Episode 118

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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 Share on X

 

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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 month