On this episode, Josh’s guest is Diane Gardner from Tax Coach 4 You. She talks about the exciting and disappointing changes Congress has made in the Federal tax laws.
Diane Gardner is a Certified Tax Coach and best-selling author whose proactive planning approach helps clients dodge the tax bullet. Her tax coaching sessions have resulted in a combined savings of over $1,767,928 to-date — hard-earned profits small business owners would have given to the government by overpaying taxes.
Diane is the co-author of the best-selling books, Stand Apart and Why Didn’t My CPA Tell Me That? She has also authored six other books including, Stop Overpaying Your Taxes! 11 Ways Entrepreneurs Overpay and How to Stop it Now!
In today’s episode you’ll learn:
- What is the difference between an enrolled agent and a CPA?
- Who gets a benefit in the pass-through and who doesn’t?
- What should we be looking at if we own businesses?
- What’s the difference between a tax deduction and a tax credit?
- Tax tips and advice…
Narrator: Welcome to The Sustainable Business Radio Show podcast where you’ll learn not only how to create a sustainable business but you’ll also learn the secrets of creating extraordinary value within your business and your life. In The Sustainable Business, we focus on what it’s going to take for you to take your successful business and make it economically and personally successful. Your host, Josh Patrick, is going to help us through finding great thought leaders as well as providing insights he’s learned through his 40 years of owning, running, planning and thinking about what it takes to make a successful business sustainable.
Josh: Hey, how are you today? This is Josh Patrick. You’re at The Sustainable Business podcast.
Our guest today is a repeat offender. We like having repeat offenders on our show. That means one thing, they were good the first time out. Otherwise, they don’t get back on the show.
We have Diane Gardner with us from Adept Business Solutions. She wanted to come on and talk to us about the new tax law that was passed by Congress this year. I think that’s probably a topic that everybody who’s listening is going to be more than a little bit interested in, why don’t we get right to it and we’ll bring Diane in and we’ll start.
Hey, Diane. How are you today?
Diane: Doing wonderful, Josh. Thank you so much for having me on your program today.
Josh: I am thrilled to have you here. First of all, before we get into the nuts and bolts of the new tax law, you have to tell me what is the difference between an enrolled agent, which you are, and a CPA which you’re not?
Diane: Well, enrolled agents typically specialize in income tax. CPAs can specialize in all types of things. They can be cost accountants. They can be auditors. There’s lots of different specialties within the CPA world. Basically, when you see EA behind somebody’s name, you know their specialty is tax and that they know that topic inside and out and that is where they spend the majority of their time. Not that they don’t do some of the other services offered by CPAs but that tax is their specialty.
Josh: Let’s get right into the tax law because that’s what we want to talk about today. Where would you like to start?
Diane: Well, we’ve got some huge changes in our tax code. Thanks to all of the updates that Congress did to the tax law back at the end of December. There’s been an awful lot of misinformation out there in the media. My hope is to spread some good news and maybe some not so good news out in the business community and let people know how that new law is really going to affect them without all the media hype.
Let’s just start with some of the real basics that’s going to affect everybody, whether you have a business or not. That’s things like lower tax brackets which has been pretty exciting to all of my clients and many prospects and key followers and stuff that I’ve talked to as we’ve been out doing a bunch of these podcast interviews, is that most of the tax brackets came down at least 2, or 3, or 4 percentage points, some of them a little bit more. Which means, in theory, a lower overall tax for everybody. And that’s great news. We haven’t had good news like that in quite some time. And so, that was something that got me excited when I saw that because I’ve had quite a few clients that are up at that very top bracket that was 39.6 and it’s now— I think it’s 34% now which is going to help them. Every little bit helps when you’re looking at your tax liability over the course of the year.
Moving on from there, one of the nice things that Congress did is they made some tweaks to that nasty alternative minimum tax that catches people by surprise. It is a tax that was originally enacted to make sure that wealthy people pay their fair share of tax. Well, over the years, as our incomes climbed, they did not ever really index that number for inflation.
And so, because they didn’t do that, average people like yourself and myself were getting caught in what we call the alternative minimum tax trap. And so, Congress fixed those levels and they increased the amount of income that you have to have now which should keep most average type people from getting caught in that tax because it was a less than nice surprise, when I’d be working on one of my client’s tax returns and all of a sudden they had some additional tax owed because of alternative minimum taxes like, “Where did that come from?” So you had to go back and really work the numbers and figure out what had happened. That should stop those types of things from happening. And it let it go back on truly those who were making an awful lot of money and not your average small business owner who maybe had a good year one year and then maybe the next year their income wasn’t quite as high and they got caught in that in one year. So that was a big plus for us.
Josh: One of the things I heard such as in States like Vermont, which I know is a fact because I just talked to my accountant about this, is the fact that our deductions for income taxes and real estate taxes are now capped to $10,000.
Diane: That was one of our losses in this new tax law. Previously, on your itemized deduction schedule or your Schedule A, you were able to deduct your property taxes for your main home and for maybe investment properties, or a second home, or something along those lines that you have – in addition to any income taxes that you had either withheld or that you had paid in as estimated tax payments. Well, in this new law, this was one of our big losses in there, is that they have now capped that deduction to $10,000, so somebody who lives in a State that has high personal income taxes, high personal property taxes is really going to suffer from that one. Those who live in the lower property tax States and the lower income tax States won’t feel the sting nearly as much.
There’s been a lot of movement from various States as they’re trying to come up with a system where you’ll be able to take a charitable contribution credit for the money that’s paid in for taxes. Congress is not happy with that. They’re doing their best to try to work around it. Ultimately, by the end of the year, we will have an outcome of exactly how that’s going to be handled. But I think we’re going to see some sort of a combination of a certain amount of tax deductions and a certain amount of charitable contribution deductions which, in theory, should fix some of that problem but we won’t know till we actually get to the end of the year and they figure out what’s going to happen and how that reform’s actually going to read for the coming year.
Josh: I know about the reduction in the corporate income tax if you’re a C Corporation. But the truth is would doubt there’s anybody watching this or listening to this podcast, who is a C Corporation. They’re all going to be what’s known as pass throughs which are partnerships, sole proprietorships or S corporations. The tax law seems to be really confusing around who gets a benefit in the pass through and who doesn’t. Can you talk about that a bit?
Diane: I can.
It is the most confusing piece of legislation that I have ever seen in my whole 37 years of doing tax returns. As a way to equalize the pass-through businesses with the C corporations, Congress came up with what they called a qualified business income deduction. I’m going to back up just a little bit. C corporations, traditionally, started their tax rates at 35% and they went as high as 50%, depending on their income. And so, that really, really harmed them as far as trading internationally, and competition, and that type of thing which is why Congress cut those rates down to 21%. Well, the rest of us will also be able to take advantage of the lower rates but we’re going to have to use this new qualified business income deduction to make that happen.
Now, I’m going to do my best not to get technical on this because it is very, very technical. I’m going to way oversimplify it for you. For most businesses, they will be able to take their net profit, multiply it times 20% and that will give them a deduction that they’ll take on their personal tax return. For instance, I was working on a projection yesterday for a client. We took the estimate net income of her business of about $113,000 multiplied it times by 20%. She was going to get about a $23— almost $24,000 deduction on her personal tax return – and I said “most businesses”.
We have certain businesses that that’s not going the apply to in a type of a straightforward type way and those are your professional service businesses. Those are attorneys, accountants, business coaches, engineers, your football players, your basketball players – so people – any kind of a business that relies on a person’s skill or ability instead of a service or a product that can be handled by others in the business. And so, that puts us in a whole new category. If your income is low enough that they will still be able to use the qualified business income deduction but as that income starts to grow, it will phase out and/or not even be available at all. That’s when it becomes very complicated. There are some phase out limits at about $315,000 for an individual. This is total taxable income on your tax return which could be your business income, W2 income from a spouse or anything like that, or, I believe, it’s about $450,000 on a married couple’s return.
This is where it starts to get very complicated is that there’s a whole formula that has to be run. And in that formula. That takes into account the business income. It takes into account the amount of wages that that company has. And it can take into account their assets prior to depreciation, so the assets are on the depreciation schedule. It gets complicated very quickly. And that is why people have a hard time talking about it. It’s just because there’s so many nuances to it, depending on the type of business that it is. But to oversimplify it, the majority of the businesses will be able to take their net income times 20%, take that deduction on their personal tax return.
Josh: I have been told by some CPAs that it’s a good idea, as a result of this, to limit the amount that you do in W2 income and have that income flow through as K1 profits. Now, the IRS probably doesn’t like that because they’re going to lose FICA taxes.
Diane: the IRS is all over that. They are really going after the reasonable compensation as a result of this because if you’ve been paying yourself a salary. Let’s say you’ve been giving yourself a $75,000 a year salary, and all of a sudden you want more QBI deduction, so you reach down, “I’m only going to pay myself $20,000.” Well, the IRS is going to say, “That’s not a reasonable compensation for what you do in your business if $75,000 is what you’ve been paying yourself all along.”
For my own clients, we’ve been preparing a reasonable compensation analysis for each one of them and making sure that we have something in the file that backs up the amount of wages that they’re taking so that if it is questioned by the IRS, we’ve got something in writing, a third-party independent company that we utilize that is corroborating where we are with reasonable compensation so that we can’t get slapped down by the IRS. But in theory, yeah, wouldn’t it be nicer to not have any salary and put it all in K1 income. But you’re not going to be able to get away with that because they’re already talking about that’s going to be their very hot audit because of this new deduction.
Josh: Does that mean that the IRS is actually going to come in and do audits or are they going to do audits like they do for investment income which is they get K1 sent in by all the investment companies, they automatically send you a bill. Are they going to do that for reasonable compensation also?
Diane: That I don’t know. But I think what they’re going to be doing is looking for some national averages. And if your particular business tax return falls below those national averages, that’ll give them a reason to at least send you that letter type audit that says, “Hey, we’ve noticed something inconsistent. We want more information.” And then you’ll have to send in the information that they ask because I know that they don’t have the manpower to do a lot of face-to-face audits like they used to do in the past. And so, we see more of the letter type audits than we used to do.
Josh: Yeah. My understanding is that the IRS is severely underfunded and, as a result, they’re not really doing all that many audits so it all depends on how they go about correcting what they perceive as an issue there.
Diane: Right. Right.
Josh: What else should we be looking at if we own businesses?
Diane: Well, we want to be looking at an area that we took another hit and that’s in the meals and entertainment area. In the past, meals and entertainment were both 50% deductible and we all were pretty comfortable with that. It’s been that way for— you know, for many, many, many years.
Well, now, under the new tax law, entertainment is no longer deductible at all. That is your golf game. That is your sporting event. Up where I live in the Pacific Northwest, we do a lot of fishing trips over off of the coast or up into Alaska. I see a lot of ski trips. Things like that that people have done with their customers and their clients. And I think that’s going to slow some of that down just because it’s no longer going to be a deductible.
Then, we have to look at the meals area. There’s now three different kinds of meals where before there was one. Now, we have travel meals. Travel meals are when you’re away from home overnight. We know those meals are still 50% deductible so we need to track those separately as travel meals.
Then, we have our business meals. That’s, Josh, where you and I get together. We have lunch and we talk about helping each other in business and we’re furthering both businesses – that type of thing. Those are business meals. Those we do not have clarification exactly on that yet. We’re hoping that they will still be 50% deductible by the end of the year.
We’re almost positive Congress will come out with something that says they are. But the letter of the law says that they’re not so. But we’re having our clients track their business meals, track their travel meals because in the hopes that those business meals are still deductible. We’re dropping them on their P&L and we’re hoping to be able to take them at the end of the year.
Then, we have employee meals. Employee meals is when you bring pizza in for your staff or you bring lunch to a crew to keep them on the job site. Those kinds of things where you’re actually feeding your employees. Under the new law, those meals are still deductible at 50%. We now have three kinds of meals on our P&L where we used to only just have one, so it’s kind of important for good record keeping now.
Josh: [laughs] Or at least good coding of your credit card bill anyhow.
Diane: Right. Right. Yeah, good record keeping [laughs].
Josh: Yes. Yes. So what else would you want people to be looking at?
Diane: Well, as I do tax planning for individuals and business owners all over the US, one of the strategies that I like to use is the hire-your-kids strategy. Under the new tax law, we’ve got a big thumbs up on that one. In the past, when we hired our kids, the first $6300 of their income basically was tax free. We would hire them to work in our business and we put them on payroll and just treat them like any other employee but that first $6300 they got was subject to 0% tax bracket because it’s standard deduction.
Well, when Congress doubled the standard deduction, that allowed us to now pass-through about $12,000 to them, instead of $6300. That’s a huge difference when you’ve got a high school or a college-age child working for you. That is a lot and it can go a long ways towards paying for a college education, paying for private or parochial school, paying for some special things that that child’s wanting to do. You have the ability to let them earn the income and pay for it that way thereby moving it from an after-tax deduction to a pre-tax deduction. And those are some of tax planning strategies I love to do because there’s no out-of-pocket cost other than just moving it from one area to another. That was a nice big score right there.
Josh: If you do that with your children, do you lose the deduction for them?
Well, actually it doesn’t matter. Under the new tax law, there is no more deductions for dependents. So instead of dependent deductions like we’ve had in the past or our exemptions on our tax return, we now have double standard deduction which means that very few people will be itemizing in the future, going forward. Standard deduction for a single person went from $6300 up to $12,000. For a married couple, it went up to the $24,000 mark. It’s going to take a lot of itemized deductions to get up and over those standard deduction rates. They’re anticipating maybe 10% or 15% of the people will actually itemize going forward.
Josh: So that might help mitigate the problem if you live in a high-tax State?
Diane: Right. We can pick up some of the information over on that double standard deduction. Another score in the new tax law for families with younger children is we doubled the child tax credit. It went from $1000 per child to $2000 per child. And that is huge for families with children.
Josh: Diane, this is a really important thing for people to understand, can you explain the difference between a tax deduction and a tax credit?
Diane: You bet.
Josh, when you and I get a tax deduction, we’re able to subtract this deduction from our income but the effect on it is dependent on our tax bracket, our tax rate. If we’re at the 25% tax bracket and we’ve got a $100-deduction, we save $25 in tax. Or if it’s a $1000-deduction, we save $250 in tax. But if it’s $1000-credit, we save $1000 in tax. We always want credits over deductions. We’ll take deductions when we can get them. But, boy, if we can get credits, we’ll definitely take credits any day of the week.
And so, there’s a doubling of the child tax credit. It’s huge. Taking it from $1000 to $2000 per child. It doesn’t help somebody like myself who doesn’t have children at home anymore but it does help quite a few of my clients who have younger children at home.
Josh: It doesn’t help me because I’m old but that’s beside the point [laughs].
Well, we have a new family tax credit. If you are supporting a family member, maybe a mother, or a father, or a brother, or a sister, or somebody like that, there is a new $500-family tax credit that you might be able to take advantage of which is brand new. That could help somebody like you or myself who might be supporting an older parent, you know, that maybe has come back to live with us now in their final years of life. That helps a little bit on that end.
Josh: Diane, we have time for one more tip. What will be your last tip that you want to give us?
Diane: We have a wonderful score in the business world under depreciation. In the past, we had depreciation and we had Section 179 where we could write things off in the first year if we needed to. Now, under the new depreciation rules, we can write things off in the first year. We call it 100% expensing and we still also have Section 179 if we need it because they did limit that depreciation by classes.
In the IRS, we have classes such as three-year property, five-year property, seven-year property, and then moving on into real estate 27-1/2- or 39-year property. So now, we could potentially write something off in the first year. But if we don’t have the ability to take everything within one class and write it off in that first year, we still have Section 179 if needed. But that is going to make a huge difference for our clients, being able to take advantage of writing off this equipment that they bought and that should allow them to be able to re-invest that money back into our country.
Josh: Cool. Sounds good.
Diane, I’m going to bet some people would like to contact you because it certainly sounds like you know what you’re talking about with taxes and I know that one of the things that business owners really hate doing is paying taxes, so how would folks find you?
Diane: Well, the best place for someone to find me is to go to www.taxcoach4you.com and that is the number four, taxcoach4you.com/sustainablebusiness and we would love to give you a copy of this little report that we’ve prepared. This is Congress Cut Taxes. It’s going to go over all the items that we just talked about as well as quite a few more that are in this report for you. It gives you something, you just kind of wrap your head around all these changes and know what to expect and that type of thing.
And then, when you’re there, if you want to reach on out to us, we’d love to do an analysis – a free tax analysis that lets you know – What are your taxes going to look like? Are you overpaying your taxes? And, if so, how can we potentially help you with that?
Josh: Okay. I also have an offer for you. This is for people who will answer yes to this question, is that, Does financial freedom from your business always feel like it’s five years away? And if the answer to that is yes, you need to know about the success path that people go down to become financially free from their business. I’ve put together this five-step cheat sheet that’s easy to say where are you on the road to financial freedom. And if you’re stuck some place, where are you stuck? And what kind of steps would be likely for you to take if you want to become financially free for your business. We call this the Financial Freedom Project. It’s something I’ve been working on the last few years. It’s also something I am incredibly passionate about because of the 28 million businesses in the United States, there’s about 25 million that are going to have a really difficult time to get to financial freedom if they don’t change the strategies and the tactics that they’re using.
This is Josh Patrick. We’ve been with Diane Gardner. You’re at the Sustainable Business. Thanks a lot for stopping by today. I hope to see you back here really soon.
Narrator: You’ve been listening to The Sustainable Business podcast where we ask the question, “What would it take for your business to still be around a hundred years from now?” If you like what you’ve heard and want more information, please contact Josh Patrick at 802-846-1264 ext 2, or visit us on our website at www.askjoshpatrick.com, or you can send Josh an email at email@example.com.
Thanks for listening. We hope to see you at The Sustainable Business in the near future.