The new tax law presents challenges and opportunities for you and your CPA. In this episode, Tom reveals how CPAs are adjusting to the new tax law, and how it can benefit you to meet with your CPA before you file your tax return. This is an important episode for anyone trying to navigate the new tax law in the U.S.
01:01: What Burdens Does The New Tax Law Place On CPAs?
03:12: The Advantages Of An Extension
05:12: How Do You Benefit From The 20% Deduction?
08:50: Why Bonus Depreciation Is So Huge?
11:50: How Has Accrual Basis Changed?
18:57: What Is The New Rule On Interest Expense Deductions?
20:36: Why Will Tax Service Fees Increase This Year?
Tom Wheelwright: Welcome to The WeatlhAbility™ Show, where we're always learning how to make way more money and pay way less taxes. Hi, this is Tom Wheelwright, your host, founder, and CEO of WealthAbility™. You know, we have this brand new tax law. This is the very first filing season for this new tax law. What questions should you be asking your CPA, your tax preparer, to make sure you're getting all of your tax benefits that you're entitled to under this new law?
This new law had so many new incentives and they're very complex, okay? So what we're finding is with filing season upon us, it's gonna be a tough year for tax preparers. We have a new law, new forms, new software. So, what we wanna discuss today is how can you help your tax preparer help you so that you get the most tax benefits possible.
Now, many people, I would say even most people, think preparing their tax return is just putting numbers on forms, right? This is absolutely wrong. Tax preparation should be much more than putting numbers on forms. If it was only putting numbers on the forms, frankly, you should be doing your own tax preparation. You should do it yourself. Don't take it to a preparer if it's just putting numbers on the forms. When we prepare tax returns, there are a lot of decisions that have to be made. For example, there's new information this year that we didn't need in prior years. There are new forms this year that we didn't have in prior years. There are new elections that we might have to make.
Now, all of this comes, really, with new software. So, tax preparers do use software, otherwise it'd be impossible. The software, unfortunately, they've had just this hard a time keeping up with things as the tax preparers have had. So what we're finding is that the software isn't doing everything that it might normally have done for the tax preparer. It doesn't have the same checks. It doesn't have the same boxes that you can check and get things taken care of. So, what that means is that there's a really much greater burden on your tax preparer than there has been in prior years. So, that means that your involvement with the tax preparer's gonna be important. It also means that you may need to be a little patient with your tax preparer from a standpoint of timing.
And that brings me to the very first thing that you could do to improve your tax preparation experience this year and that is to file an extension. I am not kidding. I like extensions. I like them for a number of reasons. First of all, I never liked to prepare or file a business return until I have completed the individual's personal tax return. And the reason is that what I find is frequently when I'm going through a personal tax return, I'll find expenses that should've been deducted on the business return. Well, this year more than ever, an expense on a business return is a much better deduction than on a personal return. Let me give you an example. Investment expenses are no longer deductible on a personal return. So, if you paid a stock broker, you paid for tax return preparation, any kind of investment expenses, they're not deductible. So, business expenses are still deductible. So there's this question, am I an investor? Or am I in a trader business? And it's a much more important designation this year.
So, I just wanna walk through some of the changes that you really need to be familiar with and that I would suggest you talk to your tax preparer about these changes. And again, I like the extension because it's gonna give you more time to talk about it. I would expect that the software providers are gonna continue to update the software so we're gonna get better software. I truly believe that more than ever, this year, you will get a better tax return prepared in June than you get prepared in March. So, with that, let's talk about five different areas that have changed because of the new law. They've changed under the new law that I think you're gonna need to ask some questions and actually provide a lot more information.
The first, if you're a business owner, is the 20% deduction. Now, many of you have heard about this. I've talked about it before on the podcast. This is the deduction that if you have a pass through business, like an S corporation, sole proprietorship, or partnership, than you potentially get a deduction equal to 20% of your net business income. Well, that's a big number. I mean, for a business owner, most of their income is coming from their business and so 20% of that is, because of the way tax rates work, it's even more than a 20% reduction in your taxes. So, what are some of the things you need to look at with the 20% deduction?
First question is, can you qualify? Let me make the question the better question, right? The question is not can you qualify. The question is how can you qualify? So, there are things you can do that will help you to qualify, and even if you don't otherwise qualify but there are certainly things you can do that if you qualify that can make you qualify for a bigger deduction. Okay? So, there are a lot of tests that have to be met to meet this 20% deduction. One of the big ones of course is are you a specialized service trader business? If your income's over, basically, $157,500 as a single individual, or $315,000 as a married couple, that's your taxable income not your business income, your taxable income … If it's over that, then you could be limited if you're a specialized service trader business.
But I have found that there's a lot of misunderstanding about the specialized service trader business. So, for example, I work with a lot of independent pharmacy owners, and pharmacists, by definition, are healthcare professionals and healthcare services are specialized service trader businesses subject to this restriction. That does not mean a pharmacist who owns a pharmacy is subject to this restriction because a pharmacy owner is primarily a retailer. So, very little of their income comes from healthcare services. Most of it comes from healthcare products.
In the tax law, every word is important. So sitting down with your tax advisor and going, okay, am I specialized service trader business? Is there a way for me not to be a specialized service trader business? If I have some restrictions, like, if I'm over the $315,000 threshold, I also have restrictions, even if I'm not a specialized service trader business, with regards to my 20% deduction regarding wages. What constitutes wages?
So, there's a number of these questions that really sitting down with your tax preparer is gonna be really helpful. Now, this is another reason why your tax advisor and your tax preparer, preferably, are the same person. If not, just let's make sure that they're talking to each other. So you don't want is you don't want a tax advisor who is in an adverse position to your tax preparer. If you've got a tax advisor that does only tax advice, doesn't do tax return preparation, make sure that they get on the phone with your tax preparer and the three of you discuss these questions.
Okay, number two. That's the 20% deduction. Number two, bonus depreciation. Now, this is huge. I'll tell you how big this is. It's so big that $100,000 investment in real estate in 2018 could produce as much as $150,000 of deduction. $100,000 of investment could produce as high as $150,000 of deduction. So, this is a really big deal. So, the first question is, do I want to elect, do I want to take bonus depreciation? Understanding that bonus depreciation is the default. So, if you don't elect to not take it, you will take it. Now, when might you not want to take bonus depreciation? Well, when you don't have a lot of other income. You might want to spread out that depreciation. On the other hand, let's say you have a lot of income. You may still have an issue with taking bonus depreciation if you're not allowed to take that deduction currently because of passive loss rules.
So, one of the questions we have is ask is … So, there's lots of questions in here. I hope you're starting to get a feel for this. If I take the bonus depreciation, how will that affect my tax situation? If it creates a loss for that activity, for let's say my real estate activity, how can I offset other income without loss? What can I do? What can I do to offset other income without loss? In other words, if that loss is a passive loss, what can I do? How can I create passive income? Now, most of these questions should affect 2018 as you prepare your 2018 tax return. Sometimes the answer's gonna be, there's not a lot you can do now. But there's a lot we can do now for 2019.
So, when we look at a tax return at WealthAbility™, we're always looking at it as the final step in the tax planning process for the prior year. So, in this case, the final step in the tax planning process for 2018 and the first step in the tax planning process for 2019. So don't ignore the coming year when you're asking these questions. When you ask these questions, make sure that they're both 2018, the return you're filing now, and 2019, the year coming up, because there might be things that it's too late to do something for 2018, but there's a lot we could do for 2019. And now's the time to talk about it because now it's fresh on your mind, your tax preparer is looking at your information, and they should be asking you a lot of these questions. In case they're not, I want to give you some ammunition so you can go in and ask them the questions and actually help them out.
So that's bonus depreciation. Here's another one. You're a business owner and let's say in prior years you were required to be on the accrual basis of accounting. Now accrual basis means that you recognized income when it's earned, not when it's paid, and you get a deduction for expenses when they're incurred, not when they're paid. So, that means that accounts payable increase your deductions and accounts receivable increase your income. The limit for being on the cash method of account, which is you only pick up income when it's received and take deductions when they're paid, that limit used to be 10 million dollars. So if your gross income was more than 10 million dollars in your business you could not be on the cash method of accounting. In this most recent law, it was raised from 10 million to 25 million.
So here's the question. What would be the tax consequence of changing from accrual to cash? What would be the tax consequence of changing from accrual to cash? If it's a really nice positive tax consequence, which in most cases it will be, then what has to happen in order to do that? Because there're elections to be made, there's forms to be filed. Okay? So, make sure that you're asking this question.
Another question related to this. If you're a retailer, and by the way pharmacists, for example, are retailers, right? They retail prescription drugs and they retail other products. If you're a retailer, you have inventory. Prior to the 2018, you only could get a deduction for inventory when you sold the inventory. There's a special provision in the new tax law for small items. Items that cost you less than $2500, okay? But there's a new exception that you, now, if you elect, you've got to file the right forms, make the right elections, if you elect, you can take the deduction for inventory when you buy the inventory. You don't have to wait until you sell it. Well you're going, well, what difference does that make? Well, look at the amount of inventory showing on your balance sheet at the end of 2018. That is a potential deduction. Additional deduction for 2018.
Now, this is one of these areas where I talk about this on stage and people always come up to me. I mean, sometimes within 30 seconds of getting on stage, of getting off stage, and say, “Tom, you can't do that. That's illegal.” So, if you're wondering, is that legal, what question are you going to ask? You're gonna ask, okay so how do we do this? If your tax preparer says you can't, the question should be, what are they missing? Why is Tom saying you can and other people saying you can't? Because it's a matter of learning, right? I mean, I'm learning all the time. So, you don't have to trust me. In fact, please don't trust me. Okay? What I want you to do is I want you to work with your tax advisor, and I want you to figure this out. If your tax advisor can't figure it out and they just throw up their hands, maybe they need more resources and they ought to talk to us about joining the WealthAbility™ network. Because that's the whole point of the WealthAbility™ network is to provide tax advisors and other CPAs with more resources and more research and more information.
So, that's actually a big one. I was in a seminar not too long ago where I walked in the room and two gentlemen came up to me and told me a story. They said, “Tom, in December, we were told by our accountant that we would owe $400,000 in taxes and we were stricken because we told him if we have to pay $400,000 in tax that will put us out of business.” And their accountant said, “Well, there's just nothing to do about that.” These two gentlemen remembered a presentation I had done a month earlier and they said, “You know what? I remember Tom said something about this inventory deduction.” So they went back and watched the video of this presentation I did and they went back to their account. They said, “Please, please would you look into this inventory deduction?” And they waited one week, two weeks. About three weeks later, they're driving down the road and they get a call from their CPA and their CPA says, “Would you please pull off the road right now? I need to tell you something.” And they said, “Well, can't you just tell us?” “No, no, no, you have to pull off the road. I need to tell you something. It's really important.” So, they pulled off on the side of the road and their CPA says, “Not only can you take this inventory deduction, you must. It will reduce your taxes from $400,000 to $45,000.”
I told this story to somebody the other day and I said, “these people were gonna lose their business.” He said, “Well, it's just a business.” I said, “You don't understand. These people own a pharmacy in a small town. If they go out of business, who takes care of their patients?” Entrepreneurs get basically, I think, a lot of bad press. What people sometimes forget is that the stores they go to, the people they depend on for their medications, for their physicians, all of their healthcare are all entrepreneurs and anything we can do to help the entrepreneurs helps everybody. That's how I feel about this situation. These two gentlemen because they took action and asked their CPA this question, and actually pressed their CPA on it because their CPA didn't believe it, and pressed them, were able to save their business. Which saved a pharmacy for a small town.
Now, I think that's worthwhile. So, your taxes are your single biggest expense. Asking these questions can make a huge difference in your business, your family, and your community. So we talked about the 20% deduction, bonus depreciation, and these accounting methods. Which, by the way, all have elections to make, there's all things you have to do. There's a new rule on interest deduction for businesses and it's a potential limitation. Just know, please, that there are again elections that you need to look at, particularly if you syndicate real estate. There's very important election that you need to make. There's a question of do I take bonus depreciation? If you're a syndicator, do I take bonus depreciation? Do I need to cost segregation? And the answer is yes. But, how do I get that cost segregation?
These are questions you have to ask. Should I take a home office? In the past I've had a lot of people tell me that their CPA said, or tax preparer said, “Don't take a home office deduction.” And they said, “It's just not worth it. You're gonna get your mortgage interest in your taxes anyway.” Well, think about this year. Are you still gonna get your tax deduction? Because remember, property taxes and state income taxes combined are limited to $10,000 and on top of that, you may not have enough deductions to rise above your standard deduction. Standard deduction for a married couple's $24,000. You may be under that $24,000. Just because you're under that $24,000 doesn't mean you don't get to deduct the interest and taxes on your home office. So, it makes the home office a much bigger deal. So the questions should be, first, what would be the tax consequence if I took home office? Second, how do I do it? Okay, how do I do that?
So, what I want to emphasize is this is actually a very different filing season for your tax preparer. It will be more expensive for you this year than it was last year. I guarantee it. Because your tax preparer has to take more time, it's gonna be more difficult for them, so you should expect, prepare to pay a higher fee this year. Alright? It's just the way it is. It is not your tax preparer's fault that your fee went up. You can blame Congress on that, okay? You can blame the government shutdown for part of that, frankly.
So, ask the questions. Really, your best tax advisors are gonna ask you the questions. I want you to be prepared in case they don't know which questions to ask so that you can make sure you ask the right questions so that you can have may more money by paying way less tax.
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