Dashboard: The Confusion Over Small Business Taxes

[Music] welcome to another 21 hats dashboard I'm Lauren Felman and I'm here with Jean Marks welcome Jean hello Lauren great to see you again so today Jean I'd like to talk to you about a topic that I know you care deeply about and that you know a lot about and that's taxes specifically how they affect small businesses uh so first last week KLA Harris introduced a plan that got a lot of headlines the plan as those headlines noted promises to increase a small business tax deduction tfold which sounds pretty good but while I'm no expert I don't think this deduction is really aimed at small businesses I think it's for startups you are an expert am I wrong about that no you're not it's funny that you say that because I just wrote a piece about this for the guardian um and it's exactly that point first of all um I think the proposal that she's making are great and I'm I'm I'm really happy that she is focusing on small businesses been spending some time on that um and by the way wasn't just um it just so we know we'll talk about the startup deduction in a minute but it wasn't just that I mean she's she wants to create a standard deduction for small businesses she wants to make it easier for small businesses to get occupational licenses to operate across state lines which is a huge you know that's such a pain in the neck for so many people you know like you have to go to you right you know what I mean like New York State you have to get like a PhD and hair cutting to become a hair cutter you know a lot of those rules are in place because the businesses that are in existence want to keep out competition they do right and I think her aim is to say like hey if you're a you have gotten a certified nail polisher in New York state you should be able to move to Illinois and do the same thing do you know what I mean so I think that's her intention she wants to have more investments in rural businesses uh and you know and more like more availability for capital for businesses she wants more businesses to get money from the federal government now so by the way like all of our proposals I mean we're still waiting for the details on this stuff but I mean it's great I mean it's it's it's really good stuff and it's stuff that you really but I do think I do think there's an issue here there are a couple of issues here one is we still can't agree on the terminology we as a society don't know what a small business is because people use the term small business and startup interchangeably and obviously you know there's a big difference between opening a restaurant and launching a venture-backed uh tech company um and this I think this blurs that line and and I just I you know I think everybody wants to be seen as every politician wants to be seen as being supportive of small businesses this got a lot of headlines saying this huge tax deduction 10 and a tenfold increase for small businesses and it may be a great policy but it's I don't think it's aimed at small businesses right so it brings us to this tax deduction because that is what got all the headlines right so you're you're 100% right this is the startup tax deduction if you start up a new business uh you are allowed to deduct $5,000 and start up costs and there's you know you know certain fees that you pay and you know there's a whole definition a whole list of pretty much all the cost that you're spending um while you're launching a business um and whatever startup cost that you don't deduct you you then have to like put on your balance sheet and then you can advertise it over a few years but what she wants to do is she wants to expand that to $50,000 so a business starting up can just take an immediate $50,000 right up on their startup costs when they have these costs and by the way they can take they would take that deduction when they actually have the income uh to deduct it against so it's great so way can they do it when they have the income or when they have profits they can defer the deduction for when they have profits the same thing income and profits so you know whenever they have the profits they would defer this deduction to those years you know but so but is that really gonna that's my second question to this you know I I think the it sounds like we agree on this I think the idea of encouraging more the creation of more businesses makes a lot of sense there's a lot of data that shows that it's new businesses that create the most jobs um so you know all good but but I I I think you hit an interesting point there though if you can't take the deduction right away is it really going to encourage more business starts if you know if you have to wait until you actually have profits so right and and on top of that um and this was the gist of my piece in the guardian okay is is this you know Lauren like there's you President Biden recently released that recently announced that under his administration there's been 19 million new startups and in fact that that Trend started before President Biden took office but there's no question there's been so many new startups of late and you and I I think have talked about this before the reason why we have and the treasury Department is saying there's like an average 430,000 new business applications per month this year which is 50% more than what was happening in 2019 which is really interesting because I think we suspected early on that a lot of this was driven by the pandemic and Desperation people who lost their jobs but it seems to keep going it does and so again another topic maybe for another day my my point which I think dovetails into your point is that I you know while we want to Foster entrepreneurism and all that I think we're doing pretty good with startups and entrepreneurism you know like my issue is I look after my audience my audience is not necessarily startups I mean I don't really speak or write to startups I my audience are like the Six Million established your businesses basically employer owned businesses you know um they're the ones stop you there for just one second because again there's there's so much confusion about the terms when you when you a lot of people throw around the number 30 million or 31 or 32 million uh businesses you said 6 million that's businesses with employees yep when you ever hear 33 million small businesses in this country don't you should ignore that number because anybody that files if I if I buy a uh these are all like new business applications so if I buy a property um or if I start up a side gig and I file a tax return for it that's considered to be a new business you know and it's just a side gig it doesn't you know fine but I'm talking about like actual businesses with payroll you know that six million of the 33 million they have payroll they're employer owned companies okay these are people that pay insurance and pay compensation costs and generally pay rent if they payroll and all the other things associated with being a business you know well it's a it's a solopreneur myself uh I will say that you know that the ability to run a oneperson business has grown dramatically and I think you know having a payroll is not the only way to judge whether something is a real business or not but I take your point I I you I do agree with you um but I just there's this romance and this sort of like sexiness of like the startup world you know what I mean and you know investing in them and giving them the tax deduction and the American entrepreneur and the American dream that's sells you know and that's what politicians like but honestly and I've talked about this before you Lauren you know I do a lot of speaking and I speak to these industry associations and all the people in the audience looking up at me are like all established employer owned businesses and they are the core of the American economy they are Distributing building materials and Automotive gaskets and cleaning offices and you know these are these are the actual businesses that are the core of this economy and what I what you know and so as much as I was like you really happy to see what what you know vice president Harris was proposing I you know I was like man I really wish she would focus more on that that six million those established businesses and for example um you know there's you know the the tax cuts of 2017 are going to expire there's a big tax cut for passrs uh s corporations and Partnerships that's going to expire the end of 2025 I'd love to see her address that because I I know a lot of my clients will be affected by that you know what I mean um there are a lot of regulations that the Biden Administration has has put through which again good you know find workplace regulations environmental things like that but they apply mostly to all siiz businesses and for very small bu people with 10 employees or 20 employees they can get owner and you know I think like boy it would be really amazing to exempt some of those businesses from some of these regulations just to give them a a chance know the you know and then she talks about you know you know investing and making more Federal contracts available I've written about because I know about the sba's 8A business development program and the Hub Zone Program and Apex accelerators and most people have never heard of these things because they don't get much funding or attention and yet they're there to help businesses get more government contracts and government financing and so rather than you know Crea new ways to do things it would be really nice instead uh to give more support to the SBA to to get word out there and that's such an interesting point Chene I I've I've wondered about that for a long time I mean about 20 years ago I was at Inc magazine and I assigned somebody to write like an 8000w piece about the SBA and what it actually did and you know one of the things we discovered is that a lot of business owners have no idea what it does and and part of the reason is because the the sba's mission is is it's complicated it's disaster relief as well as small business support so there's a lot there's confusion there but but here's the thing everybody's heard of the small business administration isn't it on business owners to check it out and and figure out what it offers and see if there's something there for them yeah I mean it certainly is I mean and that is you know that that again another topic because I do think that business owners do have an obligation of themselves to investigate the different services and things that are available for them um um you know so because so they can take advantage of them but you know again you know a counter counteracting thing is I would use Apex accelerators I think I told we have I had not heard of it until you wrote about it and we talked about it yeah never heard of them you know there's like a group for free you know they'll connect you to any open government contract or whatever like why haven't we heard why Haven I not heard about them I mean I'm the one that's supposed to be investigating I've been doing this for 20 years Jean uh same here yeah so in defense of the business owners I mean you and I do this for a living and never heard about some of these programs so you know they're trying to run businesses you know I mean they've only got so much time in the day to investigate this stuff so it would be good if the government instead took their existing stuff and said you know what let's give them a boost you know fair enough and then one other thing that I just you know I I really think is super important and I I think you and I talked about this before but um Employee Stock ownership plans Lauren I mean I mean geeez I mean you know it is we've got this silver tsunami of of employers looking to sell their you know exit out of their businesses and we always talk about you know you know giving workers more of a say and workers rights and you know all the things the Biden administration supports for the workers and you think what better way to get Workers involved than to provide even more incentives for your business employers you know owners to sell their businesses to their employees you know and right now esops are kind of limited um depending on the size of your business I mean there are tax benefits but you got to jump through a lot of Hoops man it would be great if you know if you know either Harris or Trump were to say like we're gon to we're going to have a whole program where we're going to make this a lot easier to form esops for all siiz companies we're going to expand the tax benefits for doing it we're going to give incentives for doing it so that more employees have equity in these companies and more business owners have a way to cash out of their businesses you know um again with so many business owners being of a boomer age that's a huge thing these are existing businesses that need that kind of support I guess it's just doesn't sell to the Press you know it's not as sexy to to to offer some of these things I'm talking about it's more sexy to say hey we're going to you know you know give more money to the the American dreamers you know um and I think that's why we don't see so much of it well I think there are a couple of things there one is I agree completely uh about esops um I think they're great I think they could be greater um and to your point I think there are things that could be done to make them uh work for a lot more businesses and I'd love to see that happen I would also note though that there are alternatives that are getting attention I don't know if you're familiar with employee ownership trusts also known sometimes as co-ops uh yeah and per uh also known as purpose trusts uh I have a podcast coming tomorrow uh about employee ownership trusts and they don't have the tax advantages of an ESOP but they also don't have the bureaucracy and the regulations and the inflexibility that ESOP can bring so I think they are a growing option but it would be even better if you could get the tax benefits of the ESOP with a little less regulation and bureaucracy I agree and and I guess you know I don't know I mean if I was advising you know uh you know vice president Maharis I'd be like man you know you want to go after that not in the older demographic but the Millennials who you know and the employees you know you want to say you're in favor of the workers um you know expanding the benefits of say employee earners trusts or or esops or employee owned co-ops um making it easier to form and uh giving more tax advantages to doing that I think that's a huge thing I think that would be a big sell um so anyway the point of my guardian column and the point of this whole conversation is I like what she's proposing I think it's great and I'm glad she's paying attention to it I just feel like um I I I kind of feel like she's targeting the wrong business owner you know what I mean like you know I think we would get arguments from economists who would say that she actually is going after the businesses trying to support businesses that are most likely to hire people and create jobs um and there's probably an argument to be made in that direction it it just it bothers me a little bit with the again coming back to the terminology when it gets called a small business uh tax deduction it makes it sound like it's helping those six million that you're talking about and it's really not and I I think that's unfortunate so but anyway step in the right direction and good stuff so so I'm not you know not complaining okay I think we we should also note uh we're picking on or I started this I'm picking on KLA Harris here Donald Trump last week also talked about taxes um and talked about some plans his talk prompted a lot of questions as well uh he was talking about a combination of tariff hikes and corporate tax cuts aimed at large manufacturers I chose to focus on KLA Harris because she's talking about help supporting small businesses Donald Trump was uh about corporate taxes and companies of all sizes um but you know if I could just comment on that though Lauren like we have just only because last week The Institute of Supply managers um um they released their their monthly purchasing managers index and yet again like the past two years the manufacturing sector is again showing you know a decline you know um like it's in contraction and this is despite you know uh President Biden's best efforts with the inflation reduction act and you know investing in chip makers and and all of that it's still you know the manufacturing the infrastructure bill yeah the infrastructure bill it's still like in you know it's in contraction and you know and then you know Trump wants to have tariffs because he wants to protect American manufacturers but of course that's just going to just inflate prices all over the place and then of course he wants to um now he's proposing a tax cut specifically for us man everybody is trying hard uh to you know the candidates want to help Manufacturing in this country I don't have any answers you know for this um because it is a problem mainly because it is it is just in the end manufacturers businesses are going to go where the prices are cheapest you know and if you're a business and you can get something made in Thailand or Vietnam or Brazil or Mexico rather than the us where the cost structure is just higher uh you're just going to do that I mean that's just supply and demand and I don't have an answer so you know how do you make American manufactur facturing you know price competitive compared to some of these really lowcost countries um I don't think tariffs are going to do that and I don't think tax cuts are going to do that and I don't have an answer as to what would nor do I I and I don't know how to square the data but I I would point out I know you're right about the ism um there has also been a lot of data about the uh influx of money building factories in this country as a result of some of those programs you talked about and maybe it's just too soon they're not online I don't know you're right it's a good point it's a good point yeah I mean the construction industry is doing good because of that and by the way I was I thought you were going to bring up the ism uh you know institut of Supply managers do a service index services are booming you know they've been in growth for the past however many years three years now um so while manufacturer Contracting I mean the US economy is a you know it really is more so of a service economy and I mean all services Retail Services restaurant services are considered to be but as well as business services government services so um I don't know maybe that's just the way it is maybe we'll just never be able to make stuff as cheap as they do in India and we you know we subject ourselves to being a service economy but um I don't know that's a scary thought for a lot of people all right one other topic this is also about taxes but it comes from a Twitter thread that I found really interesting published by Mitchell Baldridge he's a CPA who founded an accounting firm in Houston he wrote a series of tweets proclaiming that small businesses are the best tax deal in America um he points to a number of things including the ability to DCT deduct business expenses the pass through structure that we talked about uh I'm curious you know a lot more about this than I do do you think small businesses are uh the best tax deal in America so I think it's a great tax deal if you if you want to cheat on your taxes you know you talk about like um you know you could deduct business expenses so you're like okay well you wouldn't have those expenses if you didn't have a business unless you're putting your personal expenses including them in your business expenses which means you're cheating on your taxes you know what I mean so you know some people be like oh well you could buy assets you can buy your car and uh have that as a business expense I'm like yeah well the there is a great area there right yeah yeah they're pretty clear that you know you have to have a personal and a business use of your car so you know you shouldn't be deducting any expenses related to your car that's not for business use and again if you didn't have your business you wouldn't have that expense would you you know so I you know I think the only the only support I could give to his point of view Lauren is um is a building value kind of thing you know like you know if you're it's if you run your own business um you've got the ability uh to build an asset that will go untaxed until you sell it I mean assuming putting aside all the unrealized gain debate that's going on now but it will theoretically go untaxed until you ultimately sell it so you're you're basically you know you running something getting tax in set as for doing that I mean you're getting your business tax deductions and all of that and if you're doing a good job you're you're building up your retirement or something you can pass on to your you know your heirs or your successors or sell and uh from that standpoint that's great I mean that's why people run businesses but they they're not doing it for tax reasons they're doing it for lots of other reason other than just save on their taxes I don't think you start a business to save your taxes I'm not sure he was suggesting that people do it just to save on taxes but I think he was saying it is a great tax deal um and and I really wanted to hear your opinion of it because yeah and then think about it like compared to what I mean like say you don't run a business say you're a uh you're an employee at a company you know so you're getting taxed on your income but as an employee at your company I mean you have all the tax tax you know the the 41k plans the Roth plans uh the restricted stock plans the deferred compensation plans depending on your level uh that you would have at a business um you know whatever money that you're you're making I mean again you've got lots of ways you can save on taxes that way is you know with your the Investments that you're making you put it into municipal bonds and don't pay any taxes on those you know let me ask you about that because I didn't understand this one of his um one of his uh tweets in the thread uh read this way SMB owners are able to provide benefits for themselves including medical and retirement even better when the business is a solar solo Enterprise I'm not sure why that would be medical reimbursement plans seps 401ks pensions offer potentially hundreds of thousands in tax savings and deferrals does he have a point there uh I I think you need to talk to anybody that works at a big company and let them compare the benefits they're getting I can assure you that you know that employees working at larger companies are getting a lot better and Me by the way as a business owner if I was working if I was still a partner at KPMG at this point um you know my my health plan and retirement plans would be a lot better than what I'm getting in my own business so no I don't I don't think that's true at all I think when I look at when I look at my kids who work at you know big companies and I look at the benefits that they are getting they're way better than what I'm getting as my own you know my own business so I'm not quite sure that's true you have me convinced Jean but I I want to go through a couple of other points I think it's interesting and maybe we we I'll learn something from this he also writes there is also the opportunity to own your own real estate with your business owning your real estate uh directing your business allows the expenses to be deductible and are qualify for a 199a I don't know what that is uh clearly owning your own real estate if you have a business is a good thing is he making a good point here yeah I mean like owning your own real estate I mean whether you can do this yourself you don't have to necessarily have a business per se to have that um his 199a that's that pass through deduction I was talking about earlier with uh got it uh you know with with you know with Harrison Trump um you owning your own real estate you people can do this individually and you know and that's a separate p&l if you own your own real estate whether you form you know an entity to do it or whether you just do it on your own tax return yeah of course you deduct you know your expenses against that you know that real estate that you own um I don't see what the difference is whether you do this individually or if you do this as a business owner you you're saying that someone who has a job at a big Corporation could also invest in real estate it's exactly what I'm saying yeah yeah it's exactly what I'm saying so I'm not sure I understand um what the point is I mean you're not living on your business property because if you were you wouldn't be able to deduct all those expenses because it would be a personal I guess there's some advantages in the sense that you if you're if you're your own landlord there's um it remove some of the problem with filling the real estate that you invest in but but I take your point um he also mentions the uh qualified business income deduction uh and the potential to hire your spouse and your kids obviously they their mixed results well with anybody who knows anything about a family business knows that that's not always a huge benefit so let let me also let me also speak thought about hiring your spouse your kids and by the way it's not even a matter of hiring your spouse or kids you can be hiring anybody you you you know first of all if you're going to hire them it means that they're performing a job that needs to be done you can't just put them on your payroll and pay them if there's not work that they're being done that's cheating on your taxes so whether you hire your spouse to be your I don't know your accountant or you hire an accountant to be your accountant you're still spending the money you know I mean it's it's still going out you have payroll taxes you have uh you employment expenses as well so there there's really no you know there's there's no difference to doing that I mean again it gets back to my statement about cheating on your taxes if you're going to be hiring your family members to do Phantom work then you know if you ever get audited and a smart IRS auditor says what were they doing and you know and and it was it's made up stuff just so you can pay them and get a tax deduction for it um that's you know that's cheating so no I don't think that's any kind of an advantage at least not for tax unless you're Tony Soprano and you like to put people on your payroll he gives you power um this guy has a pretty high profile he has a lot of Twitter followers I have actually spoken at a conference where he's spoken um he has an accounting firm I assume it has a lot of small business clients any idea where this is coming from no I mean I think that's his point of view and that's his pitch and I think that you know um you know I I just I don't think that owning a business you know to save your on taxes um and I don't think that being a business owner you know for the purpose of Taxation is a conversation to have like I don't I I don't think that's the case like I said you own a business to build something of value and that to me an unrealized asset that's the biggest TX Center that you have um and just because he has a lot of Twitter followers I mean come on you know I mean you know Selena Gomez has a lot of Twitter followers you know I'm not quite sure if you can spell Twitter so yeah I I I that doesn't impress me fair enough um anything you're working on that we should look for this week yeah I'm gonna I think I'm going to write a piece uh I interviewed a bunch of people that are uh working on Etsy new stuff on Etsy and how they're succeeding on that um that's going to be a big piece that I want to I want to write about that's really you I was just talking to someone who's on Etsy and they're annoyed by the uh the percentage that they have to give up and they're thinking about they'd like to switch to shop Shopify but the transition seems more difficult they're not sure what to do yeah and you know what's funny is the um what I learned with Etsy as well which all write about is the uh uh you know the people I talked to a lot of them don't they only sell on Etsy because Etsy makes it they give you a lot of incentives to drive everything to their site you know the more that you drive through them the lower your fees get you know what I mean um so you know like I've always said to you know I've always thought like oh if you're going to be selling online you should be selling on Etsy and you know have your own Shopify sites and you know Amazon like have different channels but there there is an argument to be made for just funneling everything through one channel because that way you can maximize sales and minimize your fees and I thought that was an interesting point although obviously you're taking a certain amount of risk being on one place if they change the rules or something y i look forward to seeing that Gene marks is a CPA who writes weekly on small business for the guardian the hill the Philadelphia inquire the Washington Times the Chicago Daily heral Forbes an entrepreneur you can also hear him on ABC radio's ey on the world with John Bachelor Jean hosts two small business podcasts with Paycheck Corporation and the Hartford this episode was brought to you by the great game of business which helps businesses use an open book management system to help build healthier companies you can learn more at Greek game.com thank you Jean thank you Lauren we'll see you next week have a great week everybody