Tax Laws for Small Business Owners
In this episode, you’ll learn about many of the favorable new tax laws for small businesses designed to benefit pass-through entities. And, if you take the appropriate steps now, you could save tens of thousands of dollars in taxes in the year ahead.
- Key topics covered in this podcast include:
How to take advantage of IRS Rule 199A, which allows for a 20% qualified business income (QBI) deduction on pass-through entities.
- Service businesses vs. non-service businesses, and the different income caps and rules governing that 20% income deduction.
- How to rethink your retirement plan contributions so that you can qualify for the pass-through entity income deductions.
- Should you restructure your business to take better advantage of the QBI? Should you restructure real estate holdings, as that income is treated different under the new law?
- Why you need to revisit your retirement account options, including defined contribution and defined benefit plans.
- The new rules for automobile expenses and depreciation.
Doug Fabian: Do you own a business? This includes Sub S corporations, LLCs, sole proprietorships or partnerships. These are sometimes called pass-through entities. Are you aware of all the benefits in the new tax law for pass-through entities? We have included an action plan to take advantage of the new rules in this episode of The Science of Economic Freedom.
Announcer: The Science of Economic Freedom is intended as an investor education resource. The views and opinions expressed on this program should not be construed as a recommendation to buy, sell, or hold any specific security. Consult your investment advisor and read any investment perspectives carefully before making any changes to your investment portfolio.
This program is sponsored by Mercer Advisors. Mercer Global Advisors Inc is registered with the Securities and Exchange Commission and delivers all investment-related services. Mercer Advisors Inc is the parent company of Mercer Global Advisors Inc and is not involved with investment services.
Doug Fabian: Welcome to The Science of Economic Freedom. I’m your host, Doug Fabian. This is episode 17, “What Business Owners Need to Know About the new tax Law.” Now, this podcast is specifically written for business owners. This includes LLC shareholders, sole proprietors, partnerships, and Sub S businesses. If this is your first time listening to the show, welcome. We invite you to visit thescienceofeconomicfreedom.com and become a VIP member. This will give you access to all of our special reports and sign you up to receive notice when a new podcast has been posted. You can also subscribe via iTunes and Google Play. The Science of Economic Freedom podcast is dedicated to educating, motivating, and inspiring listeners to achieve their dreams.
Now, owning a small business is one of those great opportunities to build your wealth, pursue your passion, and leverage your abilities as an American. Now, it’s not easy to own and grow a small business. There are many challenges along the way, but there is reward for success. There is unlimited upside potential, and there are incentives in the tax code that favor business creation and achievement. We hope this podcast reminds you of those opportunities and motivates you to take action.
There are major changes to the tax law that could be favorable to your business and family. If you take the appropriate steps now, you could save tens of thousands of dollars in taxes and accelerate building your personal wealth. Most likely you’ve recently completed your 2017 tax returns. This is an important starting point. You will need these documents as you walk through the changes to the tax law and its potential impact on you.
Now, you should have an open mind. There are many savings opportunities, but some of which will require work on your part. You will need a great team of advisors. You may need to restructure your business and assets. For some of you, you may need to incorporate your partnership or sole proprietorship. You may need to consider shifting real estate holdings out of your business, into an LLC. One of the biggest opportunities is in retirement plan selection and funding. These contributions are a deduction to income and a transfer of cash from your business balance sheet to your personal balance sheet.
Meet with tax planning advisor
Now, you cannot do this on your own. The tax code is complicated. The change to the tax law did not simplify anything for private business owners like yourself. You will need the help of a good CPA, and possibly a business attorney. Do you have a high level of confidence in your current team? If the answer is no, then your next step will be to find the right team. Setting up new strategies will cost some money, but if we are to save tens of thousands of dollars, that short-term cost is a tax deduction, and it will pay massive dividends to you and your family.
What to do before you meet with an advisor
Before you meet with your advisors, you must understand how these new tax laws will affect your business. Now here is an overview of the issues you need to be aware of. The specific new IRS rule is this: 199A. And this allows for a 20% income deduction on pass-through entities. This includes Sub S corporations, LLCs, partnerships, and sole proprietorships. Now, this rule was a direct result of the generous reduction in C Corp taxes from 35% to 21%. Some in Congress felt small businesses deserved a break as well, but the rules are very complicated, therefore it is important to have that good tax advice to take full advantage of the savings.
Tax laws for Service or non-service business
Now, are you a service business or a non-service business? If you are service business in the areas of healthcare, law, accounting, consulting, athletics, financial services, brokerage, or your business relies on the skill and knowledge of one or more persons, then there is an income cap of $315,000 for married filers where the 20% deduction of qualified business income starts to phase out. Now, it is completely gone if your income is over $415,000 for married filers. Now, non-services businesses are different. They will have a wage and capital test to determine how much of the 20% qualified business deduction they will receive.
Small business tax planning
Now let’s talk about tax planning for a moment. Tax planning becomes very important. To take full advantage of this deduction you may need to lower your income to qualify for the QBI deduction. This means rethinking your retirement plan contributions, and property and equipment purchases. Many investments in property and equipment may have been enhanced due to their deductibility under the new law. Now, speak with your CPA or tax attorney to strategize how to lower your income, but you will need a plan.
Restructuring your business
Let’s talk about restructuring your business. Restructuring your business from a sole proprietorship or a partnership to a Sub S corporation may help in taking advantage of qualified business income deduction. Now, there is some expense involved. You will have to file a separate tax return on that new entity, but when you structure your business this way you can get more advantage under the new tax law. Now, it is also important to understand that non-service businesses will be required to subject themselves to wage and capital testing to know how much of their income is going to qualify for this 20% income deduction pass-through.
Now, you may want to consider restructuring your real estate holdings. Restructuring your real estate holdings into an LLC, if they are owned by the business today. Real estate income is now taxed differently under the new law, and the cost basis of your real estate holdings falls into this wage and capital testing formula. This is very complicated, but in order for you to get the full deduction of your QBI, you want to get into the detail.
Revisit your retirement account options
Next, you want to revisit your retirement account options. What retirement accounts are you using today? Now, there are many issues regarding retirement accounts. How many employees you have? What is your age? What is the cashflow of the business? Now, most of you probably have some sort of defined contribution pension plan — this means a 401(k) or a simple IRA, or maybe a SEP IRA — but you might have heard of defined benefit plans. Defined benefit plans are a great way to reduce income, but you need cash flow, and you can’t have too many employees to take full advantage of a defined income plan.
Revisit the new rules for automobile expenses and depreciation
And then lastly, there are new rules for automobile expenses and depreciation under the new tax law. There are generous deductions available, depending upon your business use and the business that you’re in. The details and variations are enormous. There are so many ifs, ands, and buts that complicate this even further, but the reward is worth it. A deduction of your business income of 20% is huge, but you need a plan. And when you’re thinking about this, think long-term, think about the next three to five years as you strategize this.
Small business tax planning action steps
Here are some action steps to consider to get the most out of the information that we have discussed today.
Number one, do you have a competent tax and legal team? If so, set up a meeting in the next 30 days with your CPA or tax attorney to discuss these issues. If you don’t feel confident with your advisors, find new ones. Talk to friends and business associates you respect and ask for referrals. Meet with at least two and then start talking about a new plan to reduce your taxes in 2018.
Number two, study your 2017 business and personal tax returns. If your business is part of your personal tax return, look closely at your Schedule C, this is where business expenses are listed. Set up a file, print hard copies, understand these documents, they are critical to formulating your new plan.
Number three, print a copy of your business balance sheet. Your business balance sheet is a part of your monthly accounting reports.
Number four, review your retirement account balances, your IRAs, 401(k)s, SEPs, or simples. What do you have now? What did you contribute to in 2017? What plans make the most sense for your family in 2018 and beyond? This is a big issue. When you contribute to a retirement account three things happen in your business. First, you get a tax deduction. Second, you lower your taxable income. And third, you move cash out of your business, on to your personal balance sheet. All three outcomes are positive.
Number five, balance sheet basics. You have a balance sheet for your business, but you should also have a personal balance sheet. This is one of the most important documents you have. This is a list of your personal assets and liabilities. It should be updated every year. If you don’t have a personal balance sheet, we have a special report and an accompanying podcast at thescienceofeconomicfreedom.com. Check out episode 5.
Now, let me ask you a question. Did you get value out of today’s podcast? If so, visit thescienceofeconomicfreedom.com. We talk about personal finance, wealth management, managing money. And watch for my second installment on this series for private business owners like yourself. Now, would you like a transcript of today’s show? If so, or if you just want to give me comments and feedback, you can send me an email. My email address is email@example.com, firstname.lastname@example.org. Now we do offer one-on-one wealth coaching where we help you find your next step to economic freedom at thescienceofeconomicfreedom.com. Now this is Doug Fabian. Thank you for listening.
Announcer: The Science of Economic Freedom is intended as an investor education resource. The views and opinions expressed on this program should not be construed as a recommendation to buy, sell, or hold any specific security. Consult your investment advisor and read any investment prospectus carefully before making any changes to your investment portfolio.
This program is sponsored by Mercer Advisors. Mercer Global Advisors, Inc. is registered with the Securities and Exchange Commission and delivers all investment-related services. Mercer Advisors, Inc. is the parent company of Mercer Global Advisors, Inc., and is not involved with investment services.