Dave Cain: Welcome to unsuitable on Rea Radio, the award winning financial services and business advisory Podcast that challenges your old school business practices and their traditional business suit culture. Our guests are industry professionals and experts who will challenge you to think beyond the suit and tie, while offering you meaningful modern solutions to help enhance your company’s growth. I’m your host, Dave Cain.
Dave: Another tax season has come and gone. March madness is over. The Masters is over, and we are left with a lot to consider. This was the first year we got to see the tax cuts and Jobs Acts in action. And a lot of people, would seems, were caught off guard.
Dave: So Today, Chris Axene, Rea’s sultan of taxation will join us to go over what those of us in the accounting industry noticed about this year’s tax season. The good, the bad, and the really ugly, and how we can approve in the year ahead. Welcome back to unsuitable, Chris.
Chris Axene: Thanks, Dave. Glad to be here.
Dave: You know, I’ve called you a lot of things over the years. The sultan of taxation is not been one of them. What do you think about that? A nickname?
Chris: Well, just added to the long list of things people have called me and that’s probably one of the better ones. So, I’ll take it.
Dave: Yeah. We’re sitting here, it’s May and and the greens are cut and starting to run nicely. By golly, we’re still talking about the massive last tax season.
Chris: Well, I don’t know how we survived but I guess we did because we’re sitting here today.
Chris: Talking about it and it’s going to be many more months to digest what took place and kind of work through, noodle through it to figure out what was good, and what was not so good and, maybe hopefully, what we can prepare for ahead of time for next year.
Dave: Right. I want to frame this conversation more under the business planning than tax planning. Tax planning plays an important role in business planning. A lot of times when we start talking tax planning, what we really mean is just good old fashioned business planning. You agree?
Dave: Let’s go for it. Certainly, taxes are a large part of a overhead for our clients and in us as individuals; and also, it represents a risk if if we don’t get it right.
Chris: That’s right.
Dave: And that’s part of what we want to do here. Feel free to add in on the conversation. That’s why you’re here as a guest.
Chris: I’m still recovering from busy season. Just the facts, man.
Dave: You’re just an ordinary guy.
Chris: That’s right.
Dave: The tax guy. And for our listeners that can see Chris up close, of course, go onto the YouTube channel. You can take a look. Chris is not your stereotype CPA. He doesn’t have a pocket protector. The guy plays golf. He’s got his pilot’s license.
Chris: I do have my sweater vest on today.
Dave: Get your sweater vest. It’s a little cold out for May.
Dave: And if you go on, you’ll see some Hendricks Gin. I mean, this guy’s rocking when it comes to taxes.
Chris: Well now, after surviving busy season, I can take the rest of the year off, right?
Dave: Sure. Here.
Chris: I’ll tell you one of the things we did see on the business side this past busy season, which I think was really helpful in terms of cash flow. So, going back to your point about businesses and overhead and managing taxes to increase cash flow was the whole accrual to cash. Change that came out of tax law.
Dave: So, let’s dive into that because we have quite a few stories all on the very, very positive side. Is that still going to be available for a 2019, 2020?
Chris: Yup, absolutely. It’s in place, and what’s really intriguing, as we’ve gone through busy season and discovered that for 2018, the threshold if you will, what this accrual to cash apply to was for small businesses. Congress defined that by reference to gross receipts. And so, average gross receipts, $25 million or less, you’re eligibility use accrue to cash method of accounting. That’s important and beneficial for clients because they don’t pay tax on their income until the clients, actually their customers, pay them.
Chris: Versus on the accrual method when they’re paying it, when they send an invoice. And so, if there’s a delay in payment, they can be front end of the float on that, if you will.
Chris: So, what’s intriguing is that $25 million is indexed for inflation. And so in 2019, it’s gone up to 26 million. So, that’s even better.
Dave: It’s good stuff.
Dave: Good stuff. One of the things that we both heard that folks were a little bit challenged of making that change because what may happen is they may have a tax return that has virtually no income or maybe a loss for the year in their financial statements, had at a net profit, and certainly they were concerned about their financial statements and the bank. And we both heard that loud and clear. Can you comment on that?
Chris: Well, certainly. So, when we had these conversations with clients this past busy season, the discussion was, Hey, as a part of how it gets reported on the cash method, you’re taking receipts off of the tax return. But I think to your point, you’re not taking receipts off their financial statements because there isn’t what we would call a conformity requirement, where the financial statements have to match the methodology on the tax return.
Chris: You can have a accrual basis statements for financial purposes, but be on cash for tax. So, the bankers like that because they’re used to seeing if you’re accrual, that’s what they’re used to seeing; and the therefore, you don’t have to mess with their financials and then have to have a conversation with the bankers.
Chris: Who may or may not understand what we’re doing from a tax perspective.
Dave: Yeah. Without giving away a lot of numbers, you and I both were involved with a couple of, I’ll call them home runs. I mean, they were big home runs as far as tax savings, tax planning, cash flow strategies.
Chris: Well, don’t hold back.
Dave: Well, we got to go for it, but you brought that to our teams, to the table, a number of times and it took a few examples, real life examples, to get that ball rolling. But I think we’ll see more of that in this coming year.
Chris: It is a powerful tool, and of course, the discussion we have with them is in the end, it’s about time value of money because if we were all kicking the can down the road on when they’re going to pay the tax on those sales, when they get the money-
Dave: Right. Sure.
Chris: But nevertheless, if that period down the road is four, five, six years, because they’re continuing to expand their business and they’re continuing to build customers, then the savings today on that can be on the order of $200,000, $300,000 of cash flow that then they can use that and they may not pay that back-
Chris: Four, five, six years.
Dave: Correct. Correct. We’re going to talk about throughout the retina next few minutes, the winners and losers and some other things that we’ve run across. The media’s been all over this and I don’t know if we have the final numbers, but the first thing we both heard from a personal standpoint that refunds were down x percent from a year ago.
Chris: Yeah, I’ve heard a lot about that and certainly we’ve seen some of that, as you’ve pointed out. The way the tax law gets made, and this isn’t new historically, there are winners and losers and that’s just the way it works. It’s hard for everybody to win, unfortunately, when it comes to that, because at the end of the day, we’re talking about taxes that fund our government.
Chris: So, if you’re giving a benefit to somebody over here on this side of the table, in large part, you’re taking something away from somebody on the other side of the table and that’s just how our system works.
Dave: You think there’s going to be some patches coming forward this fall, maybe?
Chris: Well, we need some. I’ll say it that way.
Chris: We absolutely need some patches and fixes to correct, some of some things that maybe weren’t intended, but the-
Dave: Unintended consequences.
Chris: Unintended consequences. The challenge though, unfortunately, when you have divided Congress is it’s hard to get anything done. And I think that’s borne out through the first five plus months here in 2019. and unfortunately from what I’ve seen, I’m not too optimistic of getting anything meaningful through.
Chris: So in that case, then we have to rely on the IRS and Department of Treasury to maybe help us out in terms of issuing regulations and guidance on this is what we think Congress is intended, and this is how we’re going to enforce it and treat it until or unless they can fix it themselves.
Dave: Am I going to get my real estate taxes back?
Chris: I don’t think you’re getting your real estate taxes back. If I were a betting man, there’d be a better chance of the Brown’s going to the Superbowl.
Dave: You put your money on it, buddy, I think you’ll see it. I think you’ll see it.
Chris: Well, see it in your lifetime?
Dave: Well, maybe. Let’s go onto the next topic as well, but this qualified business income thing that approached this past year. I don’t care what firm you’re with, this thing was just a total nightmare. A good for a lot of people, but very complex.
Chris: It is. Absolutely. It is. And Accountants Full Employment Act type provision, where it’s kept us busy trying to figure out what the heck, how to comply, and how to ultimately reported and all the ins and outs that that go into actually getting it on, and in individual business owners tax return. Not the least of which was the whole rental real estate part of it, and that’s a large part of what we see in our client base is we have business owners that also own the real estate for the business and they own it in a different entity. And there’s some challenges there of it. It feels like it’s harder than it should be-
Dave: I agree.
Chris: To get that qualified.
Dave: Right, right. On a surface, it sounded really good and great. And we saw some really key benefits, and then we saw some other things. Oh, boy. That that probably is not right. That was an unintended consequence.
Chris: I agree. Yeah. The, and it all comes down to, in that example, is the lack of a definition of what constitutes a trade or business?
Dave: It seems pretty easy to me.
Chris: Well, if it looks like a duck and walks like a duck, it must be a duck. Right?
Dave: Sure. Yeah.
Chris: Well, maybe not.
Dave: Yeah. In that analysis, there was certainly discussion about triple net leases, which again, I think a lot of our listeners who are in the lease, especially commercial, triple net leases, it’s where it’s at. But could that possibly change? Is this tax act economy maybe forced people to take a look at that?
Chris: There’s an old saying that don’t let the tax tail wag the dog. And I think that’s still true. So to translate that, don’t get so tunnel vision on an individual on the tax side of something that you lose the larger picture of what you’re trying to accomplish. So, there’s valid reasons that are outside of tax, why you have a triple net lease, and there may be a downside to changing one or more of those provisions.
Chris: Certainly on the face of it, it seems simple to adjust one of the provisions so that it’s no longer a triple net. Maybe it’s double net, and all the that those terms mean, but just because you can do it doesn’t necessarily mean it makes good business sense to do it.
Dave: Well, I’m glad you brought that up. Kind of go back to where we opened up is this is a topic about business planning. Sure. You might be able to save a couple bucks by doing this on your tax bill, but it may not make sense from a business standpoint.
Chris: Yeah. And we’ve discussed this on prior podcasts on choice of entity and where you could make a foolish decision in the short run because you’re focused on, Hey, I’ve got a low tax rate, but in the long run you, it’s going to cost you money.
Dave: That’s why you’re the sultan of taxation, because you have a practical approach to life in general and business in general. So, you’ve got your finger on the pulse on this thing. But again, qualified business income, I guess our listeners, if they pulled their tax return out and take a look at that, that’s a tough item. They probably saw an increase in their professional services bill for their advisors walking through some of those calculations.
Chris: That’s right. So, this is an example of, regardless of the level of benefit you might get, there’s reporting requirements that have to be disclosed on the pass through entity returns of the business return for all of the owners, the K-1 owners in the business. We have to go through that because if we don’t disclose what’s required, the IRS assumes that it’s zero.
Chris: And so, regardless of whether or not we do all of the investors, the owner’s tax returns and sometimes we don’t do all of them, we still have to go through the time and effort to make sure we have all the proper disclosures in our pass through entity tax return because we can’t make that decision for them. We don’t know their situation is. And if we don’t do our job, then they don’t get anything.
Dave: So, the K-1’s just got a little more crowded with a bunch of financial data.
Chris: There’s lots of additional white paper statements on the back of the official form this year than there has been in the past. That’s for sure.
Dave: So again, I can recall several times walking out of the office during tax season and you had your head down. I don’t know whether you had just had enough, you were praying, or got into that Hendricks. I wasn’t quite sure. This thing was driving you nuts.
Chris: Well, it was probably all of the above. And when I started a busy season, I had a full head of hair and look at me now.
Dave: Yeah. Hey, going forward, 2019, 2020, country club dues, season tickets to the Browns, concert tickets to George Strait.
Chris: I assume those are all going to be deductible.
Dave: Wow. So, you’ve apparently missed the prior podcasts where we talked about that.
Chris: I’m not a sultan in taxation, I’m just a regular guy.
Dave: I know you’re hopeful that maybe there’ll be a tweak, and the entertainment lobby will be able to get that repealed. I don’t see that coming.
Chris: And I knew that rule. I just want to see if anything changed. I wanted to see if you knew that rule because you were going to sign my tax return if not, but-
Dave: How about investments in business going forward. You see, sense anything, a depreciation changes so far so good, looking good. But what do you think?
Chris: Well. What’s interesting is this qualified opportunity zone benefit that came out of the tax law change and the ability to kick the can down the road on paying tax on the gain, on capital gain, if you reinvest the proceeds of that equal to the gain in a qualified opportunity zone.
Chris: And so, those are popping up and around the country and certainly here in Ohio as well, and even in Columbus. And so, I think the private equity dollars are still hot. There’s still lots of money looking for deals. And so, that’s generating gains, and those gains, that’s absolutely one of the tools that we have when we representing sellers if they’re interested in deferring some of their gain is to maybe you look at these qualified opportunities zones.
Chris: And so, part of that is businesses that are operating in those zones have an opportunity to have an influx of capital.
Dave: Certainly, we saw less folks paying the alternative minimum tax this past year, but it’s still there. Any chance that’s going away?
Chris: I don’t see. The crystal ball’s not showing that.
Dave: Not showing that.
Chris: It is good news. I’ll admit myself, this is the first year I haven’t had to pay some amount of of alternative minimum tax; and so, that’s a good thing. But the reality is, it’s still a revenue raiser. And again, that’s what it comes back to is the calculus, if you will, of we’ve got to fund our government and if we eliminate entirely the alternative minimum tax, then that’s dollars that are not coming in that have to be found someplace else.
Dave: I think we got to remember that a lot of that alternative minimum tax that we hadn’t passed went away because of the loss of the real estate tax deduction in the limitations of our tax deduction on our itemized deductions.
Chris: And that’s a good part of it. They’re really two tweaks there. That was one of them.
Dave: You didn’t think I was paying attention, did you?
Chris: You’re pretty smart for an old guy. The second part of it was though they also raised the, if you will, the threshold of kind of where the AMT kicks in. And under prior law, if you were somebody that was maybe in the 300,000 and up range, you were going to be in AMT. A lot in AMT. Now, I think the kind of prevailing wisdom what we saw coming out of busy season was $1 million and above.
Dave: Sure. Okay. And a lot of that had to do, I think, some of the examples that we looked at was maybe heavy capital gain, things like that that maybe the alternative minimum tax or the Altman a cop popped in there. In the past, a lot of these tax credits that were running around, like the research and development credits, couldn’t take full advantage of that because of the alternative minimum tax.
Dave: As that threshold has changed, are we going to see more opportunities with tax credits?
Chris: Sure. Their tax credits never go out of out of vogue. They’re always something that should be considered because it’s even better than a deduction because it’s a dollar for dollar reduction in your tax, and the R&D Credit Congress is permanent now.
Chris: And that’s been in La for a couple of years; and so, that’s a good thing. And when you have the right set of facts, and as tax preparers and planners, when we’re having a conversations with our business clients, that’s absolutely one of the things we talk about is, Hey, what kind of credits are out there that you aren’t taking advantage of that maybe you should? And that’s one of them. Work opportunity tax credit. Depending on what type of industry you’re in, that could be another one.
Dave: Again, as we had and held our post tax season huddles and shared ideas, we did hear on a number of times that people had made gifts and felt that since the gift tax or the estate tax had changed, that they really didn’t need to file a gift tax return. And I still think that’s the case. We have to file a gift tax returns.
Chris: Sure. Yeah. Certainly, from a number of perspectives. The first one is if you are gifting non-cash property, you absolutely need to file a gift tax return to get the statute of limitations running on that year you made the gift because if you don’t file a return, the statute never runs and that gives the IRS basically forever to attack the value you used.
Dave: Right. Before we wrap up with winners and losers, want to talk about tax planning for the year ahead. I think we talked about a few of them, but let’s go back and revisit some home runs, if you will, or some things that has to be must conversation in 2019.
Chris: Okay. Got anything you’re thinking?
Dave: Well, I want to go back to that accrual to cash.
Dave: I think that’s good. I think you may need to have some education with our clients about their rental structure. Again, anytime rental agreements always need to be updated, but there may be some things there. Any other things that you’re going to have conversations with our clients and our colleagues about?
Chris: Yeah. So, to your point, the pass through business deduction, having conversations now that we’ve lived with it for one year and maybe discovered some things that we weren’t sure about going into it is planning around that, and are there opportunities to restructure, to maximize the benefit that is there on the owner’s personal returns?
Chris: Accrual cash you mentioned. A choice of entity.
Dave: Choice of entity still good? Okay.
Chris: Still good. Still there.
Chris: And that because on the corporate side, the C-corporates are permanent, that change was permanent. At least, as we sit today.
Chris: So, talking about that, what’s interesting back on the individual side is with the changes on the itemized deductions and the capping on the state and local tax deduction piece of that, and charitable giving and, we’ll see throughout the next month or two on how 2018 played out, and whether the charities as a group solid, diminished, decrease-
Dave: Good point.
Chris: In contributions, but having conversations with clients that didn’t contribute enough to get over that standard deduction hurdle about what we call a term we call stacking, where you’re trying to every other year, maybe you’re going to plan to be an itemized deduction, take those on your return.
Chris: And so, you’re planning for those contributions to get you there. So, that it gives you some benefit. Certainly, many people give because they want to give and they don’t care that don’t want or expect anything in return, but there certainly is a subset that gives, and they give because they know historically, that they could get a deduction and that made them feel even better about it.
Dave: Right. I think we’re planned to get together next week to do another podcast on partnership and operating agreement. So, we’ll dig into that, but I want to make sure you put on your calendar to come back and visit us in the fall, and kind of revisit this conversation. We’ll replay it and see where we go from there.
Chris: Well, I’ll have to fit that into my golf schedule, but we’ll see what we should do.
Dave: Good. Okay. Let’s end up with who are the losers.
Chris: Well, losers. Yeah, so if you had, in all likelihood, if you had a family with kids that are older than 16, you probably came out worse this year than than under the prior law; and that has a lot to do with the changes to the child tax credit.
Chris: And the loss of personal exemptions in all those tweaks. So, that certainly, as a group, we saw a lot of that. On the flip side of that, younger kids, you are going to be on the winning side of that.
Dave: Cool. Good, good. Our guest today has been Chris Axene. Chris is a federal tax strategy expert and I’ll use that term very heavily because this guy knows a lot of things about tax strategy and business planning. So, thanks again for joining us, Chris. Enjoyed it.
Chris: Thanks, Dave, was happy to be here.
Dave: Now that we’ve taken the time to reflect on this last tax season as a whole, we’re going to bring you back to talk about another change and future implications. Next week, we’re going to talk to you about the new IRS partnership audit rules and how they will impact partnerships going forward. Really looking forward to that conversation.
Chris: That’s going to be a great topic. You won’t want to miss that.
Dave: Listeners, I hope you will make plans to join us. In fact, now would be a great time to subscribe to unsuitable on Rea Radio. If you haven’t already, on iTunes, SoundCloud, Stitcher, or on YouTube so that you will be notified as soon as next week’s episode drops.
Dave: In the meantime, help us share the love by liking today’s episode, commenting on it, and sharing it within your network. Until next time, I’m Dave Cain, encouraging you to loosen up your tie and think outside the box.
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