Dashboard: Is the GOP Tax Bill Good for Business?

[Music] Welcome to another 21 Hats dashboard. I'm Lauren Feldman and I'm here with Jean Marks. Hello, Jean. Hello, Lauren. Great to have you here, Jean, as always. Uh, since we last spoke, you've written a couple of interesting pieces uh about the GOP tax bill that has passed the House, but is still being debated in the Senate. Let's start with the article you wrote that lays out what's in the bill for small businesses. What do you think are the most important provisions? I mean there there's lots of different things that impact small businesses in the bill. Um but you know just to focus on the top three that I focused in this article that I wrote for the Philly Inquir uh Lauren is um and I'll go down them. Uh the biggest one is the pass through deduction. Right. This is the uh some people call it the uh is the qualified business income deduction or the section 199A deduction for all of you you know CPA wonks that are out there. Um but it is um the deduction is again if you run a pass through like an S corporation or a limited liability company or a partnership and uh as you know you whatever money your business makes it passes through to your individual tax return. Um in this example uh you know if you make a thousand bucks uh you know in your business you don't pay any taxes at the business level you pay taxes on your individual level. There was this qualified business income tax deduction that started in 2017 which allowed most businesses like this, not all, but most to deduct 20% of that income before it went down to their individual return. So if you uh made a,000 bucks, you would get taxed on $800 of it. And um that was set to expire at the end of 2025, which is really uh you know, it was a big deal for people that were really taking advantage of this deduction. Well, in the House bill, not only has this deduction been made permanent, but it's been increased to 23% from 20%. And uh they increased the income levels of some of the small business owners that could qualify for this, which means more business owners would qualify for this. So, uh speaking as one who is fully taking advantage of all of this because I own an S corporation, um you know, I'm absolutely thrilled. I get an even bigger tax deduction um you know and have more more ability to to qualify for it. So it is a uh um it's a real bonus to a lot of uh businesses. Let me ask you about that real quickly, Gene. Sure. Um there there is clearly this is a big benefit for small businesses. Many do take advantage of it. If there's one criticism of it that comes even from small business owners, it's that it it helps a relatively small number of small businesses. For one thing, you have to be profitable, obviously. Um, nonprofits can't be part of it either. Uh, yeah. I mean, it's I don't have a relatively small number. I think that's a, uh, that's a debatable fact. Well, uh, I mean, clearly you have to be making a profit or you're not going to be able to use it. There are groups that make the argument that if it were if you were spending the same amount of money, but it were some sort of small business credit that everybody got, it would help a lot more small businesses. Do you think that would be a better way to spend the treasury's money? Honestly, well, first of all, a credit is always better than a deduction just mathematically because a credit goes against the taxes that you owe and a deduction just decreases your taxable income. So, anybody that you know you know you anytime you have the ability to have a credit over a deduction that that's always a good thing. Um but there are yeah there are certain small businesses that are excluded from this. There's there's a list of it and it really you know it really determines like what you do. Like for example businesses that are in the health field, law field, accounting firms, consulting fields, there's certain thresholds that they have to make and there's a lot of a lot of small businesses that are you know service businesses you know so you know I get that. Um, but for most of my clients, the 7 million uh employerowned businesses, those businesses that that uh that employ people uh that that you know have less than 500 employees, um most of those clients, most of those companies if they are a pass through are really able to take advantage of a good part of that deduction. So, it's a benefit. It really is. So, um Okay, that's where I stand on it. Um, next on your list, so there's the bonus depreciation deduction as well. Now, this means that if you buy assets in your first year, um, you can fully deduct those assets as long as they're placed in service. Uh, that deduction was 100% back in, you know, 2017 and 2018, but then it started going down and down. this year. Uh if if this didn't get passed, you would you would be able to deduct 40% of your first year purchases against income and then you have to depreciate the rest. Wait, you say first year? I'm sorry, Jean. You said first year purchases, you mean you can anything you purchase, you can deduct 40% of the cost in the first year. That's correct. In the first year, correct? And then you have to then advertise or or depreciate the remainder amount over the remaining life of the assets. Next year it gonna be. And this is for capital equipment or it is it is for is for equipment, machinery, furniture and fixtures, computer hardware, software. So a lot of stuff not not property though, not real estate. So when you deduct that, you know, this year you can only take 40% in the, you know, in the first year and then you have to depreciate it after that over the life of the asset. Um, next year that would have only been 20% a deduction that you can take. Um, so the House Mill restores it to a full 100%. And it restores it going back to any purchases that were made after January 19th um of this year going forward. And um, you know, it expires, by the way, it's not a permanent deduction. This never, this deduction has never been permanent. Um, it expires in 2029. So you've got, you know, four or five years to take advantage of it um, until it's going to be up for expiration at another date. And the other thing just to keep in mind, which is no different than before, but you have to put the asset into service during the year. You can't just buy the asset and mothball it. Um, you know, it's got to actually be plugged in and working and in service. And I have a lot of clients that take advantage of the deduction and finance it. I mean, you can finance a piece of equipment in December. You can uh find, you know, uh, get it in operation in December, but you don't start paying the loan back until 2026, 2027, whatever the terms are. you can still take the deduction for it for that cost in the first year because you put it into service. So that's a big deal. It's in the House bill. It's in the Senate bill. I don't expect there to be any changes in the Senate bill either. I do expect that to happen and go through as well. You don't expect any changes in the Senate bill relative related to this is what you're saying. Right. Right. Correct. Related to this. That is exactly right. And then the third and final um item is research and development expenses. There are not enough companies that take advantage of this deduction by the way because there is a wide definition of what counts as research and development. Um some people think that it's just for like you know pharmaceutical firms but it's really not. It's really for people that are developing any new product lines. And if you are, you have R&D costs that are associated with you, which you're supposed to segregate. And um those costs could be your employees, outside contractors, materials, supplies, the cost of generating samples, market research studies, things like that. Well, starting in 2022, you were no longer able to deduct those costs in the first year. you had to, you know, allocate them separately, uh, track them separately, and then you can only u, you deduct them over five years. You can only take 20% of it in the first year. So, that's been restored in the House bill, which means that you can now deduct 100% of your R&D expenses right away in the first year. It doesn't have to be advertised over five years. So, it gives you more of that first year benefit. That's also in the Senate bill. And like the other two items I discussed, I do expect that to happen as well in the final bill. And just to clarify, what appropriate R&D expenses are is that something that could affect a a professional services business like yours? I mean, if you introduce a new if you're carrying a new line and you have to hire somebody or do educ training or something like that, those expenses count. It could. So, it's it's getting up to speed on a product or a service. So, it can be a service. Also, if I were to pay consultants to do say a market research study um to see if it's a viable service at a certain market, um those kinds of things would absolutely be part of a research and development um expense deduction that you can qualify for. So, yeah, that's a great question and that's something that you can definitely do. So, those those three right away are pretty big, you know. Um just a couple others just just if I could throw out there, Lauren. Um the rule Yeah. on charitable deductions as well. Uh you know, there's a a 1% floor now on a company's income if you're a Ccorporation. You can't take a deduction for charitable expenses unless it exceeds 1% of your income. So, um that I I'm it's a I question and I'm curious. You know, my wife runs a nonprofit. We were talking about this like will this incentivize companies that are Ccorporations to deduct more or not? You know, like oh well I can't be bothered if I have to get it up to 1%. Or maybe like yeah let's spend whatever we got to spend so we do get it up to 1% and get the full deduction. So that will be an interesting thing to see. Interesting. Um and then you know again there you know other sort of smaller things that are out there but they do affect business owners is like uh no tax on tips and no tax on overtime. Now, the no tax on tips rule um the House passed uh you in in the House bill is that anybody making less than $160,000 a year, that's a tipped worker, who has yet to be defined, by the way, um their first $25,000 of income, they can take a deduction against it, so they don't have to pay taxes on that money. So, um we're telling all of our clients, Lauren, to just reclassify all of your workers as tipped workers and therefore they don't have to pay any taxes. I'm just kidding. You can't do that. There's going to be there's going to be a list of qualified tipped workers. Obviously, it's the usual, but but something some movement in that direction could actually happen, couldn't it? Yeah. Who knows? I mean, you know, people are going to test, you know, push the envelope on what's a tipped worker or not. You know, it um so they they get that benefit. Um that the Senate is expected to keep those same stipulations in place. Um it's a giveaway to uh to employees. I I wrote a piece to the Boston Times last week, Lauren, that it's not going to happen because politicians don't work this way. But, you know, this money it'll, you know, a typical tipped worker will will put about a thousand bucks in their pocket from something like this based on average tips that they make. And, um, you know, and I think to found money, and I get it that a lot of people need the money, so don't don't get me wrong, but it is found money. And I think to myself, man, with a retirement crisis that we've got going on, you know, if I was in Congress, I would have I would have pushed to make this one of these uh you know, you you can only get the deduction if you take the savings, the tax savings, and put it into a Roth retirement account. You know, a Roth retirement account is for after tax savings, and it grows tax-free, and you can take it out anytime you want without any penalties. So, it's not like you can't get the money, but it would just incentivize people to put money away in savings in retirement, the tax savings that they got from, you know, from this no tax on tips thing. Um, but that's not going to happen. It's not part of the bill. I'm just sitting here going way off. It's an interesting proposal, though. I hope you keep pushing it maybe one day. Well, you know, you you know what it just I guess gets back to you. you told me probably offline that you would love to see me when I write stuff rather than yell and scream about things I don't agree with to uh actually um uh you make suggestions or you know what would I do otherwise and I was thinking about you when I was writing that because I was like would like this I'm taking something and you know trying to you know make a point here. So there you go. I wrote it for you. You were right. All right, let's talk about the other piece you wrote uh saying that the big beautiful bill is going to be a big ugly problem for small businesses. Why did you write that? Well, you know what? Rather than me answering, why don't I just turn this over to Elon Musk? Elon, can you come here for a second and explain what is happening? It is um it's it's it's a tax and spending bill and uh depending on the latest Congressional Budget Office estimates, I don't know, you're increasing national debt by anywhere from 2 to four trillion over the next, you know, through 2030. And that's, you know, who knows how accurate these these estimates are. It could be a lot worse. Um but it ain't, you know, it ain't great when you look at all the spending that's going on here and the taxes themselves that you're reducing. And you and I have talked about this before as a business owner. How can I not like tax reductions? I mean, that's why a lot of my clients supported Trump. I mean, selfishly. Selfishly. You know what I mean? Like Jean, I don't know if you remember, but we had this conversation back when we used to be on serious radio together. Um, and we talked about the 2017 uh tax cuts. And uh I would challenge you about some of the giveaways to big corporations. is, you know, the $40 billion that Apple got. And I think your answer was pretty much, you know, it's great for small businesses. If it's great for small businesses, I'm in favor of it. I haven't changed that stance, but um um my my concern is growing. And I'll tell you the reason why. Interest rates right now, when you and I talked in 2017, interest rates were like zero. You know, I mean, the prime rate right now is just 7 and a half%. And you know, I I don't expect any significant reductions in interest rates from the Fed uh over the remainder of this year. Um our national debt, we talked in 2017, this is before the pandemic, our national debt back then was below $20 trillion. It's $36 trillion now. You know, I mean, it is just absolutely exploded and the interest maintenance on that debt is more than a trillion a year and going up and and that's a big big problem. And you know, and that's a problem for small businesses. Why is it a problem for small businesses? Because here's what happens. First of all, if you ask any business owner, and I know when people say like, "Oh, well, the government's not the same as running a business." There's a lot that's the same. And if you have a budget that's running $2 trillion deficits a year, there's only two ways. Well, actually, there's three ways to fix it. The two ways is what a business would have to do. Either cut costs. Well, good luck with that. We saw how successful Musk was trying to cut, you know, costs. I mean, forget about that, right? And number two is in this in this environment or raise revenues. I mean tax more and here we are taxing less, right? So you know you know it doesn't seem like you know the government's taking actions to get that deficit under control if it's just a matter of cutting costs or raising revenues for whatever reasons. I'm not saying that's good or bad. It's just that's a fact, right? But then there's a third. So what do you do if you have to maintain if you have to pay your interest expense? What do you do? Well, you print more money because you inflate your way out of your debt. And what happens is you print the money to pay your interest and and that puts more money into circulation and that puts a hell of a lot more pressure on inflation. And that causes an obviously an increase in costs and the Federal Reserve and and desperation to keep control on inflation. We'll have to continue to keep interest rates relatively high, maybe even higher than now. And that impacts our cost of financing and capital. And we live in a capitalist society. So if the cost of capital are too high, it it you know will will affect many businesses who can't make the investments they need to make. And that's a problem and it's becoming a bigger and bigger problem as the interest payment part of our national of our of our budget gets bigger and bigger and bigger. The money's got to come from somewhere. Nobody's going to raise it through more taxes and nobody's going to Well, actually, there has been a huge tax increase if you count the tariffs and tariffs. Yeah. Right. Right. that maybe you're right. Maybe that solves the problem. He was well I'm not saying it's going to solve the problem but it is generating cash right now. 28 billion in May is what I read like it was the highest tariff like ever. Uh so okay so those tariffs are coming in. I don't know how long-term or sustainable that is but it it cannot do two it can't do both things that have been promised. It can't both solve the debt and restore manufacturing to this country. Agreed. because as we know those those tariffs are coming in are having another inflationary impact. So it's like you know you get one thing but then you're paying for it elsewhere. So you know until somebody gets serious about spending by the government um you know it is it's a problem and as the debt grows and as interest rates are what they are um I was you know we weren't talking about this as much you know five years ago because interest rates were so low right now it's becoming an issue. So shortterm, super happy for tax cuts because I'm a selfish bastard and I want more money in my pocket. Fair enough. Uh but then I am concerned longer term over the next few years. What impact, you know, are all this interest that we're paying? The money's got to come from somewhere and I just think it's going to cause inflation and higher interest. I really do. Are you still feeling relatively optimistic that all these changes this year, the tariffs, the big beautiful bill are going to in the end produce a a happy outcome. Longer term, I really do believe that we are still in a pro business environment. I feel the tax decreases that are happening are going to be a huge help. Um, I do I do feel confident. I I think 2025, as we've talked about before, is going to be a very disruptive year. and uh you and I are going to have a lot more talk about tariffs because there's a lot more going to happen with tariffs over the next few months. Trust me on that. So, and that's a whole other discussion to have. So, well, I think we're going to have plenty to talk about. No doubt for quite some time, Jean. I I am glad you're optimistic. Uh I hope you're right. Gene Marks is a CPA who writes weekly on small business for the Guardian, The Hill, The Philadelphia Enquire, The Washington Times, the Chicago Daily Herald, Forbes, and Entrepreneur. You can also hear him on ABC radio's Eye on the World with John Bachelor. Gene hosts two small business podcasts with Paychecks Corporation and the Hartford. Thank you, Jean. Thank you, Lauren. Talk to you soon. Have a great week, everybody. [Music]