The new tax code offers many people the opportunity to cut income tax by 20%. In this episode, Tom offers a glimpse of how he works with clients to help them reduce taxes. Hear from a small-business owner about how tax planning helps him effectively run his business and reduce taxes. This is a must-listen show for anyone interested in reducing taxes.
03:15 – How Am I Allowed To Shave 20% Off My Income Tax?
08:45 – What Kinds Of Businesses Benefit From The 20% Deduction?
13:09 – What Tax Advantages Do Retailers Have?
20:46 – What Is The Value Of Paying Attention To Taxes?
Learn more about Cliff Holt by visiting https://www.utahfamilypharmacy.com/
Speaker 1: This is The WealthAbility™ Show with Tom Wheelwright. Way more money, way less taxes.
Tom Wheelwright: Welcome to The WealthAbility™ Show, where we're always learning how to make way more money, and at the same time, pay way less taxes. This is Tom Wheelwright, your host, founder of WealthAbility™. Very excited for today's topic, because today, you're going to discover how to shave 20% off your income tax. You heard that right, 20% off your income tax. So what we're going to do is, we're going to discuss this new 20% deduction for businesses. And you know, this potentially applies to everybody because, anybody could be a business owner. Even employees could become business owners. And the good news is, we've got a real life example. So, my good friend, Cliff Holt, is with us today. He is a business owner, and we've known each other for several years now. I’ll let him introduce himself in just a minute.
And then, we're going to talk about these new regulations. We have brand new regulations on this 20% deduction to help us understand how to apply it. We hope that some of them will change but, we'll discuss the regulations. We'll discuss what this amazing tax benefit, how do you take advantage of it. What do you do? And what are some of the pitfalls you need to look out for?
So, Cliff it is great to have you on The WealthAbility™ Show.
Cliff Holt: Tom, it's great to be with you.
Tom Wheelwright: So, if you would, just tell our audience a little bit about yourself, how we know each other, you know? And so forth because, I mean, you're a real life business owner. So if you would, just tell a little bit about your business and where you're … And what you do.
Cliff Holt: Okay. Well, I've been a pharmacist for a lot of years, and I've worked in retail. I've worked in it with the chain stores, hospital, independent pharmacy. And that's my passion. And so, nine years ago, we opened up a store down in southern Utah and in hurricane. Hurricane is how it's spelled but it's pronounced “Hurricane”. Hurricane Family Pharmacy and then we've acquired and opened some new stores. I have four stores now, all in Utah. And we're just trying to make a go for it.
Tom Wheelwright: Well, that's awesome. And Cliff is one of our star students. We've been working together, what? Three … Four years now, right?
Cliff Holt: I think I met you about four years ago at a conference in Florida.
Tom Wheelwright: Yeah.
Cliff Holt: At the PDS Conference.
Tom Wheelwright: Absolutely.
Cliff Holt: So it's funny because, you have a Utah connection. You're from, you grew up in Utah, I believe, right?
Tom Wheelwright: I did.
Cliff Holt: [inaudible]
Tom Wheelwright: And I think you were surprised that I knew that it was pronounced “Hurricane.”
Cliff Holt: That was the lead that I knew you were from Salt Lake, that's right, or from Utah.
Tom Wheelwright: That's how you know. Because it's Hurricane, and it's not a creek, it's a “crick.” So, just …
Cliff Holt: That's right.
Tom Wheelwright: There are certain things you have to understand if you're from Utah, but anyway, Cliff and I have actually had several discussions about this 20% deduction, because … So, just to give people, give everybody a little bit of background, this is a new deduction that came from the Trump tax law in December. And really, the idea was, look, the corporations obviously, everybody knows, they got this big tax reduction from 35% to 21%, so the small business people go, “Well, what about us? And where's our tax reduction? Because you know, we drive a lot of the economy. There ought to be something here.”
And what they came up with was a deduction of 20% of net income from a qualified business. And of course, the question is, “What's qualified business income?” And you know, of course, they were concerned, well, what if everybody quit their job and became an independent contractor, would they then qualify? And the regulations actually address that. We'll talk about that a little bit, because what we want to do is let you know that truly, anybody could take advantage of this deduction.
But in Cliff's case, we were talking about this when it first came out, and Cliff, you've got a particular interesting challenge, because on the one hand, healthcare professionals, so healthcare services, like legal services and accounting services don't qualify for this deduction, unless your income's low enough to qualify. But generally, they don't qualify. So, you actually do two things, right? I mean, you sell, you're a retailer, but you also do some healthcare services, don't you, in your pharmacies?
Cliff Holt: Yeah, exactly right. So, the majority of our businesses, of course, retail pharmacy. But we have nurses on staff, and we do a lot of immunizations and some other medical services and clinical services that, I think, would not qualify for that.
Tom Wheelwright: Right, so then the question is, what are they gonna do? Are they gonna throw everything out because you've got some healthcare services? And that was the big question that we were waiting on, the regulations. I actually suggested to Cliff … We were actually both in … I got Cliff involved with The Wall Street Journal article. And did a nice spread on you, by the way, Cliff. Those were nice pictures that they put in their paper.
Cliff Holt: Hey, thanks.
Tom Wheelwright: What they were asking about is this whole idea, well, so what do you do, okay? Do you break out the businesses? You know, how do you handle this? And I said at the … I remember saying at the time, I said, “What I'm hoping is, is that we get a de minimis rule. And what a de minimis rule means is that if there's a small amount of your business that is a non-qualified business, like a health services business, then you don't have to throw out the whole thing. It doesn't contaminate the whole thing. And in fact, we got that rule.
So, we got a rule that said, “Look, if you have less than 10% of your business in a non-qualified business, okay, what they call a specified service trade or business, SSTB, but we're just gonna call it a non-qualified business. If less than 10% of the revenue from your business is in that non-qualified area, then you can ignore it. So Cliff, I would think, in your case, and we haven't really talked about this, but I would think in your case that you could probably … It might make sense for you to get it down to that 10%.
Cliff Holt: Well, I think that we're already below the 10%. I haven't put numbers together exactly for the year, or even to look at last year. But our revenues are pretty high on the pharmacy side, so I think we're probably okay there.
Tom Wheelwright: So, what that means, of course, is that the pharmacies, you're gonna get that 20% deduction. So, that's like all of a sudden, I mean, literally, that's a 20% reduction in your tax. And actually, the way it works, you know, if you think about this, every one, we have progressive tax rates. So that means that the last dollar we earn is taxed at our highest rate. But it also means that the first dollar of deduction it also reduces taxes at our highest rate.
So, in this case, for your pharmacy income, anyway, and then I know you've got some other sources of income. But, for your pharmacy income, anyway, you literally will reduce at least 20%, and maybe even more, because it might even bring you down into a lower tax bracket.
Cliff Holt: Wow, that would be awesome.
Tom Wheelwright: So you know, that's the thing. Now, here's the thing; There's some planning that we need to do. I mean, let's say for example, Cliff, that you had, you know, you were at 12%, right? Let's say you looked back and you go, “Well, we're at 12%. Well, it's a weird part of the law. Let's say that you had … I have no idea what your net income, and I don't expect you to tell everybody. But let's say it was a million dollars, just because it's a nice round number.
Let's say your net income from your business is, or your pharmacies was a million dollars. Well, that's a $200,000 deduction. And at a 40% tax rate, that's a lot of money, okay? I mean, that's $80,000 in your pocket.
Cliff Holt: Right.
Tom Wheelwright: So, the question is, is one percent, you know, is doing that extra immunizations might actually cause people to go, “Well, jeez, maybe we're not gonna push immunizations so much. Maybe we're not gonna expand that part of the business because that part of the business doesn't get this, it’s gonna be taxed at a higher rate, and maybe we put our efforts to someplace else.” Because you always want to put your efforts where the most money is, right?
Cliff Holt: Exactly.
Tom Wheelwright: So, you have other businesses as well, right?
Cliff Holt: Yeah, I'm on the, I got some medical business. I own a medical clinic, and then I have a Hospice company and a home health company, and a personal care company.
Tom Wheelwright: Okay, so all of those, those are probably health services businesses, all right? So, the nice thing is, is that, I think we can do this. Now, here's what's going on right now; You're just experiencing I'm talking to Cliff for the first time about this since the new regulations came out, right now, live. So, what we have to look at is, what do those other businesses, how do they affect the pharmacy business? And I believe, my reading of the regulations is the good news is, Cliff, that I don't think that those businesses, because you don't provide pharmacy services to those businesses, right?
Cliff Holt: No, not at all.
Tom Wheelwright: So, because of that, you're probably okay, as far as those businesses won't get the 20% deduction, but your pharmacy still will. So, there's some other things, as well. I mean, there are, for example, one of the big challenges in the regulations, you know, the concern the Treasury and IRS had is, what if everybody just quits their job and becomes, instead of being an employee, they become an independent contractor. And the regulations actually address that, okay?
And they're actually a little onerous from the standpoint that if you … Let's say you make partner. Let's say you're at a law firm, and you make partner at the law firm, okay? Well, if your income's under the specified amount, which is $315,000 for married, filing jointly, then even as a law firm partner, you ought to be able to get that 20% deduction. However, if you've been an employee, if you've been an employee at the same business before you become a partner, you are presumed under these regulations to be an employee, even as a partner.
So, you have to overcome that presumption, which is going to be a little challenging, because it's easy for an auditor to come in and say, an IRS auditor to come in and say, “You haven't overcome that.” So, there's a lot of planning and structuring to do, between now and the end of the year on this 20% deduction. And looking at what qualifies as specified service trade or business. I’ll give you an example and what my friend, Robert Kiyosaki, I know you know who Robert is, Cliff. You know, who's very popular with his book, Rich Dad, Poor Dad, you know, I look at him and I go, “Okay, well, wait a minute. If you're, if you make money because of your name, then that is a specified service. So, that's not a qualified business, either.
And so, you have to look at, “Okay, well how much is because of your name, versus how much is because you're selling educational products or things like that?” So, this is one of those areas where I think that people really need to spend some time with their tax advisor. And this is what Cliff and I were talking before we started the show is that, there's gonna be, you know, really sitting down with your tax advisor and asking them, “Okay, so what can we do here?” Because just because you're presumed to be an employee doesn't mean you can't actually be an independent contractor.
And there are ways to show that you're an independent contractor. So, there are some really great opportunities here, really, to reduce your tax. This 20% reduction, I think, with good tax planning, could be a bonanza for a very large, a large group of people. And I know, Cliff, it would have, I mean, 20% off your tax liability would, you'd probably put that to good use.
Cliff Holt: We could definitely put that to good use. That's a game changer for us.
Tom Wheelwright: You know, and it's interesting too, because Cliff's in the retail business. There's another game changer that actually, Cliff, I think in your industry, it's probably even a bigger one, just for one year. And this is one that's not talked about. This is part of the new tax law. And it's specifically applies to retailers.
So, Cliff, I'm sure you know this off the top of your head. About what percentage of your business is actually retail?
Cliff Holt: Oh, in the 90s. It's almost all retail.
Tom Wheelwright: So, you carry, I presume then, if you're retail, you carry a lot of inventory.
Cliff Holt: We do, we do. I mean, each one of our pharmacies, I mean, even just the prescription inventory, that adds up in a hurry, not even counting the front-end inventory.
Tom Wheelwright: So, here's something in the new tax law that nobody's talking about, and I keep getting questions about it, and it's very clear in the tax law. You just have to walk through how you come to it. But, the rule now is that if your inventory items are less than $2,500, you don't have to keep inventory. So, that means … So, if you have a million dollars of inventory that was sitting on your books at the end of 2017, that would mean that you would have a million dollar deduction in 2018. So, would that … How does that impact your business?
Cliff Holt: So, say that again? That seems unreal.
Tom Wheelwright: Okay. So, how much of your inventory is more than $2,500? I'm guess you probably got some specialty drugs that are more than $2,500.
Cliff Holt: Oh, are we talking about individual, like, individual package?
Tom Wheelwright: Yep.
Cliff Holt: Yeah, I mean, we have a few of those. But the vast majority is not that.
Tom Wheelwright: Right, so …
Cliff Holt: I mean, 99% of it's less than $2,500 per bottle …
Tom Wheelwright: Right. So …
Cliff Holt: … or package.
Tom Wheelwright: What that means is that you're no longer, if you're under 25 million dollars of gross revenue, okay, if you're under 25 million dollars of gross revenue, you don't have to keep inventory anymore. It's called a Change of Accounting Method. You have to file it as part of your tax return, but you change to not keeping inventory.
Well, if you're not keeping inventory, that makes all of that inventory that you had, that you were showing on your tax return at the end of 2017, Cliff, deductible in 2018.
Cliff Holt: Wow.
Tom Wheelwright: So, I was talking to … So I was talking to PDS, right, this pharmacy development services, the conference, in February. And I brought that up on stage. And I'm still getting questions. My CPA says you can't do that. And one of the things that I've learned as I travel around the world speaking is that, it doesn't matter where I am. I mean, I can be in … I was in Johannesburg, South Africa last week. I'm headed to Sydney, Australia next week. Or, I could be in Orlando, Florida, which is … We were down in Florida at this PDS Conference, and I'm gonna get somebody that says, “No, you can't do that. There's no way you can do that.” But that's what the law says.
So, you know, I don't write the laws. If I did, the laws would probably change somewhat. But in this case, this is a very clear change in the law. But it's confusing to get there. So, if you're in the retail business, if you have inventory, this could apply to dentists have inventory. It can apply to doctors, pharmacies, of course, big inventory. And certainly, any retailer, any food establishment, anybody who carries inventory, you can change your accounting method this year. And it's a one-time deal, right?
Because if your inventory stays consistent from year to year, that means that, you know, next year you buy the same amount of inventory, you're not gonna have a big deduction. But, if you're increasing your inventory, so, like, Cliff, you just bought a new store, right?
Cliff Holt: Right.
Tom Wheelwright: So, in that new store, you're gonna get to deduct that inventory. So, that could have an impact on … I would expect, Cliff, that that might have some impact on your planning for buying new stores.
Cliff Holt: That would have an impact, yeah, on all my stores now and in the future, for sure.
Tom Wheelwright: Well, and you think about it, I mean, now think about year-end planning. I mean, this is a question that I got. We do this course once or twice a year for pharmacy owners at our office in Tempe, Arizona. And one of the questions they had was, “Well, what if we just buy a lot of inventory at the end of the year? Could you manipulate it that way?”
And the answer is, potentially. I mean, you know, you have to be careful with things like that. I mean, any time you manipulate, then you have to go, “Am I really following the law here?” So, be careful with that and talk to your tax advisor about it. But the reality is, is there a little bit of flexibility. I mean, do you have … I'm curious to know, so Cliff, do you have drugs that you might keep on hand, but then that you have to send back?
Cliff Holt: Yeah, we'll do a house cleaning once or twice a year for things we're not using anymore. Things we bought and we had people on, but they've changed therapies.
Tom Wheelwright: Right, so …
Cliff Holt: Is that what you're talking about?
Tom Wheelwright: Yeah, that's what I'm talking about. So, you might have something on hand at the end of the year, that's still deductible when you bought it. When you bring it back, if you return it, if you actually get a credit for it, then that's gonna just go into income.
So what it does is, what I like about this new tax law is, I think the small retailers, I think inventory … My experience, especially with independent pharmacists, which of course, we deal a lot with your guys, and with dentists and other healthcare providers is that, inventory is just challenging, okay? It seems to be, from an accounting standpoint, it seems to be your most challenging issue, is keeping inventory. Is that a fair statement, Cliff?
Cliff Holt: Oh, it is. I mean, it's a daily task. I mean, yeah, we have employees dedicated to that.
Tom Wheelwright: Yeah, so it doesn't mean you don't want to track your inventory. Obviously, I mean, there's a business reason for keeping track of an inventory, obviously. You want to be really careful about that, particularly in your business. Legal drug dealers, right, that you have to be really …
Cliff Holt: Right.
Tom Wheelwright: I'm sure you have to be really careful about that. You want to be really careful, because in total, that inventory is a big, you know, it's your biggest, single expense. So, it doesn't mean that you don't want to do it from a business standpoint.
What it means is, from a tax standpoint, we don't have to worry about this. We don't have to keep track of this anymore. Except for those line items that are over $2,500. And the reason it's $2,500, folks, is because it's actually treated as materials and supplies. And materials and supplies are deductible if they're under $2,500. That's just a … Again, this is just a de minimis rule. So, this idea of a de minimis rule is very important in the tax law because it gets us some nice benefits.
And in this case, I mean, the $2,500 also applies to real estate. So, for example, if you're repairing some real estate and you have individual items that are less than $2,500, let's say you go out and buy 75 new washers and dryers for your apartment building, all those washers and dryers are going to be below $2,500, so you're gonna be able to deduct all of them as basically, as a supply, okay?
So, it's actually the same rule as buying a washer and dryer for real estate, the same thing applies now to inventory, because they specifically made that rule. So, I would think, you know, you're in a retail business type of thing, Cliff. So, you know, five, six years ago, you were … We were not having these conversations. So, you know, if you would, just, what's the difference in the conversation and how you think now, versus how you thought before you were really, you know, paying attention to taxes?
Cliff Holt: Well, before I thought, just, it is what it is, right? Your CPA comes back and says, “Here's the bottom line.” And I mean, I don't even think we talked about the word planning six years ago, in tax planning. And so, it's changed drastically. I mean, we're talking about things, all through the year, planning for the year, and then also planning for the next year. So, we're looking at it totally different than we did before.
Before we were looking at it for maybe one or two days a year, and just having that terrible feeling when you had to figure out how big of a check to write out to the IRS. But now, planning makes a big difference.
Tom Wheelwright: Well, and what I love about you, Cliff, is that you're paying attention. I mean, not everybody does. You know, not every business owner pays attention and is thinking about the taxes. And this is one of the things that I think that people don't always recognize is, we always say, “If you want to change your tax, you change your facts.” And you just have to know which facts to change.
In this case, for the inventory, it's a matter of making and actually filing a form with your 2018 tax return, with the 20% deduction, it might be, okay, am I an independent contractor or am I an employee? And how do I prove I'm an independent contractor? Or, if I'm a … You know, how do I structure my business so that I don't, I come under this 10% rule? Or what do I do in order to make sure that I get the full benefit of the 20% deduction?
I mean, there's … You'll love this, Cliff. There's 184 pages in these new regulations. And this is just for this 20% deduction. And we got 129 pages of regulations three weeks ago for the new bonus depreciation. So, this is a lot of detail. And it's not like, Cliff, I presume you're not reading the regs, are you?
Cliff Holt: That's why I'm friends with you, Tom.
Tom Wheelwright: Well, and that's the idea, right? I mean, the idea is that this is why you have a team. This is why you have a team of advisors. I'm guessing, Cliff, you don't fill a lot of prescriptions yourself, do you?
Cliff Holt: Not anymore. I don't have time for that.
Tom Wheelwright: Well, exactly. So, because you have a team who does that. So, this is … You know, we talk about having teams, but obviously, the tax advisor has a pretty big impact. You know, when you have things like, “Oh, I can deduct my inventory this year.” Or, “I can shave 20% off.” This is something that we talk about all the time about look, your tax advisor … Outside of your spouse, your tax advisor probably gonna have a bigger impact on your finances than any other single person.
So, sitting down, I would just encourage everybody and hope I can get Cliff to encourage everybody, too, to actually sit down with your tax advisor sometime between now and preferably, the end, between now and November. Because there are things that you may need to do, in order to take advantage of that 20% deduction this year, or take advantage of the inventory deduction. Or, the myriad of other tax benefits that came out of the tax law.
Cliff Holt: I think that that's an important key, Tom. I think a lot of us probably don't have a tax advisor. I mean, certainly, I do with you now, for the last several years. But before that, I'd never even have heard of a tax advisor. And the only advice I got was from my CPA saying, “Hey, you need to write a check out for this amount. Have it postdated by this day, and here's where to send it.”
And looking back, that wasn't tax advice. That was something different. So, I would encourage everybody to find a tax advisor and sit down with them and spend some time with them. Because they're worth their weight in gold, for sure.
Tom Wheelwright: I appreciate that, Cliff. And Cliff, I mean, I certainly appreciate the conversations we have. And all your support. And I love to watch as your business grows. And it looks like you may have a little bit more money this year, because you probably won't be paying a whole lot of taxes this year, once you deduct all that inventory from 2017. So, I just want to say thanks, Cliff. It's absolutely great to have you. It's great to have you as a friend, of course. And it's … I think you're an absolutely terrific example of how a business owner who's super busy, because you have stores in, what, four different cities?
Cliff Holt: Yeah, throughout Utah, yeah. Four different locations.
Tom Wheelwright: Yeah, four different locations. And Cliff was just telling me where his new locations are. And I happen to know that they're not next door to Hurricane, okay?
Cliff Holt: Right.
Tom Wheelwright: They're a few hundred miles away from Hurricane. And so, you know, the fact that you can have that and still pay attention to your taxes is what I tell people all the time, that I find that the business owners who pay attention to the details, and actually take the time to pay attention to details, are always the most successful. And I think that's Cliff, where you know, I've watched you and I've watched you grow over the last several years. And I think that's a lot of it, is that, you know, you've got a great team, obviously, and you're paying attention to the details. So, thanks again for being on the show, Cliff. I really appreciate it.
Cliff Holt: Tom, it's always great to be with you. Every time I talk to you, I learn several new things. I've been taking notes today, even, so thanks again for everything.
Tom Wheelwright: That's awesome. And remember, everybody, The WealthAbility™ Show, it's recorded. You can listen to it again at wealthability.com. And you know, please give us your comments. Give us your feedback. We'd love to hear more about it. You know, people ask me, people were asking me just last night, somebody was asking me, you know, “If I have money, where should I put it?”
And my answer is, it's always in education. So, your time in education, when Cliff's reducing his taxes, he's taking the time to meet with his tax advisor. It's not just his tax advisor that's taking the time, Cliff's taking the time. So, getting that education and understanding how to do things, that's how, at WealthAbility™, we're always talking about, it's your ability to build wealth. And when you develop that ability to build wealth, you're always gonna make way more money, and pay way less taxes.
Speaker 1: You've been listening to The WealthAbility™ Show with Tom Wheelwright. Way more money, way less taxes. To learn more, go to wealthability.com.