First of all, kudos to Wisconsin Senator Ron Johnson and the other Senators working behind the scenes to help protect small business owner’s interests in this critically important tax bill.
The truth of it is, the House bill does very little for small business owners, as I will set forth in detail below. The Senate bill however has a glimmer of hope for us, and hopefully Senator Johnson’s objections and concerns will be heard.
Over the past three weeks, I have been extremely vocal about my personal concerns regarding the House Bill and what should change in the legislation before it becomes law. In fact, I will go as far to say that the House version hurts small business, let alone helps the average small business owner.
In fact, I was shocked to see Treasury Secretary Mnuchin’s comments that this legislation “substantially helps small business owners”. Either his definition of ‘small business’ is far from that of mine, yours and the Small Business Administration (SBA), or he can’t do math. Since he is the Treasury Secretary, I’m going to assume we have a definition problem.
But enough rhetoric, lets break it down and I’ll give you the pros and cons of both the House and Senate Bills in a simple, easy to understand format (as much as humanly possible with over 750 pages of combined legislation material to pour through and decipher).
Moreover, at the end of this article I’m going to give you the method and resources to contact your elected representative, and preferably your Senator, to express your concerns and plead for some relief for the small business owner as ‘reconciliation’ between the two bills takes place over the next few weeks.
Now, as we dive into ‘the numbers’, it is important to put this Bill in perspective regarding the ‘definitions’ and ‘facts’ being thrown around. It may be interesting for you to note that the IRS and SBA have an extremely broad definition of ‘small business’. Believe it or not, under both of these institutions, a small business could be anywhere from 2 employees to 500 employees, or sales from 7Million to 35Million.
However, according to the U.S. Census Bureau in 2015 there are two critical facts you and I need to recognize:
The point being is that when the GOP leadership stands up in front of the microphone or camera and says that this legislation is going to substantially help small business aka. “Main Street”, don’t be fooled by the smoke screen. There is a very slim cross section of small business owners this legislation will ‘substantially’ benefit, and its primarily ‘Big Business’, not the firms with less than 20 employees.
Moreover, in fact this legislation from both the House and Senate delivers a whopping 15% permanent and across the board tax cut to large corporations, NOT the 97.9 percent of small business owners or 99 percent of C-Corporations that have no ‘global impact’ and need for a tax cut to be competitive.
The benefits to ‘pass through businesses’ that the GOP leadership loves to boast about, is so convoluted, complex, and watered down, it’s truly a joke. In fact, if I was IRS Commissioner John Koskinen, I would be thrilled to get this legislation on my desk. The IRS has been trying to find any method to further regulate pass-thru compensation for year!!
This legislation will give the IRS carte blanche latitude to now further scrutinize officer/owner compensation. It will in fact have a negative impact on pass-thru tax planning and potentially even a chilling effect on the whole concept and benefit of a pass-thru company. It’s actually frightening the negative impact this legislation could have on millions of S-Corporation owners.
Here is what the small business ‘pass through business owner’ really gets in the terms of tax savings:
GOP Tax Bill Summary for Small Business
So rather than just complain and not give any constructive recommendations, here are my 10 ‘Amendments’ I would propose to the House and Senate as you go through ‘reconciliation’:
In summary, I cannot emphasize enough how important this is for you, the small business owner, to take seriously and contact your elected official. Share you concerns. Demand more. The two Senators from your state are probably the best method to hopefully finding some resolution. This is primarily because the Senate has a much slimmer margin for victory and have to carve out a Bill during the reconciliation that will pass the Senate. At this point anything will pass the House as you can see from my analysis above.
This may seem bold to hear from your CPA. I’m not a realtor selling you real estate, but as a tax lawyer, I am actually trying to help you save taxes and build wealth at the same time.
I consistently repeat and encourage my clients and students everywhere I go that working towards buying a rental EVERY year is critical to building a retirement and wealth. It’s a goal that is tangible, emotional, conceivable and realistic for most Americans.
Now I realize a rental may not be for everyone, AND some of you have had a bad experience before with real estate. However, I would at least like to encourage you to consider it and get the process started. Maybe you already have a deal in the works.
A good rental property strategy will not only to build an incredible long-term and sometimes immediate tax strategy, it will inevitably build wealth for future retirement and should provide current cash flow benefits if you choose wisely.
Here is a diagram of the 4 benefits to Rental Property I want to discuss briefly with you and suggest you consider this strategy seriously as part of your investment and tax planning strategy.
The 4 Benefits to Rental Property:
2. Mortgage Reduction
3. Tax Benefits
4. Cash Flow
Appreciation. This is rental property you are keeping at least 7-10 years. This is not a fix and flip strategy. The National Association of Realtors (“NAR”) has reported that real estate nationwide has averaged over 6.74% appreciation during the past 50 years.
This rate of return out performs the S&P 500 and most Wall Street investments. Now I realize not all property in every market experiences this growth, but some actually do even better than the national average. Don’t discount appreciation.
Mortgage Reduction. This is often an overlooked benefit to rental property. Think about it. If you purchase wisely, the property should be at least be ‘breaking even’ in cash flow and thus the renter is paying the mortgage for you.
The principle reduction in the mortgage instrument is an ongoing tax-free benefit along with appreciation as you hold the property. This is a return you can calculate and count on over time with a typical mortgage. Keep this in your spreadsheet as you calculate your total Return on Investment.
The NEBDG Blog, by our Tax & Legal instructor Mark J. Kohler, is "The Real Estate Investment Conversation You Can Rely On." Mark J. Kohler is a CPA, Attorney, Radio Show host and author of the books “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions” and “What Your CPA Isn’t Telling You- Life Changing Tax Strategies”. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP. For more information visit him at www.markjkohler.com. Let us know if there is a topic you would like to discuss!