Blog | Personal Finance

Secret Stimuli: How Trump’s Tax Plan Can Benefit Entrepreneurs

Think of the new tax law as a series of incentives for business owners and real estate investors

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President Trump’s newly implemented tax plan (aka the Tax Cuts and Jobs Act of 2017), which passed both chambers of Congress in late December, is designed to bring relief to the middle class and small businesses. However, the way I see it, the largest benefits will hit entrepreneurs and real estate investors. As you know, entrepreneurship and real estate investing is what I preach, so this news perfectly aligns with my business philosophy.

Because the last time the U.S. had a major tax reform was 1986, I decided it was a good idea to sit down with Tom Wheelwright, Robert’s and my personal and business accountant and Rich Dad Advisor on Taxes. Aside from being a CPA, he’s also a best-selling author, entrepreneur and worldwide authority on tax—so I knew he’d already be well-versed in the new tax rules. And frankly, if you or I even took the time to read the 479-page tax bill, we’d likely find it incredibly confusing—so I’ve taken the liberty of bringing you three of Tom’s major callouts below:

1. 20% Pass-Through Deduction

Generally, business owners and real estate investors receive a 20% deduction of their net income after depreciation and amortization. Now, the 20% deduction is capped at either 50% of wages or 25% of wages plus 2.5% of capital assets, whichever is greater. Because many real estate investors do not pay any W-2 wages, the deduction normally will be limited to 2.5% of the original cost of the building and equipment.

So what does this mean? For the very first time in the history of U.S. tax law, you can reduce your taxes by becoming a small business. If you are a pass-through business (a sole proprietorship, a partnership, or an S Corp), be sure to sit down with your tax advisor and discuss the rules and limitations (they are complicated) to see if you qualify. Essentially, the government has decided that earning income through a business is so much better for the economy than earning income as an employee, that they’re going to reward you by taxing you on only 80% of you income. Note: If your income is less than $157,500 as a single person or $315,000 as a married couple, you have no limitations.

2. Bonus Depreciation For Leasehold Improvements

Under the previous law, roofs, HVAC and alarm systems depreciated as if they were part of the building—which meant depreciation over 39 years for commercial property and 27.5 years for residential rental property. The new bonus depreciation rules make these items entirely deductible. For instance, instead of deducting a new roof through normal depreciation, 100% of the cost is now deductible in the year it was purchased.

So what does this mean? If you spend $500,000 improving your office this year, you’ll receive a $500,000 deduction this year. If your rental property needs a new roof or AC unit this year, it’s 100% deductible this year. How great is that?

3. $12,000 Exemption For Wages Paid to Children

It’s time to pass along your amazing work ethic to your offspring. The previous law stated that a child could be paid up to $6,350 without paying tax, but under the new Trump Tax Plan, a child can earn up to $12,000 without paying tax.

So what does this mean? This change creates a tremendous incentive for parents to hire their children—our government wants you to teach your children how to work! If you have a child who can provide legitimate services (think: social media, marketing, technology, bookkeeping or modeling) for your business, you’ve just turned your kids into an asset. Plus, you can control where their money goes since they are under-age—what a great way to save for their college fund! Note: The child must be legitimately doing the work and you must pay a reasonable salary.

Rules of Engagement

Now, I should point out that there are four questions you (and your tax advisor) should ask yourself in order to create a legitimate deduction:

  1. Is there a business purpose?
  2. Is this an ordinary (or typical) expense in your industry/business?
  3. Is this expense necessary (the expense should create more income)?
  4. Do you have documentation (keep receipts)?

If you can confidently answer yes to each of these four questions, then congratulations! You’ve got yourself some rock-solid deductions and you’ve just increased your financial literacy.

For those of you who already have a business, it becomes fairly easy to see how you can immediately start taking advantage of the new tax rules. And the best part? They are not only legal, but it’s evidently what the government wants us to do!

Tom loves teaching entrepreneurs how to reduce their tax burden and increase their wealth, and this new tax plan provides the perfect example of how to do it properly. He refers to these new deductions as “secret stimuli”—so it’s up to you to work with your tax advisor to make sure you’re retaining as much of your money as possible. Simply put: If you follow what the tax law tells you to do, you will make and keep more money.

If you don’t yet have a business or aren’t investing, then it’s high time to start. Work with a knowledgeable tax advisor to build a strategy around deductions and tax law, to ensure you have getting every benefit you are entitled to. Shouldn’t we all strive to pay the least amount of taxes as possible?

Original publish date: February 08, 2018

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