The 2017 Tax Cut and Jobs Act (TCJA) impacted returns for the first time this year, bringing considerable change and causing mass confusion among taxpayers and tax preparers alike.The TCJA is the most comprehensive tax reform since 1986. One of its biggest changes was to increase deductions, primarily for business owners and investors. Unfortunately, due to a lack of education by CEOs/founders, investors and tax preparers, many entrepreneurs failed to take full advantage of the new tax law benefits, as a result.
As I traveled the country this past year speaking to thousands of entrepreneurs and investors about the tax law’s new benefits, I found consistent misunderstanding. With few exceptions, attendees at these events were unaware of the many new deductions. Based on their questions, below are the most overlooked ones I heard about during the 2019 tax season that were connected to 2018 returns.
1. The 20 percent pass-though deduction for small business was missed.
At one event, I spoke to 50 collision-shop owners. When I asked them if their businesses were structured as pass-through entities such as S corps, partnerships or Schedule Cs, all but two hands went up. Then I asked how many of them had heard about the new 20 percent pass-through deduction on business profits and how to determine if you qualify. This time, not a single hand went up.
It’s unlikely that not one of these business owners received the deduction on his or her tax return. However, it is very likely that the majority of small business owners remain unaware of this change. And if millions of entrepreneurs and tax preparers skipped this 20 percent pass-through deduction, the tax savings missed probably total billions of dollars.
To save on their own 2019 business tax returns, entrepreneurs and investors should have a discussion about this deduction with a tax preparer ASAP!
2. The bonus depreciation deduction for real estate investments was missed.
Unfortunately, many real estate investors missed the new bonus depreciation deduction. After my presentations, a good number of real estate investors and syndicators asked about this new tax benefit. Apparently, few knew it even existed for both new and used property.
And in some cases, I had to get on the phone with their tax preparers to explain how most of their property could now be written off completely in the year it was acquired, even if the property was being used. Many attendees also were unaware that a real estate syndicator could opt out of the 30 percent interest limitation rules and still take the bonus depreciation.
3. Inventory deductions for small retailers were missed.
The biggest missed deduction of all? That would be the deduction for inventory by small retailers (with less than $25 million in gross sales). This miss has been egregious.
While the Bluebooks (explanation by the staff of the Joint Committee on Taxation) make it very clear that small retailers may now deduct inventory under $2,500 per line item when the inventory is purchased, rather than waiting until it’s sold, people told me their CPAs said this move was was illegal. In fact, at one conference of retailers, another CPA in the audience was telling people they would be assessed a 40 percent penalty if they took this deduction!
Fortunately, some of the participants in these meetings went back to their CPAs and insisted that those tax professionals research the new law. In one case, a pharmacy owner’s CPA, who initially had been resistant to the idea of deducting inventory at the point of purchase came back following his research and told the taxpayer that his taxes would be reduced from $400,000 to $45,000 if he made this change! That one change actually saved that man’s business.
Clearly, entrepreneurs, investors and CPAs or others educating themselves about the new tax law, aren’t reading it. They are relying on articles or courses to learn about the changes. And that’s not always smart because those sources may simply be wrong. How to avoid that outcome? Study the law.
My wife and I, for instance, both own our respective CPA firms and we have spent countless hours reading the law, regulations and rulings, as well as taking courses to get other professionals’ opinions of how the law works.
In sum, entrepreneurs deserve better than they got this tax season. As a major engine for the U.S. economy, the TCJA set up many new tax incentives to reward small business owners for creating jobs, investing in businesses and buying goods. And what a shame that opportunities were missed.
So, to learn how to “save way more money and pay way less taxes,” as I call it, get educated on the new law. Schedule a meeting with your tax preparer and ask questions instead of waiting until it’s too late. Every transaction is an opportunity for a tax deduction, and for potentially millions in savings over your lifetime.
