Dave Cain: Welcome to unsuitable on Rea Radio, the award-winning financial services in business advisory podcast that challenges your old-school business practices and the 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 you enhance your company’s growth. I’m your host, Dave Cain.
Today’s topic is a hot topic and a popular topic. We’re sure you’re going to enjoy today’s guest and today’s topics. Since Donald Trump has stepped into office, he’s made good on his promise to bring change to Washington as we’ve seen many of these changes in the executive orders he’s already signed in the last few days. Many business owners are left wondering, what the hell does this mean to me? Our guest today is Ashley Matthews.
Ashley is a tax strategist with Rea and Associates with a specialty in real estate and pass-through entities which will be impacted by some of the pending tax changes. Ashley’s been keeping close tabs on the current political client and how Mr. President’s changes will impact businesses throughout Ohio. She joins us today on unsuitable to give us a much-needed update. Welcome to unsuitable, Ashley.
Ashley Matthews: Thanks, Dave. I’m very happy to be here and thank you for that wonderful introduction.
Dave: Well, we’re not done with that introduction. In the production notes, obviously the resume is as long as my arm, but the item that I’m probably the proudest of on that resume is the way you been able to establish a work-life balance with your career. You and your husband both have a tremendous career and spend plenty of time in quality family time so I congratulate you and your husband for being able to do that.
Ashley: Thank you.
Dave: Now, before we dive into today’s topic, our content management marketing expert has warned us that we have to have accurate data and accurate sources. Where do you get your tax information for today’s presentation?
Ashley: That is a really great question. Most of the information … Well, all of the information we’re going to talk about today comes from the joint committee on tax reform, as well as other industry sources so I’ll have to tip my hat to Deloitte. They do a great job in staying up to date with the changes in Washington, so a lot of our information will come directly from them, as well as reading … We’ll talk about the House GOP blueprint, reading that, reading President Trump’s tax proposal coming from there. Then there’s a lot of commentary and opinions on and what we think will happen that are mine, personally.
Dave: Your personal? Okay.
Ashley: As well as other Rea professionals as we’ve had discussions.
Dave: Do I need to read that little disclaimer? The views expressed here and not of those of Rea and Associates, but-
Ashley: Maybe, maybe.
Dave: I think our leadership is giving us the okay to go for it. But I think it is important to establish that the data we’re talking about is accurate. It’s been certified to the best of our knowledge and ability because there’s just so much information out there that is completely inaccurate or misunderstood so again, tip of the cap for accurate reporting.
Ashley: Course.
Dave: As you know, this is a hot topic and a hot debate and you can talk about the Trump plan. We’re going to talk specifically about the business issue, the tax side of things, but as you know it’s a hot topic. There are certain places you should talk about this information and other places where it’s very difficult. Obviously, the rules have changed and has gotten extremely complicated these days about how you talk about this stuff. Let’s start out with something that’s pretty easy. Let’s say that we’re at a cocktail party. You know when you’re at a cocktail party, everybody always seeks out the CPA looking for some free tax advice.
Ashley: Of course, of course. Very popular.
Dave: So we’re at a cocktail party and I want to know if this is an appropriate question for a cocktail party. I come up to you and I say, “Look, I really don’t care much about the Obama care. I hope they get rid of that, but I kind of like what’s in the affordable care act.” How would you respond to that? First of all, is it okay to talk about that at a cocktail party?
Ashley: Sure. I think it’s a great question for a cocktail party. Maybe after I pick my jaw off the floor from laughing a little bit, I would tell you that Obamacare and ACA are the same thing. So, when Obamacare is repealed, unfortunately all of those people with insurance through the ACA will no longer have that, either.
Dave: We can touch on ACA a little bit later, but okay that’s a good starting point. I think the another area that we’re hearing a lot of discussion that’s somewhat controversial is at the family dinner table. The Thanksgiving dinner table.
Ashley: Your table or my table? It might be a little different.
Dave: Either one. Either one. Number one we’ll see what question is appropriate, and how would you answer it. So let me give an example.
Ashley: Sure.
Dave: Give you an example. Which one of these would be an appropriate question? Let’s say we’re at the family dinner table. “Hey mom, did you march last Sunday and did you carry a sign?” That would be one question.
Ashley: Okay.
Dave: Two would be, “Would you please pass the broccoli casserole?” Or three, “Are you happy that they are repealing the alternative minimum tax?”
Ashley: Well you know, at my table, those are probably all appropriate questions. Probably most tables maybe, B. The broccoli casserole.
Dave: Broccoli casserole would be fitting?
Ashley: Yeah, but you know AMT repeal, it’s pretty great.
Dave: It is on the table that the alternative minimum tax at both the corporate level and the individual level, may be repealed.
Ashley: That is correct. We’re looking at two tax policy proposals here. I mentioned earlier, the Trump plan, and the house GOP blueprint. In both of those plans, going forward they have recommended the repeal of the corporate AMT and the individual AMT.
Dave: Do you make broccoli casserole, by the way?
Ashley: I don’t make broccoli casserole, no.
Dave: You do not? I don’t you’ve lived yet, then.
Ashley: I know, I like to eat it though.
Dave: It’s good, good stuff. In and of course you have the professional setting where those discussions occur and also the water cooler and many other social places where as we’ve both been part of some of these discussions can get pretty controversial. I wanted to make a little light of that in the first two examples just to get the ball rolling, but obviously, I think it’s your opinion, in my opinion as well that there is going to be some tax reform.
Ashley: It’s coming.
Dave: You feel that tax form is needed, your personal opinion.
Ashley: Yes, I think … Well that’s a charge question, Dave. Talking about any of this stuff you know it’s really hard to make everyone happy and we’re not going to have a one size fits all tax code. I don’t know that that’s possible, in my opinion. I do think reform is necessary. I don’t know if it’s necessary to the full extent that either of these proposals reform to the extent that they have proposed, but I do feel that some type of reform is necessary.
Dave: Just for our listening audience, the tax code is approximately 75,000 pages long. I probably looking about 400 of those pages in my career.
Ashley: That’s a lot, even then.
Dave: So 75,000. compare that to the novel you’re currently reading you probably see 3 to 500 pages and then, our tax code is 75,000 pages and then all of the other analysis and the tax court cases and things like that. That gets to be a pretty large tax code. I think we both agree that a tax code overhaul of some kind is coming. You’d mentioned there’s two proposals out there. There’s obviously the Trump plan and that’s been out there for a while and then the GOP plan. Can you talk about that a little bit high level on … Let me just throw a question out to you as we start into that. Is there an appetite, is there discussion out there about a federal sales tax or consumption tax?
Ashley: I think we always hear that consumption tax, the value added tax, all of those kind of widespread flat tax … They come around with every election. They circle around. The problem with those is that, the proportionate … Who bears the liability as a proportion of income, and we’ve had some of the Washington think tanks do quite a bit of analysis on those and unfortunately, the middle to lower class families bear the brunt of that tax, because they … As a percentage of income. So, I don’t feel that we’re going to throw out those 75,000, 750,000 pages of tax code in favor of a value added tax or a flat tax, unfortunately not in our lifetimes.
Dave: Not in our lifetimes?
Ashley: I don’t think so.
Dave: You know we’re going to play this recording back in about three days to see if it’s still accurate.
Ashley: You know what? It might not be, but one of the proposal … The changes in the proposal and it’s getting a lot of press right now is the border adjusted gross receipts tax, is what they’re essentially calling the repatriation, the 10 percent tax on imports. That’s really hot right now in the media. Trump’s plan has said that exporters will not be taxed on any income they make on exports, but importers will be heavily taxed. There’s a lot of questions about how that will impact the American consumer. Can America even bear the brunt of manufacturing and creating all of the things that we need that we typically import? Is that really a fair tax? So you’re going to hear quite a bit to come on that, but that’s probably one of the most highly publicized pieces of both of these tax plans right now.
Dave: Off the air, prior to this, we were talking about when are these tax changes going to occur and it may be a while, some may be immediate but we think it’s a little bit more longer-term like 2018 and beyond, is that still your feeling?
Ashley: Yeah definitely. I mean think about the political environment right now with ACA, what we spoke about earlier. I think there’s consensus on both sides of the aisle that there needs to be a change, ACA needs to be repealed, something needs to happen with it and then compare that with how long it’s taking. It’s taking quite a bit. I think they’ve even tabled it right now, the repeal of ACA. Now think about tax reform and think about how contested that is on each side of the aisle and how much disagreement there is and think about how long that could potentially take. I definitely don’t think we’re talking about 2017, at all. It’s definitely not going to be something that’s retroactive so even if we get to the end of 17 and something gets pushed through, I would not expect that it would be in place until one one of 18. But I think even getting reform in for 18 is going to be a struggle now just looking at the environment currently. We’re still confirming cabinet members, so we’re not moving probably as quickly as as those would like that are looking for tax reform in this year.
Dave: However, if we know that tax overhaul is changing and probably a lower corporate tax rate and lower or fewer brackets at the individual level, there may be some discussion that you have to do some planning in 2017 to take advantage of those tax breaks.
Ashley: Definitely, as I advise my clients that are reaching out to say, “What do I need to do because there’s so much information swirling around?” All I can tell them and I can’t say it for certain … I can say it was almost, a little bit, most certainty, but not for certain.
Dave:100%, we got you.
Ashley: Is that we know tax reform was coming. If anything we know tax rates are going to go down. We don’t know how much, we don’t know in what manner, but tax rates are probably going to go down and so the thing that we can plan for for certain is to accelerate deductions, get the benefit of those deductions at a higher tax rate, now. Push off income if we can. Doing that type of tax planning is appropriate in this environment, but there’s a lot of restructuring that if all of these pieces of these plans actually come into place, there’s going to be a lot of really great tax planning that can happen to make sure that our clients and businesses and individuals are taking advantage of the new provisions. We’re staying really close to our clients. I encourage everyone out there to stay close to their advisor and talk to them about how these changes will affect them personally. It’s really hard to understand the nuances of what’s happening, but you got to stay close to your advisors and really understand. That way if we get towards the end of 17 and we do realize, recommend some restructuring that we can help our clients work through that quickly so that they’re ready for when the new provisions into effect.
Dave: Are you ready for another cocktail party discussion about tax law?
Ashley: Of course. Always.
Dave: Tax overhaul.
Ashley: Wait do I have a drink in my hand? Is this a cocktail-
Dave: Yes, you do. Yes. You’re all set.
Ashley: I’m definitely ready.
Dave: One of the proposals under the Trump plan is the corporate tax rate would be 15%, a flat 15%, so number one would … Is that a true statement? Is that true? We see it in a number of publications, but I think we’ve confirmed that that’s what’s in the Trump plan.
Ashley: Yes definitely. Trump plan is corporate rate of a flat 15%, the House GOP blueprint is at 20, so both of those though are significant reductions in the corporate tax rate which is effectively 35% currently, today, as we sit here.
Dave: If that’s on the horizon, I can see a tremendous amount of planning that would go into place if that lower rate. Companies may be more inclined to keep earnings inside the business, and it may even impact the way you do business.
Ashley: Definitely. You mentioned earlier that I may pass through his person, so as much as I hate to say it, I’ve studied that past three section of the code, probably-
Dave: Excuse me, was that passed out or passed through?
Ashley: It was passed through, but probably a third of those [inaudible 00:15:53] the code is on partnerships and so while I’ve studied it, and know it really well, the chances are that that’s going to go away if Trump and the house have their way. We’re moving more towards a corporate structured income tax. Not only may it make more sense for our clients who are structured as pass through’s to revisit the corporation structure, it might be necessary. One of the things, the nuances people have heard is there’s a pass through rate too. Right now pass through income is taxed at the individual level, based on the individuals’ income and the individual rates. Both plans have proposed a pass through rate and we’ve had some trouble trying to figure out what that means because right now, there is no pass through rate.
Trump has expanded a little bit on his plan to say that pass throughs will essentially be taxed as corporations and if you meet the definition of a small taxpayer, which we’re not quite sure what that is yet, some are saying $500,000 or less in gross receipts, then you would be able to deduct your dividends. The issue with corporations is double taxation. You get taxed inside the corporation and then shareholders get taxed on their dividends. There would be hopefully a provision that would allow some taxpayers to deduct those dividends so they’re not taxed twice. But that is something that’s very new. That’s a new structure, that’s not changing the rate within a current structure. That’s creating a brand-new part of the code, maybe getting rid of another, so that’s a pretty big overhaul.
Dave: There’s also another piece of this I want to discuss with you and it’s a little bit bothersome because I think it would impact certain industries that are staples in our country but there’s a discussion about the interest deduction being, I don’t know if eliminated, reduced, I don’t know what the proper terminology is, but can you speak to the potential loss of the interest deduction?
Ashley: Of course, so both plans include a provision that they’re calling full expensing. Currently, when a business purchases an asset to use as a part of their business, they’re not allowed to expense it in the year that they purchase it. They have to capitalize it and depreciate it over a certain amount of years. Both plans are calling for full expensing. Trump’s plan is limited to manufacturing industry. The GOP plan is any industry, any taxpayer. Fully expensing any asset you purchase, including real property, except for land, in the year that you purchase it. But the trade off to that is that they would no longer allow taxpayers to deduct business interest. If you’re purchasing those assets with debt, you would not be able to deduct the interest that you’re paying on that debt. I have some opinions on this particular provision.
Dave: Oh, you’re allowed to share those.
Ashley: It’s really hard to understand because you’re trading a timing difference. Meaning, you’re going to recover the cost of that property over the life of the asset, 5, 10, 15 years so eventually you’ll get to take the entire deduction and take the interest, currently but under this new plan they’re saying you can take the deduction only one year, but you’re giving up interest. So you’re trading a timing difference for a permanent deduction, which I’m not sure that that makes a lot of sense in our current tax environment. Some people have said that it’s because we want to encourage businesses to fund their businesses with equity and not to rely on debt. Unfortunately, I think there’s a lot of industries that rely on debt. It’s the nature of the industry, and this could really hurt industries out there that do so.
Dave: Well, take for example, a manufacturing usually that industry carries a fair amount of debt because the cost of equipment etc. Real estate’s another area that comes to mind where some entities just decide that being highly leveraged is the plan. It could turn some things upside down a little bit. Employer-provided childcare, that seems to be another one that’s hit the news waves lately.
Ashley: Right now there are limits on how much of a dollar amount, fair market value amount to the employees that an employer can provide for childcare and anything above that becomes taxable income. Part of the Trump plan is to increase that cap to $500,000 and to shorten the recapture period to five years, meaning if an employer provides more of a benefit over that amount, that they could pick it up into income over five years.
Dave: Our guest today is Ashley Matthews with Rea and Associates. Ashley is a tax strategist is what I like to refer you to and in many industries, and ask you as we wind down the podcast, we’re going to do a couple quick hits here. Going to go very quickly through the next several topics. Currently there are, I believe, seven tax rates at the individual level. Under the Trump plan, I believe there may be three.
Ashley: That’s correct. Three brackets under both plans and as well as repealing the Medicare tax. That .9% Medicare tax.
Dave: Capital gain. What’s going to happen on capital gain? You have the crystal ball. In fact, you read an article, looking in the crystal ball, so what’s going on with capital gain?
Ashley: With capital gains, it looks like one of the proposals is to retain the current law rates, and the brackets, for capital gains. So the 15, 20%. The GOP plan, however, is a little bit more aggressive with this. They want to tax the capital gains at ordinary rates. But, exclude a certain amount of capital gains off the top, so you’re not paying tax on all of it.
Dave: I do have one final question for you. Obviously, we’ve been talking about tax and joking around a little bit, but there’s some serious issues ahead of us and we encourage the listeners to take advantage of the planning. Let’s dream a bit. You’re in charge of the tax code for a day. One full day. What are you going to do? What change … What’s a couple changes you would make?
Ashley: This is a hard one, I taught … I spoke earlier. I have a bleeding heart so I’m very … Lots of causes are close to my heart and social welfare is one of those. If we can talk about that for minute. I know taxes obviously are a big part of funding that. It’s really hard for me because I could say I want to get rid of taxes completely, right? But we all know that would have devastating impacts to help our country. For me, so the AMT, I hate the AMT, it’s antiquated. It doesn’t do what it was supposed to do any longer. I think a lot of people agree that it’s terrible and a lot of Americans that should not be paying a higher tax rate on their income are caught in that net, and that wasn’t what it was originally intended to do, so I want to get rid of that. There’s some technical stuff in the partnership side that I hate.
Dave: Get rid of it. Get rid of it.
Ashley: Just get rid of it. Make it easy.
Dave: All right. Okay, make it easy. Again, as part of the Rea way, one of our core values of the firm is, proactive solutions, and I think you’ve done a great job in your career looking for proactive solutions for your clients and it looks like you’re ahead of the game. Staying ahead game of if that’s possible on the tax overhaul. So I appreciate your insight. Thanks again for joining us on Unsuitable, Ashley, and we hope that the topics we covered today over the last 20 minutes aren’t completely out of date by tomorrow at midnight, but either way we may have to have you come back for another visit.
Ashley: I’d be happy to.
Dave: To our listeners, if you need any additional information, check out the Rea website, at reacpa.com and you can always email us at podcast@reacpa.com. We will be sure to connect you with an advisor who can provide you with custom insight. Until next time, I’m Dave Cain, encouraging you to loosen up your tie, and think outside the box