Dashboard: You Can Still Save on 2025 Taxes!

Welcome to another 21 Hats dashboard. I'm Lauren [clears throat] Feldman and I'm here with Gan Marks. Hello Jean. >> Hello Lauren. Been a while. >> It has been a while. It's great to see you. >> Good to speak with you. >> Let's talk about taxes. Gene, I know you like that topic. >> I do. [music] >> You wrote a piece recently about how for some small businesses, emphasis on some, the pass through structure may no longer be their best option. Why is that? >> Yeah. So, um, as I've been, you know, running around the country and talking to a lot of businesses and also to some tax experts and and whatnot there, there were some big changes that were made by the, uh, the tax and spending bill that, you know, went into law back in July. And >> the big beautiful bill, I believe you're referring to >> the big beautiful bill. Yeah. And it is, uh, because of those changes, um, they are, uh, motivating a lot of uh, businesses that I'm talking to to take another look at their tax structure. And uh let me explain to you why. Um most businesses are pass through entities. You know, they're S corporations or uh partnerships or limited liability companies. >> Do you mean most small businesses or most >> most small businesses? Most small businesses. So um you know, being a pass through entity, you know, and again not to insult the intelligence of anybody, you know, listening to this, but you know, whatever money that you make at the corporate level is not taxed at the corporate level. It passes through to your individual returns. So um there is a deduction there which allows many pass through businesses to uh deduct 20% of those earnings before they hit their personal returns. Um and they are um that's been a big tax benefit. It was going to expire. The tax bill not only renewed it but made it permanent. So that's really you know that's good news for a lot of businesses. um because that was made permanent and because the corporate tax rate is also has not been touched and is still you know hardcoded in the legislation. Um a lot of companies are taking a look at whether or not even with the pass through deduction uh it makes sense for them to stay as a pass through. And here's the reason why. Um individual tax rates are higher than the corporate tax rate. Um I mean the top individual tax rate goes up to like 37% for higher earnings but they range between 25 and 37%. The corporate tax rate is 21%. So I have a number of companies that are saying wait a second if we convert our entity from a pass through to a corporation we would be paying less taxes even with that pass through deduction because the corporate tax rate is so much lower than the individual tax rate that they are paying. And there has been um quite a lot of movement among companies that are reconsidering and actually making those changes. Um, and they're doing that for, you know, you know, over the next year or two. It's not something that they're, you know, they're immediately, you know, jumping on, but they've realized that there's a big tax benefit for doing that. Have I explained that so far correctly? >> Very well. I think uh here's my question. You, as you've laid it out, if I understand, um, if you go the CC Corp route, you pay the 21% corporate tax rate. uh if you go the pass through route, you get that 20% off the top, which is uh a big deal. Uh [snorts] you're saying that it for some companies it might be an advantage to shift from the uh pass through to the CC Corp structure. Um >> but I think you wrote in your piece that that doesn't apply to all companies. you I think you said you really have to be in the very top marginal tax bracket where you would be paying 37% on your personal taxes. Do I have that right? >> No, I mean I don't think that that's a uh black and white. I mean I used as an example because that's the biggest difference. But really again it's it's people that are paying more than 25% as an effective rate all might be in play to consider making this change. So, you don't necessarily have to be in the top tax bracket to, you know, to find this to be a benefit. It would affect uh many taxpayers. The um the biggest issue, Lauren, is getting money out of the business. You know, um the reason why is because with an SC corporation or a pass through, you can just distribute money, you know, out to yourself. Uh again, all the money is being taxed at the individual level. But with a Ccorporation, you know, as cash builds into your business, um there are only three ways to get the money out. You can pay yourself more, but you'll pay taxes on that. You can issue dividends, but you'll pay taxes on that as well. Or many companies are looking, you know, seriously at doing loans from their business. The kind of practice that's done by sort of the 1enters. So, if you build up cash in your business and you take a loan out against that cash, just a loan to your shareholders, which is you, um, and as long as it's structured the right way and it's documented the right way, um, it's a way that you can get money out of your business still without paying any taxes on that. Just bear in mind that that loan is on your books. So, if you ever go to sell your business one day, um, that loan's going to have to be addressed. But that's another way that people are using to get money out of their businesses when they have a CC corp. >> Well, that that also addresses [snorts] the issue that if you're a pass through structure, you pay taxes on all of your earnings, even if you leave the money in the business. >> Correct. >> Whereas with a CC Corp, that's not the case. >> Well, you pay No. And the CC Corp, you are paying money on all the earnings. Um, you know, it's staying in the business. So, you're right. you pay no taxes again. It's like they call it double taxation if you dividend it out to yourself, you know. So again, the way to avoid doing that is you structure loans to take the money out. So that's another advantage. Now, by the way, there are other advantages to C corps if I can also explain. Um they are they're more corporate obviously. So you can bring on outside shareholders if you're a company because there has been a huge wave in private equity firms buying up small businesses. Private equity firms almost to you know to complete uh uh they they require companies to be Ccorporations because it makes it easier to do those transactions where you can have outside shareholders in a company more than the 35 shareholders allowed by an S corporation. Um, so CC corps provide, you know, that benefit. They provide more governance. They provide more structure. So there's other benefits, you know, to being a C corp. It kind of makes you official. So, you know, I had one client down in Texas. Um, they they're all S corps, right? Right, Lauren? And they they have numerous entities. So they've got their main company and the guy's got like five real estate companies that own properties and you know that that you know that money is coming in and um all that income is being taxed at an individual level and what he's done is he's moved forward and he's created a CC corp for his main company and he charges a management fee to all of the other real estate companies because they are doing all the managing of that. So all the income comes into the CC corp, which means all of those other companies that where the money was passing through to his individual return at a higher rate, that no longer happens. It all goes to the CC Corp. So now he's only paying the 21% corporate rate. And as he's building up cash in that corporation, he's got shareholder loans uh that he'll take money out when he needs that money um you know for you know you know for his own personal purposes. So that has saved him a significant amount on taxes already. >> That's a pretty complicated structure that probably doesn't apply to a lot of people listening to this. You'd >> be surprised. A lot of business owners own property and a lot of business owners have their they have their facility. They have one, two, or three properties, business properties that they own. It's very common to set up separate entities for each property. Uh you know, there's tax and organizational reasons for doing that. And many business owners that I see because they they're used to doing these passroughs, they set up their properties as passroughs as well. So all the income that those properties are generating are being taxed at their individual rates. So it it it it involves looking at your entire setup um and coming up with a way to funnel all that income into your Ccorporation so that you can pay that 21% uh rate instead of uh your your higher rate from before. All of this is being um you know motivated because the tax bill you know again that passed in July made a lot of these things permanent and I realize permanence only means so much but for the most part it's it's permanent and whereas [laughter] like the ethical deduction was going to expire so there was still too many things up in the air but now that some of those things have been settled a lot of business owners are looking out now over the next four or five years and they're making their um their plans. they can they can make more concrete decisions as to how they want their tax structure to look. That's what's driving it. >> What's the best step to take if a business owner wants to figure out whether this would make any sense at all for them? >> I can tell you it's it's just math. It's just math. So, I'm not saying you have to be a tax expert. So, you probably want to talk to your accountant about this. But, you don't have to be overwhelmed. You you spreadsheet it out, you I mean, you say, "Okay, here is my current structure, the company that I own or the real estate entities that I own or whatnot. Um, here's, you know, my my income statement for 2025. Here's what I paid in taxes. This is what it is." Now, if I did scenario B and I changed over where I converted to a Ccorporation and had that sort of new structure, let's do the numbers again and let's see what our tax liability would be. and you compare plan A, your current plan to plan B, you know, the proposed plan, and whichever plan saves you the most money in taxes over say the next five to seven years seems to be the way to go. >> So, for a lot of businesses, it could be quite simple. I mean, if you don't have the real estate issue, if you just have uh whatever you're taking out of the business uh as a pass through, say it's $100,000, um that would be a simple calculation, right? >> Yeah. I mean, it it really could be very simple. So, it really depends. But regardless, it's it's important to sit down with your accountant and go through this. >> All right. Uh on a somewhat related topic, uh that big beautiful bill did create a lot of changes other than this uh that can affect small businesses. Have you been tracking those? >> Yeah, there have been quite a few changes and quite a few um things that business owners need to make sure that they are um you know, keeping on top of. So, I know you always ask me like what I'm working on, but um one one column that I'm working on right now for the Philly Inquirer um is about the no tax on tips and no tax on overtime. Um you know, as much as that sounds like a great benefit, um my take is that is going to create great headaches for business owners, particularly this year, because there is a lack of guidance as to how this these numbers should be reported to your employees. And trust me, your employees are going to want to know if they're getting tipped income. They want to know what income is eligible so can they can take a deduction against it. >> And it's not it's not all tipped income that's eligible. >> It's not all tipped income. And then the same thing with overtime, it's not necessarily all overtime income either. It's it's your differential. Um and the limits are different. And you know what people um I'm I'm realizing a lot of people don't understand is that the tipped income and the overtime income, this is a deduction that the employee takes on their own individual returns. you know, they don't get a benefit for it this year until they file their tax returns. And to take the deduction, you have to know what that qualified income is. And because there's there's no, you know, um separate reporting for it yet for 2025, the onus is really on the employer to um determine the numbers and report that to their employees in in some way. And some employers may be doing this better than others. And I am warning uh all employers, if your employees get tipped income or if they get overtime, they're going to want to know what those numbers are so they can take the deduction and they're going to be knocking on your door asking for it and you're going to need to know, you know, be able to provide them with answers. So, I do think this year um there's going to be a lot of headaches for employers because of that. >> Are you aware of anybody who's introduced software that makes this easy? So the payroll companies are all doing their best to help and obviously companies like into it uh you know with Turboax are also doing it but it's not it the rules are still unclear right now. The forms have not been updated for 2025. There's no separate place to put the eligible tipped income on a W2 with the same thing with a with overtime income. Um and it's still up in the air as to how we're determining this. So, you know, as good as the software companies might be, they could only deal with the information you deal with the information they have at hand. Um, the shutdown did not help at all. So, the IRS, you know, you know, fell behind in in providing this guidance. And the guidance that was provided is basically like, okay, we're going to give the employees employers, you know, leeway into figuring out, you know, what to do. um you know and which which leaves it open for employers to to decide how they want to determine tipped income or overtime income. It it's something that I'm just advising my clients and also for other employers. Um be aware of this. Start this calculation now. The W2s are going to be due by the end of January. So you're you know you're going to have to include somewhere on that W2 at least, you know, or have a backup as to how you're coming up with these numbers. So that um and then you have to be prepared because once those W2s go out and your employees start doing the returns, they're going to be coming to you for some answers. >> And that rep uh applies retroactively to all of 2025. >> It does. It's the entire year of 2025. So you have to go back and and run those numbers. And um and again, you need to be prepared to do that. And it's worth, you know, uh it's it time is running, you know, it'll be running short before your employees start knocking on your door. >> There's also some good news, isn't there? looking at 2026 in terms of some uh tax deductions that are coming back such as the research and development credit. >> Yeah. So there's um it's a research development deduction not a credit and people always make that you know sometimes get those confused. >> Yeah. The credit is a separate calculation that you can take against the taxes that you owe. The deduction is a deduction against your income. So up until, you know, 2022, you were able to, you know, if you had any research and development costs, you could just deduct them right in the year that they were incurred. And then by 2022, you then had to start advertising them over five years. Um, so that was a, you know, not a help to businesses, but that's now been reinstated. So for it started for 2025. Now you can start deducting your research development costs in the year they are incurred and you can go back to as far as 2022 um and and recalculate that deduction and amend your returns and get benefit for it. So all of that has changed and that's a big that that's a big help for a lot of businesses that do research and development. So that you can go back look back if you made those uh applicable investments you can but obviously you can't go back and and make investments in 2022 but you can think about that for 2026 right. >> Yeah. Well, absolutely right. But if you did spend money back in 2022 and u you could deduct it all in that year and you had to advertise it over five years. Um you could go back and and take that deduction in that year. And depending on how much money you were making or what your situation was, it might, you know, it might create a better tax benefit than if you had just advertised it over five years. You need to take another look back and see what makes the most sense for you. And again, that's sounds like it's something that you want to include your accountant in those [gasps] conversations. >> Well, because it it won't just affect that one year, 2022. If you take it all that year, it means you're going to get less of the benefit in the following years that you advertise. >> That is absolutely right. And again, depending on what you earned in those following years, maybe you don't need that benefit, maybe you do. It really kind of depends. >> Anything else we should be thinking about as this year comes to a close? Yeah, you know, I mean, it's as as you and I are having this conversation, it's it's late in December, so making last minute tax moves is always tough, but I do have, you know, ju just a couple things, you know, you know, I'll give you three things. Um, number one is clean up your inventory. I know that sounds basic, but so many of us are carrying around inventory that's old or out of date and it's taking up space and incurring overhead. And if you if you write it if you get rid of the inventory, you have to dispose of it, you could take a write off for it against your taxes, and you might as well do that. I have a lot of clients that take advantage of the year end to to get rid of their inventory. The same thing with receivables. You might have some old receivables that have been outstanding for a while. And you know, I mean, if it's not something you think you're going to collect anytime soon, um, or become a write them off, take a deduction for it. I mean, keep a separate list somewhere else. Maybe the money will fall from heaven someday. Um, but you should try and get it off your books and take the deduction for it. And then finally, you know, to the extent that you can max out your retirement contributions. Remember, you can do that to as late as March 15th um to max those things out. But, you know, whether it's an IRA or your SE plan or your 401k, um, sit and look at what your profits are and uh, you know, try and contribute as much as you can to reduce uh, to reduce your taxable income. >> Those are great tips. When you talk about getting rid of inventory, are you suggesting just getting rid of it or having a fire sale? >> Disposing it. I mean, if you haven't gotten rid of it at this point and you can't sell it at this point, um, you probably just want to scrap it. But, you know, I mean, listen, if you think you can sell it, by all means, go for it. I mean, a lot of business owners hold on to it because they're like, damn, you know, we're not selling it for anywhere near what we thought we were going to get. But, you know, that's what you thought you were going to get like eight years ago. [laughter] it's still sitting there, you know, like collecting dust. You like squirrels nesting in it. You know, I think that's a sign to get rid of it and it's just taking up space. So, you know, I'm sure you made many, many good decisions and bought really great inventory in the past that you sold for many times over in profit. But, okay, you know, you're not perfect. None of us are. So, maybe that piece of inventory wasn't such a great buy. Just get rid of it, move on, take the deduction. >> Those are great tips. anything else you're working on that we should know about aside from uh the piece you already mentioned? >> Yeah, I mean I'm working on a piece for Forbes right now, Lauren, about um uh switching over to AI because I cover technology for Forbes and I've got three specific AI apps that are um actually working for business owners this year. Um because a lot of it is such overhyped stuff. Do you know what I mean? Sure. But um I'm recommending that you know based on what I'm seeing out there covering seeing with my own clients there are three types of AI apps that are starting to actually provide benefits for small businesses and u but I'm not talking about just chat GPT. I'm talking about some other stuff. So that's what I'm working on right now. Maybe we can talk about that next time. >> I'm sure we will and I will look forward to that. Gene Markx is a CPA who writes weekly [music] 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 [music] on the World with John Bachelor. Gene hosts two small business podcasts with Paychecks Corporation and the Hartford. Gan, if I don't talk to you before then, have a great set of holidays, and I look forward to uh catching up in the new year. >> Me too, Lauren. You too. Take care. Have a good week [music] everybody.