Episode 118:

As soon as I heard the tax law had passed, I made one call – to Eric Levenhagen, my personal tax advisor who has helped me craft my own tax strategy for years and today works with many agency owners across the country.

I had two questions for him: 1) How do we need to alter the tactics we’ve been applying for my businesses and 2) Will you be on my podcast and help my listeners understand how the tax laws will impact them?

As you’ll hear, we got right to the heart of the matter and spent the entire episode talking specifics about how we can take advantage of the new law and what we’re going to have to shift because it’s no longer advantageous or possible.

I hope you’ll listen and walk away feeling like you have a better handle how the new tax law is going to impact your agency and your personal finances.

Eric Levenhagen founded ProWise Financial Coaching (formerly known as ProWise Tax & Accounting) in 2005. Eric’s mission is to perform a comprehensive service for his clients, unlike any other firm out there, and help clients lead a life of financial abundance.

Eric is both a Certified Public Accountant and a Certified Tax Coach who integrates both disciplines into a holistic, client-centered approach towards maximizing his clients after-tax income and wealth.

Outside of the office, Eric enjoys spending time with his wife and kids. His hobbies include reading, following college and professional football, and music. Finally, Eric is an aspiring traveler and hopes to be able to take his family many places around the world someday.

 

 

What you’ll learn about in this episode:

  • What isn’t changing with the new tax law
  • The big deduction changes you need to know about (both for S Corps and C Corps)
  • Income pass through: the specifics of the 20% deduction you will now get on income that rolls down to your personal taxes from your agency and any other businesses you may own (as long as you don’t make too much)
  • Why we don’t know everything about the new tax law yet (and why it will take months or years to figure everything out)
  • The loopholes that are going to appear in the next few years and why you need a tax strategist (and not just a tax preparer) to find you those loopholes
  • How the new tax law will impact agencies that make stuff for clients and those that consult and sell their knowledge as a stand alone product
  • How the way C Corps get taxed will help those making over $100,000 in net income but hurt those making under that threshold
  • Are there any things that agency owners should shift from their personal taxes back to the business?
  • Keeping versatility in your tax plan so you’re not stuck if and when things change again when the tax law changes again
  • How to get your money out of your agency to invest elsewhere under the new tax law (and why it differs for S Corps and C Corps)

The Golden Nugget:

“It could be years until we figure everything out about the new tax code, and it’s not going to all come at once. We have to wait for the IRS to interpret all the laws, and then those interpretations will be challenged.” – Eric Levenhagen Click To Tweet

 

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Speaker 1:

If you’re going to take the risk of running an agency, shouldn’t you get the benefits too? Welcome to Agency Management Institute’s Build a Better Agency Podcast, presented by HubSpot. We’ll show you how to build an agency that can scale and grow with better clients, invested employees, and best of all, more money to the bottom line. Bringing his 25-plus years of experience as both an agency owner and agency consultant, please welcome your host, Drew McLellan.

Drew McLellan:

Hey, everybody, Drew McLellan here with a special episode. We’re slicing it into our schedule because I know it’s a hot topic for you. On Build a Better Agency, today, we are going to talk about the new tax law and how it’s affecting agencies and agency owners. So let me tell you a little bit about the guests that I have invited to join us today. I want to preface all of this by saying that Eric is my personal tax coach and has been for many years and has saved me more money than I can count, thank goodness, by teaching me some great tax strategies. I knew when I wanted to talk to someone on the podcast about the changes, I wanted to talk to someone who… If they can explain it to me, they can explain to anybody, and Eric has done that for years.

Let me tell you a little bit about his background, and we’re going to jump right into this. So Eric Levenhagen launched a business that back then was called ProWise Tax & Accounting, it is now called ProWise Financial Coaching, back in 2005. His mission is to perform a comprehensive service for his clients unlike any other financial firm or tax firm out there and help clients lead a life of financial abundance. He’s a certified tax coach, and many of you have heard me talk about the difference between a tax strategist and a tax preparer. Eric is really a tax strategist who then eventually does the preparation as well. But he’s meeting with his clients like me on a quarterly or semi-annual basis to really put together an overall financial strategy, and taxes are a big part of that. So not only is he a certified tax coach, but he also earned his master’s degree from Keller Graduate School of Management in Accounting and Financial Management.

But in a nutshell, basically, his goal is to help small business owners stop stressing about money and make good decisions. Eric believes that running a business is hard work, and you certainly have heard me talk about that, but keeping up with the financials, developing new strategies and revenue generation strategies, all the things that we do are huge. What Eric and his team does is they help take some of the stress off our shoulders in terms of how we manage the money side of the business and how we really mitigate our tax risk by really understanding the tax laws and taking full advantage of them in a way that is both legal and advantageous to us. With that, Eric, thanks for joining us on the podcast today.

Eric Levenhagen:

Yeah, thanks a lot, Drew. It’s great to be here.

Drew McLellan:

So everybody’s freaking out about the new tax law, and so I wanted to get a show on right away that would talk about this a little bit. First of all, most of the listeners are probably S corps… I guess let me preface this by saying I know that many of you are listening from other countries, and this is probably not going to be an episode that is as pertinent to you. So if you are not US-based, you’re welcome to listen in, but obviously, this is going to be different in your country. For the folks that are in the US and in the most case are S Corp, what doesn’t change in terms of how we manage our business and our finances with the new tax law.

Eric Levenhagen:

Yeah, that’s a good question. I mean, S corporations, not a ton of stuff at the entity level changed for S corporations. For a long time, especially for where I spend most of my time in my practice with clients being professional service providers, coaches, consultants, et cetera, the S corporation has always been a great strategy for limiting self-employment tax that you pay, and that’s going to remain the case even under the new law. So when we talk about entity planning, the S corp is still going to have a very prominent place for people in the overall structure. A lot of the things as far as the regular deductions, and we can get into some of the deductions that have changed, but most of the deductions and things, normal business deductions, regular expenses, that sort of stuff is all the same as well with a couple of exceptions that we can get into here. By and large, we’re not seeing a ton of change on that entity level.

Drew McLellan:

Okay, so what are the exceptions around deduction specifically for S corps? And then remind me to ask you if it’s the same for C corps.

Eric Levenhagen:

Sure. Sure. Yeah, so there’s a couple of things. I mean, probably some of the bigger hitting ones that we’re talking about now are, first off, entertainment expenses. Because there’s a handful of them, but this would be the first one. So entertainment expenses used to be that you could go out, take a client or a prospect out to a sporting event or a theater show, something like that, and write off half of that expense. That’s going away. So anything you’re doing for entertainment purposes to schmooze the clients or prospects, that’s unfortunately not going to be available anymore. Another thing that’s going away, and included with that, are employee meals provided by the employer. Meals and entertainment have always been together because you get this 50% write-off, right?

Drew McLellan:

Right. Right.

Eric Levenhagen:

The entertainment piece is going away. All the meals now are going to be deductible at 50%. They used to be if you had a team working late on a project or something, you could provide them occasional supper or something like that. I had clients who would have employees work on the weekends, they’d bring in the food. And since we met some qualifications like it was provided onsite for the… oops, for their convenience so that the employees would stay at work longer, they would get 100% deduction for that. That piece is going away. It’s not going away completely, but it’s going to be all 50% deductible now.

Drew McLellan:

So if the meal is a part of a meeting, can it be included as a meeting expense, or is it still considered a meal?

Eric Levenhagen:

My understanding of the way it is right now, it’s all meals are at 50%. I should preface all this by saying that even though we know a lot about the basic structure of the new tax law, there are still a lot of things even today that we don’t know. We can talk about that a little bit more towards the end here, about how that works and why that’s so important. For right now, the guidance we have is the first top layer of the tax code that says that this is all going to be 50%. Once we get more additional guidance, some of this stuff may very well change as some of these rules are fleshed out.

Drew McLellan:

Okay. Is the meal and entertainment deduction, is that the same on the C corp side or-

Eric Levenhagen:

Yes.

Drew McLellan:

… is that different?

Eric Levenhagen:

No, that’s going to be the same. That’s going to be the same. Another thing, especially for people and clients in larger metro areas is that the transportation fringe benefit’s going away. So these are subway or transit cards, if you paid for employee parking spaces. You’re not going to get a deduction for those anymore, again, if you’re paying those for your employees. Tied in with all this stuff that’s going away is the… over the years been a lot of people’s favorite when I talk about it, the on-premises gym or other athletic facilities. If you had a gym at your office or adjacent to it or something, on the premises, you could deduct it. This is a fun loophole we used to always talk about where people would get to deduct their swimming pools at their homes if you structured it up right, deduct your swimming pool. It’s been in the books and stuff that we’ve written. That deduction is going away as well. Again, these apply to all businesses, so C corp-

Drew McLellan:

All entity.

Eric Levenhagen:

… S corp, sole proprietor, across the board, it’s going away.

Drew McLellan:

Okay. Has anything been added in terms of deductibility that things that we couldn’t deduct before? Is there anything on the plus side of all of this in terms of deductions?

Eric Levenhagen:

There are a couple of things that are changing. Now, I wouldn’t say they weren’t things we couldn’t deduct before, but we’re being able to deduct them in different ways. One of the big ones is the expensing of what they call capital investments, which would be your equipment, tangible or fixed assets, things of that nature. We’ve had different types of bonus depreciation and immediate expensing. Some people may recognize the term 179 expense. It’s a common phrase, I guess, thrown around. That’s being expanded. So the bonus depreciation for at least the next five years, okay, is going to be at 100%. So that means that you don’t have to take the depreciation deduction on some of these items that you’re buying for many years, you can deduct it all in the year that you purchase it.

Drew McLellan:

Is there a cap on that?

Eric Levenhagen:

On the bonus depreciation, there wasn’t really. No, not really. It does-

Drew McLellan:

So no matter how big of a piece of equipment you bought, you could deduct it all in one year?

Eric Levenhagen:

Right. Right.

Drew McLellan:

Okay.

Eric Levenhagen:

Yeah. There may be a limitation to that I’m not thinking of, but there’s not a cap as far as… The 179 spending has a definite cap, which I believe was… I don’t know if I wrote that down in my notes. I think it was at five million bucks for the year.

Drew McLellan:

Yes, for most agencies that’s probably plenty.

Eric Levenhagen:

That’s a lot. Yeah.

Drew McLellan:

Yeah. [inaudible 00:10:04].

Eric Levenhagen:

The bonus isn’t going to be any less. The nice thing about the bonus is that it used to only be the difference between Section 179 and bonus, and that’s a complicated thing people should be talking to their advisors about. But the nice thing about the bonus is that it used to be… or under current law 2017 and before, it was for only new property, right. So it had to be brand new, off the assembly line type of property. And now they’ve expanded that to be used property as well. So as long as it’s first-time use to you, it’s new to you so to speak, and not purchased from a related party, then it qualifies for the bonus depreciation.

Drew McLellan:

Okay.

Eric Levenhagen:

Okay?

Drew McLellan:

Okay. Anything else in the positive column for us?

Eric Levenhagen:

Yeah. Well, there is a thing that not a lot of people are talking about yet, but I noticed vehicle deductions are getting better, okay? Most people probably would recognize this rule when they talk to their accountants and their accountants talk about that 6,000-pound vehicle, right?

Drew McLellan:

Right.

Eric Levenhagen:

Where you have to get it over to get more of a deduction. The reason why they did that is because under the current law, smaller vehicles are subject to what they call luxury automobile limits. All that means is that for a smaller vehicle, car, crossover, that sort of thing, the law only allowed you a certain amount of deduction, and over five years, which is all you have to depreciate a vehicle over, you can only deduct a little over $15,000 for that smaller vehicle. And a lot of cars used and new, are over that mark, right?

Drew McLellan:

More than that yeah.

Eric Levenhagen:

So you weren’t going to be able to deduct the whole cost of it if you’re going to keep the car over five years. So now under the tax reform, that five-year limit is now a little over 47,000. So, a lot more room to buy that vehicle if you… It is still limited year by year, so you’re not going to be able to take it all in one year, but I mean, you get $10,000 in the first year, 16 grand in the next year, and then it tails down from there, but it all adds up to 47,000 over five years. So you get a lot more of the cost through there.

Drew McLellan:

So that expands your shopping options.

Eric Levenhagen:

Exactly. So if you want to get back to a more fuel-efficient rig, then this is your opportunity as long as you’re buying it in 2018.

Drew McLellan:

Okay. So what else from a business owner’s perspective, and I want to talk about the pass-throughs and all that sort of stuff in a minute-

Eric Levenhagen:

Sure.

Drew McLellan:

… but what else from a business… In terms of the way we manage our expenses and things like that, is there anything else that we need to be mindful of?

Eric Levenhagen:

There’s a couple of smaller things. I mean, we always take a look at some of these major strategies that we use at the foundational level. We talk a lot to people about home office expenses. The deduction and the calculation for home offices themselves has not changed, but how it’s being deducted might change, especially for some of the S corp owners. For years we’ve been having people set up something called an accountable plan. Because if they don’t do that as an S corporation, you’re limited to taking that deduction on your personal return as an itemized deduction. It was something called unreimbursed employee expenses. So there’s actually a whole category of stuff, home office is included in that, could be other things like personal vehicle use, anything that you’re spending out of your own pocket for the business that you want to get a deduction for that you don’t have the company reimburse you for properly, like do an expense report.

So if you’re still getting expenses like that, know that now that itemized deduction is going away. So there used to be a fallback for when we first hired somebody that was if they weren’t doing the accountable plan, we could for the first year still get most of the deduction, or part of it at least, and then fix it for them. We don’t have that fallback anymore. If the term accountable plan is foreign to you and you’re an S corp owner, you should probably be looking into that.

Drew McLellan:

Okay.

Eric Levenhagen:

Another thing real quick is just on family tax strategies. We’ve talked for years about hiring kids in the business, various different things, but one of the main benefits was that, under the old law, the first about 6,300 or 6,350 in income that you could shift to them was essentially tax-free if they had a bonafide employment in your business. That’s expanding now because the 6,350 was derived from standard deduction and standard deductions have doubled. So that standard deduction is now $12,000. That’s going to be the new amount that you can pass through to them tax-free, or shift, I should say, pass through shift to them tax-free under employment opportunity like that.

Drew McLellan:

That’s kind of sweet.

Eric Levenhagen:

Yeah.

Drew McLellan:

Yeah. So explain to us this whole idea of the income pass-through. How does that work, and how is that going to impact our taxes?

Eric Levenhagen:

Yeah. Quite honestly, this is an area that can get confusing fast because they put in some various limitations. They have a phase-in of certain things and a phase-out of some other things all happening together. But to keep it simple, basically, a pass-through, and the way the law reads right now, this is one of those things that may get fleshed out and clarified down the road, but right now, the way the law reads is that it’s any pass-through. So it’s an S corporation, it’s a partnership, it’s even a sole proprietorship. So presumably if you-

Drew McLellan:

So basically, any income that we earn in our business that rolls down to our personal taxes, that’s what we’re talking about right now.

Eric Levenhagen:

Exactly.

Drew McLellan:

To our personal income.

Eric Levenhagen:

Exactly. And right now, the way the law reads as of the date we’re recording this, it also would include things like rental income as well. So that passes through. And farm income, that’s all included. But the S corporation and partnership obviously is going to be a lot for this audience.The basic rule is that we’re getting a 20% deduction of what they call qualified business income, and that’s a whole-

Drew McLellan:

So let’s create an example.

Eric Levenhagen:

Yeah.

Drew McLellan:

Let’s say at the end of the year you have a net profit of $100,000. That’s going to roll to your personal taxes, right?

Eric Levenhagen:

Mm-hmm (affirmative). Yeah.

Drew McLellan:

So what you’re saying is the first 20,000 of that-

Eric Levenhagen:

Is not-

Drew McLellan:

… is not taxed.

Eric Levenhagen:

Is going to get deducted from your income, right. Yes.

Drew McLellan:

Okay. Okay. And if you own multiple businesses, so let’s say you own five businesses, you own rental properties, or whatever it is, and each of them has $100,000 of net profit, and wouldn’t that be a fine problem to have?

Eric Levenhagen:

Right.

Drew McLellan:

Then is it 20% from each business, or is it of the total?

Eric Levenhagen:

That’s a good question. When I looked at it before, I believe it’s in the total. But here’s the tricky part is that once you get… You have to look at net income from the flow-through businesses, but you also have to look at your own taxable income on your personal tax return because that’s where the limitations start to flow in, right?

Drew McLellan:

Okay.

Eric Levenhagen:

If you’re married, filing joint, once you get to 315,000 in taxable income, then your 20% deduction starts to phase out and go away. So then there’s going to be additional planning opportunities within there to expand that, but that’s the basic goal right now. Once you hit up to 415,000, the 20% goes away. If you’re anything other than married, that magic number is 157,500, 157,5. And then it only goes up for the next 50,000. So the phase-out period is only 50,000 there. So 157,5 to 207, 5, that’s where the 20% gets limited. After you hit 207,5 then it goes away.

Drew McLellan:

Okay. So basically you’re double [inaudible 00:18:10] income, right?

Eric Levenhagen:

Mm-hmm (affirmative).

Drew McLellan:

As either a solo filer or a married couple, if you are filing either as head of household or a single, it’s 157,5. And if you’re married, it’s… What’d you say, 315?

Eric Levenhagen:

315, right.

Drew McLellan:

As long as you’re below that for your W-2 income, then you would get the full 20%. And anything after that, it’s going to start to phase out based on how much over the limit you are.

Eric Levenhagen:

Well, let’s clarify. It’s taxable income.

Drew McLellan:

Okay.

Eric Levenhagen:

Again, this is where we’re going to wait for additional guidance to come in. But the way we’re reading that right now is taxable. So it’d be income from all sources minus your itemized deductions and things like that will get you your taxable income.

Drew McLellan:

Okay. So it would include the net profit from your business.

Eric Levenhagen:

Yeah. Yep.

Drew McLellan:

Got it, okay.

Eric Levenhagen:

So quite presumably, if you just throw out a scenario like if you have a successful S corporation that’s making 150,000, and then you have a successful spouse and has a W-2 job, a high-income job that puts you over that 315 mark total, then presumably you could be getting that deduction limited. That’s the way we’re reading it now.

Drew McLellan:

So again, most agency owners are paying themselves a salary, and let’s say it’s between 75 and $150,000, and some are obviously lower or higher, they’re going to want to meet with their advisor to figure out how to strategize their own income in terms of how the agency pays them. Because, really, it would almost be better to leave it in the business and then take the deduction, the 20%, right?

Eric Levenhagen:

Well, if you’re going back and forth between leaving in the business versus paying a salary, I mean, there’s our own strategy aside from that on how to optimize that. But really that’d be a watch, because you’d be hitting your return in one way or another.

Drew McLellan:

Right. Okay.

Eric Levenhagen:

If you’re under the mark, I see what you’re saying, you’re right, you’d want to potentially still leave as much in the business as possible because that’s what’s going to drive that 20% deduction. You’re absolutely right. Anytime you have wages, so the reasonable compensation or an S corporation, what the officers are paying themselves, or if you’re a partnership, it’s also the guaranteed payments, what the partners are paying themselves, that doesn’t apply to the 20% deduction rule. So you don’t get to deduct any piece of that.

Drew McLellan:

Okay. So when you keep saying, “We’re going to find out more,” when will we find out more?

Eric Levenhagen:

That’s a great question. So I have to preface this a little bit. I mean, I have to give you a little bit of background on how this works because, otherwise, I’m just going to say it could be a couple of months to a couple of years, and it’s not all going to come at once. The reason for that is because-

Drew McLellan:

[inaudible 00:20:58].

Eric Levenhagen:

Exactly. The tax code is a wonderful thing, right? Is because of how the tax law is structured essentially, right? Without boring you to death, I mean, just in less than a minute, federal tax law is made up of a lot of different parts. The tax code, or officially called the internal revenue code, is what they just passed before Christmas, and that’s the piece that we have now. What comes after that, there could be other federal statues that are in the code. But really what we’re going to be waiting on next are going to be regulations.

We have treasury regulations that’ll be issued by the IRS that start to interpret all the laws and tell us exactly what they think the law means. So you have different types of regulations, something called revenue rulings and revenue procedures. As we delve more into the gray areas, and then the IRS picks up on the loopholes that got left behind in the haste of writing all this law, they’re going to try to give us additional guidance to fill in those things. And then the part that may take years are going to be when people come in and challenge what the IRS is… how it’s interpreting those laws, right? So they challenge them through tax course. We’ll have judicial proceedings, tax court rulings that we can fall back on. All of this stuff now, you realize it’s been 30 years since the last major tax reform like this, and over those 30 years, all of these things have happened that have built up and provide us the tax law that we’ve been advising people on up until now.

So we’re going to restart this process in some of these areas because my assumption, and this is pure speculation, but my assumption is that just because of how quickly this moved through Congress, there’s initially going to be a lot of loopholes and a lot of opportunity available for people to exploit holes in this thing once the regulations start to come out and the loopholes are left behind, right? So it’s going to be a long process.

Drew McLellan:

So what you’re saying is this short period of time, whether it’s a few months or a year, is when everything is going to be the loosest? There’ll be the most tax loopholes that people can take advantage of, and then as those are discovered or challenged in court, things start getting tightened up over the course of years?

Eric Levenhagen:

Right. Yeah. Essentially, that’s the way it works.

Drew McLellan:

Well, actually, let’s take a break and then I’ll come back and ask you about how the heck we know what to do if everything’s still up in the air. So let’s take a quick break, then we’ll come right back.

If you’ve been enjoying the podcast and you find that you’re nodding your head and taking some notes and maybe even taking some action based on some of the things we talked about, you might be interested in doing a deeper dive. One of the options you have is the AMI Remote Coaching. That’s a monthly phone call with homework in between. We start off by setting some goals and prioritizing those goals, and we just work together to get through them. It’s a little bit of coaching. It’s a little bit of best practice teaching and sharing. It’s a little bit of cheerleading sometimes. On occasion, you’re going to feel our boot on your rear end, whatever it takes to help you make sure you hit the goals that you set. If you would like more information about that, check out agencymanagementinstitute.com/coaching. Okay, let’s get back to the show.

All right, welcome back. I am here talking 2018 tax strategy with Eric Levenhagen, my personal tax advisor and coach, and also a certified tax coach who owns his own business called ProWise Financial Coaching. Before the break, we were talking about the fact that all this is still a little nebulous because it’s so new. It hasn’t been challenged. There are loopholes that are going to be discovered. So how you as a professional and how do we business owners dealing with our tax professional, how do we plan appropriately when everything is still a little in the gray zone? And frankly, how do we identify the loopholes that we can take advantage of and jump on those while they’re still available?

Eric Levenhagen:

Sure. Yeah, well, I mean the biggest thing, obviously, is going to be this: all of us as tax professionals, especially ones that are proactive advisors, are keeping on top of this as different developments come up. It’s not too much different than what we’ve done in the past, except for there’s going to be a little more action presumably now because of the new laws. So first off, you talk about it when you discuss having an advisor versus a preparer, right?

Drew McLellan:

Right.

Eric Levenhagen:

The advisors are going to be the ones that are constantly communicating. I mean, common question we ask even before the new tax law when there’s still plenty of opportunity to overpay your taxes in the old law, that hasn’t changed under the new law, so one of the biggest questions is, how often is your tax advisor coming to you with ideas to save you money? That should actually be increasing now, I would presume, over the course of the next year to two years, and probably even further than that but especially over the next couple years.

It’s one of those things where right now so many things are changing that we’re having to run as many calculations, projections as possible to come up with what I call determine the new foundational strategies or the new basic strategies. Yeah, there’s going to be things in there that get tightened up over time. It’s also going to depend a little bit, I mean, on how far you want to take some things. I mean, when we talk now about how all the tax strategies we use are court-tested and IRS-approved, this is the process that I just explained before the break. That’s exactly what we were talking about, is this whole long process that’s developed over time. I think there’s going to be plenty of opportunity under the new foundational basic strategies to get as much benefit out of them as possible if you have somebody that’s actively working with you and actively working with you now like in January of 2018 and not in November, December. Because most of the moves that you’re going to have to make at a foundational level are going to have to happen sooner than later. I mean, that’s what we’re working on for our clients is rerunning their scenarios, coming up with the moves we need to make here perhaps in the first quarter or so, and then developing from there on out.

Drew McLellan:

As you are developing then some of your new foundational recommendations, looking at agencies, because I know you work with several AMI agencies, when you look at that kind of a business, are there some commonalities in terms of the foundational shifts that you’re thinking about agency owners should be considering?

Eric Levenhagen:

Yeah, absolutely. I mean, some of the things we’re just talking about with the pass-through deduction and, I don’t want to say controlling but planning for the amount of income that’s going to hit the personal tax return if they’re going to start to hit those as limits. The other thing that we haven’t talked about yet that is concerning maybe for a small portion of the audience is this idea of personal service companies and that relation to the 20% deduction.

Personal services are typically like people… You usually think professional. So people in the fields of accounting, law, health, engineering, that sort of stuff, but it also includes consultants. Some of our clients are straight consultants or life coach. There may be a brand consultant or marketing consultant. The trigger there is that the main service is your own advice or counsel that you’re giving to clients as opposed to a product, a package, a graphic design, a training component-

Drew McLellan:

You’re making stuff. Right.

Eric Levenhagen:

Well, you’re simply advising on stuff, right?

Drew McLellan:

Okay.

Eric Levenhagen:

Yeah, that’s the other side of it. You could get out of personal service, but if you’re simply advising from your own knowledge, then you should at least be looking into this idea of the personal services because your 20% deduction… Again, if you get up into those thresholds, you’re going to phase out of the deduction more. It’s going to be limited. It gets really nasty as far as calculation wise, but it’s just something to keep in mind.

Drew McLellan:

So if you basically don’t produce things for clients but all you do is sell strategy and advice-

Eric Levenhagen:

And your knowledge.

Drew McLellan:

… which is probably… and your knowledge. But you’re not making stuff for them. What you’re saying is then you are considered a consulting professional and that the 20% deductions are different for you than they are for an agency that makes stuff?

Eric Levenhagen:

Correct. Yeah, that’s going to have an impact on that.

Drew McLellan:

So folks should check with their tax advisor on that.

Eric Levenhagen:

Right. Exactly.

Drew McLellan:

Okay. Okay. What are some of the other foundational things that you are thinking is going to make sense for your clients?

Eric Levenhagen:

Well, the other big one when you talk about deals with C corporations, because there are a number of our clients when we do entity planning… I mean, entity planning is by far the biggest component of the foundational strategies, right? Everything else that you can get as far as the other deductions that we can take, et cetera, spider web off of the entity planning. Because what’s available for an S corporation owner or a C corp owner… I’m sorry. What’s available for a C corp owner isn’t always available for an S corp owner and so on. Sometimes we need a sole proprietorship in the mix or something like that, different entities.

The C corporation strategy will have to be taken a look at as well. There’s business purposes why we had people putting in a C corp into their mix. So maybe I’d just giving an example. Maybe we had a couple of S corporations and maybe a LLC holding some rentals, and they would use a C corporation to farm out some common services and manage some of those entities. It shifted some liability on a legal side, but from the tax perspective, we could do some tax rate arbitrages there and we can basically extend out in the old law the 15% tax bracket because the first $50,000 that you gave or had as taxable income at a C corp was only subject to 15% tax.

Under the new law that’s changed, and now instead of C corporations having this graduated or progressive tax bracket, it’s just a flat 21%, okay? So-

Drew McLellan:

No matter what the income?

Eric Levenhagen:

No matter what the income is. And so that’s great for C corps that were making a lot of income, over 100,000 in net income. But it impacts some of our clients where we were actively planning to keep that C corp income below the 50 or $75,000 mark as much as possible-

Drew McLellan:

To hold their tax at the 15%.

Eric Levenhagen:

Right, to hold the tax at the 15%. Now it’s 21%. I mean, not to get overcomplicated, but if you look at the individual tax brackets and how they matched up, I mean, before the individual tax brackets went 10, 15, okay. So you have 15% corporate, that’s great. You didn’t have to make too much income, and the C corp strategy was helping you out, right?

Drew McLellan:

Right.

Eric Levenhagen:

Now, the rates, and I don’t have them all in front of me, but it’s 10, 12, and 22. So you have to make a little more income before that tax bracket with the C corp matches up. And so we just have to look at that differently to make sure that we’re still getting the benefits we want out of that C corporation. It could be because there are also some other deductions, like I said before, that S corp owners can’t take that C corp owners can. That will still play into the mix as well. But again, we just want to make sure that the income that we’re running through at a new 21% rate is going to still be giving us the intended result and actually lowering the tax.

And really, like I said, we’re still running calculations and projections as we develop the basic strategy for this stuff because the thing that I’ve been cautioning people to do so far is not make too many drastic moves too quickly and really crunch some different scenarios. I’ve already been running scenarios where people are losing deductions on the personal side. We’re not here to talk about that specifically, but there are deductions that are going away on the personal side as well. But then the tax brackets also changing and rates are going down. So, I mean, I’ve seen it go both ways where people are losing deductions and they’re in a sweet spot. Very small percentage of people are actually paying a little more tax than what they were under the old law. So we got to work for that.

But a lot of people who are losing deductions, and they’re panicking about losing them, but their tax rate actually went down. Their total tax actually went down under the new bill because of the rate difference. So it’s just, again, the more experience we get with this, the more fleshed out our own strategies are going to become here.

Drew McLellan:

So let’s talk about what happens on the individual side and if there are anything we can offset on the business side, so some of the tax deductions or some of the ways we could save taxes on the personal side of our income tax. Is there anything that we can shift from the personal back to the business? Or are you just saying that basically because of the new tax brackets you’re going to pay about the same anyway?

Eric Levenhagen:

Well, that’s true. I mean, the same or maybe a little less. Like I said, a small percentage will pay a little bit more just depending on what income level you’re at. So again, important to run your own numbers. But as far as shifting things over to the business, there’s a couple of things. Well, as far as the itemized deductions on the personal side, a lot of us heard at the end of 2017, the big rush was to prepay some personal taxes like property tax and income tax because that deduction under the itemized deductions is getting capped in 2018 and forward at $10,000 per year. So if you have a lot of state income tax, you live in a high property tax state, that probably affects you.

I mean, in terms of shifting property tax, something we’ve talked about in the past, so it’s not new, but it just becomes more important to look at, is you can always shift away partial of that under the home office rules, making sure you’re maximizing that home office deduction and shifting that. So if you shift it away from your itemized deduction group and over to a new spot, then the deduction’s not capped anymore, right.

Drew McLellan:

Got it. Yep.

Eric Levenhagen:

So you’re potentially getting a piece of that deduction that you weren’t before. So yeah, that’s going to be a big one. I talked about the accountable plan and that other group of itemized expenses going away, unreimbursed employee expenses, which include the home office but anything else that you’re paying for or individually, you want to make sure you’re getting them reimbursed through your company.

Drew McLellan:

Was I correct in reading that one of the things we can’t deduct anymore starting in 2018 is tax preparation fees?

Eric Levenhagen:

Right, yeah. So that’s in that category of miscellaneous itemized deductions.

Drew McLellan:

But if we pay that through the business, is it a business expense thing?

Eric Levenhagen:

You should allocate your tax preparation fees, which again is not something new, but if you haven’t looked at it or done it before, there’s no time like the present to start. A lot of our clients will pay us a certain fee and it includes their tax advice but also includes personal tax prep and business tax prep, right? So if you have a-

Drew McLellan:

Right.

Eric Levenhagen:

… a jumbled bill like that, you should allocate that bill to the different portions. So you still probably have to allocate in some instances some to your personal tax prep, but the bulk of it will probably go to the other places where the business can pay and you get the full deduction for that stuff.

Drew McLellan:

Okay. I think a lot of people are also freaking out a little bit about the… And all of this changes in five years. All the personal deductions and blah, blah, blah, go away in five years. Is that something we should be worried about yet? Or is it going to change so much between now and then that there’s not a lot of value in fretting about it or strategizing about it yet?

Eric Levenhagen:

I wouldn’t worry too much about it yet. I mean, we can only control so much of this, right? Yeah, the sun sets on all the… I think it’s at eight years. In 2025 is when all the personal law changes are set to go away and revert back to the rules we had in 2017. The business stuff that we’ve been talking about, so like the 21% C corp tax rate and I think the entertainment expensing and that type of stuff, and the vehicle expensing, depreciation rules, those things are all business measures. And so for now they’re permanent, but the personal things, yeah, they, they sunset in 2025 or at the end of that year.

Right now, I haven’t seen enough to get too up in arms about it. The way we’re looking at that is that we’re definitely taking it into consideration. Because if we’re going to have somebody do a lot of work to strategize, say, around that 20% pass-through deduction, right?

Drew McLellan:

Right.

Eric Levenhagen:

We don’t want to necessarily have it be so hard to either revert back or shoot themselves in the foot eight years and then they’re going to be screwed for a while. So we’re taking that into consideration too. And it’s hard to say because we don’t know what the political landscape’s going to look like. It’s too many variables to really, like I said, freak out about it right now. So take it as a little bit of consideration for the moves that you’re making currently, knowing that you may want some versatility to be able to go either way, back and forth in the future, and go from there. But yeah, we really don’t know.

I mean, the big thing is that it’s going to take an act Congress to extend any of those. And we’ve seen that in the past, right?

Drew McLellan:

Sure.

Eric Levenhagen:

Depending on who’s in office and who’s in Congress, we’ve actually seen tax laws that are set to expire… For instance, a speculation, but an example of how it could go down would be we get to January of 2026 and then they say, “Oh yeah, all the new laws are still good for another year or two.” And then it’s tough to plan for that kind of thing because we didn’t know that the law was coming, but that’s the kind of stuff we’ve had to deal with in the past. It could work like that. It could be in three or four years somebody else comes in and blows the thing up. It’s hard to say. But so we’re just keeping some versatility in people’s plans right now so that they can be flexible to, again, not get stuck if things to revert back to closer to the old ways.

Drew McLellan:

So one of the big things that we advocate at AMI, and I just actually did a podcast on it a couple of weeks ago, about the idea that agency owners need to build their wealth outside of their agency while they still own their agency, that their business should be a money-making machine, and they get the money out of the business and put it somewhere else, whether they buy resources or real estate or stocks or whatever their thing is, right?

Eric Levenhagen:

Mm-hmm (affirmative). Mm-hmm (affirmative).

Drew McLellan:

So does all of this with the 20% and all of these other things we’ve talked about today, does that upset that apple cart, or is that still a viable financial strategy for the listeners?

Eric Levenhagen:

Oh, absolutely, that’s still very viable. The basic structure that we coach around is very, very similar, right? It’s try and maximize the profitability of the company, try to lower the tax as much as possible, or shelter as much of that from tax so that we’re not overpaying and then we have as much leftover to take out and provide for our lifestyle both now and in the future throughout these different investment vehicles that you just talked about and growing your net worth. That basic strategy for wealth doesn’t change, it’s just the steps you take to get to that end result are going to have to be adjusted if you want to maximize your result.

Drew McLellan:

So, if I have to leave money in my S corp to take advantage of that 20% that I don’t have to pay tax on, how do I get that money out of my business?

Eric Levenhagen:

That’s a complicated question, but in short, I mean, with an S corporation, it’s easier because remember that… So let’s throw out another example, easy enough. Let’s say you end the year with $100,000 in net income in the S corporation, right?

Drew McLellan:

Yep.

Eric Levenhagen:

And let’s say you’re fortunate enough, which we know always doesn’t always happen, let’s say you’re fortunate enough to have $100,000 sitting in the bank to match up with that net income. So what happens with that? The whole 100,000, under the old law, under the new law, the whole 100,000 comes over and drops onto your personal return, right? Now under the new laws, we get that 20% deduction, whatever, but still, that whole amount comes over and gets taxed, okay? So that means that when you go to pull that 100,000 out, whether you’re using it to go into the business or out of the business, it’s already taxed money.

So you can pull it out, generally speaking, without additional tax consequence, right? The trickier part comes in for the C corporations and maximizing this 21%. Because I’ve already had some questions to be like, “Well, people are looking at the new tax brackets on the individual side, which affects you if you’re an S corp owner, and people are already getting into 24 and 32% tax brackets on that side.” And they say, “Well, the C corporation, that tax rate’s only 21%, doesn’t matter how much I make. Should I just go change into a C corp and have it all taxed there?” I’d really caution you not to move too quickly on that or at least have a good active strategy.

The reason is is because that whole rule that I just described with the [inaudible 00:43:34] income works a lot differently in the C corporation because double taxation still exists, right?

Drew McLellan:

Right.

Eric Levenhagen:

So that means that the same 100,000 gets taxed at 21%. But then when you go to take that money out, you’re going to get hit again at probably a 15 or 20% max rate, that dividend rate. And that combined rate then, the pre-tax is going to be 36% for somebody in a, yeah, C corp structure. It’ll be a little bit less than that actually. But that’s already almost a 36% tax rate, so that’s not a viable strategy.

Drew McLellan:

You’re [crosstalk 00:44:14] there.

Eric Levenhagen:

Right, right. So that’s why I said at the top of the hour that S corporations really are still going to be one of the best entities for people actively making money in a business with few exceptions.

Drew McLellan:

Yeah. So bottom line is, let me just try and sum this up, so for most business owners, if you’re in an S corp, the two biggest day in and day out changes that are going to impact us is the entertainment deduction going away and that we can’t feed our people and deduct all of it deduction going away. On the upside, we have more leverage and wiggle room on the automobile and equipment side. And potentially, we have a new opportunity to think through a strategy with this 20% pass-through.

Eric Levenhagen:

Right.

Drew McLellan:

So on the C corp, the upside is if you were making more than 50K in your C corp, now you’re capped at a 21% tax bracket. If you were making under the 50K or trying to sit at the 50K, to take advantage of the 15, you’re going to need to rethink that strategy.

Eric Levenhagen:

Right.

Drew McLellan:

And that some of the itemized deductions on our personal, we now need a strategy for bringing that back into the business in a more planned way so that we don’t lose that completely.

Eric Levenhagen:

Exactly. Yep.

Drew McLellan:

Yeah. So after talking to you, and you and I obviously have had some offline conversations about my own personal stuff, but after talking to you, it doesn’t… I know a lot of people are freaking out about this personally and politically for other reasons that are not relevant to the show. They’re very relevant to all of us in our life but not to the show. But from a business perspective, this doesn’t seem to be an all bad deal. Am I right in that we probably don’t need to freak out too much about this? We just need to refresh our strategy a little bit.

Eric Levenhagen:

Absolutely, that’s it. I mean, you hit it on the head right there. I mean, I have not seen anything to ultimately… I mean, yeah, there’s pieces of it that people aren’t happy about. There’s a lot of football games that are going to go untaxable, right?

Drew McLellan:

Right.

Eric Levenhagen:

Or stuff like that.

Drew McLellan:

Yeah, a lot of season ticket holders are unhappy right now.

Eric Levenhagen:

Exactly. Exactly, yeah. In the long run, will that really hurt them, those sporting events and venues? I don’t think so. So, yeah, there are pieces of it were like, “Oh, that’s a bummer.” but I mean, that happened anyway, the old stuff. And it’s not something that I don’t think is life-changing. You’re just going to have to adjust to a new normal, so to speak, about what you think about when it comes to taxes.

Drew McLellan:

Yeah. Okay. Eric, if folks want to track you down, they want to learn more about your work and your firm, what is the best way for them to find you?

Eric Levenhagen:

Absolutely. A couple of things, our website is probably the best one, prowisefinancial.com. On the front of that page, there’s going to be some links to a Facebook community that you can join for free that just will have some other discussions going on in there about all things financial, but of course, tax will remain a hot topic. So if you want to get into our community and know the ideas that we’re putting out, that’d be the best place to go.

Drew McLellan:

Okay. Awesome. Thank you so much. I know you were crazy busy. We’re actually recording this a couple of days before the end of the year, and so I’m sure that many of your clients, like me, have been pinging you nonstop. So I’m grateful that you carved out the time to do this.

Eric Levenhagen:

[inaudible 00:47:51].

Drew McLellan:

Thank you for, as always, providing great advice. Thanks.

Eric Levenhagen:

Yeah, you bet. I don’t think my phone stopped buzzing since I’ve been on here, but I turned it into silence. It’s just been a constant light.

Drew McLellan:

I’m sure. And just so the listeners know, Eric and I were talking before we hit the record button, we’re going to schedule some time probably in January or early February to do a live webinar where we’re going to talk through some tax strategies. That’ll give Eric another month or so to prep and dig into some of this stuff and you’ll be able to ask questions live. So I will make sure that that information gets out to everybody as well.

All right, that wraps up another episode of Build a Better Agency. Can’t tell you how much I love spending this time with you. Thanks so much for listening. Hey, speaking of thanks, another way we want to give thanks is we’ve built a new tool that I would love you to check out. We’re calling it the Agency Health Assessment. And basically, you’re going to answer a series of questions, and based on those answers, the tool is going to tell you in which aspect of your business maybe you need to spend a little extra time and attention to take your agency to the next level. We’ve identified five key areas that really indicate an agency’s health. We’re going to help you figure out where you need to spend a little more time.

To get that free assessment, all you have to do is text the word assessment to 38470. Again, text the word assessment to 38470, and we will send you a link so you can do that at your leisure. And hopefully, that will give you some new insights and some direction in terms of your time and attention in the agency. In the meantime, as always, I’m around if I can be helpful, [email protected] I will be back next week with another great guest and more things for you to ponder. Talk to you soon.

Speaker 1:

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