at least smart people's behavior. You know, if you're paying attention, it better affect your behavior because you want to align your interest with working through the loopholes and getting the best deal out of it. So no one can deny that, you know, it affects people's behavior. We will continue the rest of this interview on the next episode. Thank you so much for listening. Please be sure to subscribe so that you don't miss any episodes. Be sure to check out this show's specific website and our general website, hartmanmedia.com for appropriate disclaimers and terms of service. Remember that guest opinions are their own and if you require specific legal or tax advice or advice in any other specialized interest, please consult an appropriate professional. And we also very much appreciate you reviewing the show. Please go to itunes or Stitcher Radio or whatever platform you're using and write a review for the show. We would very much appreciate that and be sure to make it official and subscribe so you do not miss any episodes. We look forward to seeing you on the next episode.

Welcome to Meet the Mass. Welcome to Masters of Income Property Investing. I'm your host, Jason Hartman.

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