Jason Hartman hosts Ryan Schellhous, the founder at IndigoSpire CPAs & Advisors. Ryan gives us his background as a CPA and discusses the latest tax plan. He starts with an overview of the plan then goes into specific components to dissect the benefits of the plan. He explains who the winners and losers are under the new bill and how it will impact individuals and their families.
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Welcome to the Solomon success show, where we explore the timeless wisdom of King Solomon and the Bible, as it relates to business and investing false prophets and get rich quick schemes are everywhere. Let’s not be distracted by these. Instead, let’s go to the source, the eternal principles that create a life of peace, power, and prosperity. Here’s our host, Jason Hartman.
Jason Hartman 0:40
It’s my pleasure to welcome Ryan shell house. He is the founder and principal of Indigo spire, CPAs and advisors and he’s here to talk to us about a very, very important topic that affects everybody in the US very directly, but also all of you around the world have We have listeners in 165 countries worldwide. And this will trickle throughout the entire planet what we’re about to talk about, and that is the first real tax reform we’ve had in about three decades. This is extremely significant. I think it’s very good. For most people listening, you’re going to benefit by this. I think everybody ultimately will probably benefit through the Trickle Up, down and all around effect. But let’s see what Ryan says he’s a CPAs. And he knows his stuff. Ryan, welcome. How are you?
Ryan Schellhous 1:34
Great, Jason. Thanks. Thanks for having me on. It’s good to have you on about this. This is good stuff.
Jason Hartman 1:39
This is a big, big deal, folks. Everybody’s got to realize the single largest expense in any of our lives are taxes. So we’ve got to be good at this. We cannot be bored by taxes. We cannot lay it off on somebody else. We have got to have some degree of knowledge. Of course. We want to get Experts like Ryan on board to help us prepare our tax returns. But we’ve got to have some level of our own knowledge to bring to the table. Ryan give our listeners a sense of geography. Where are you located?
Ryan Schellhous 2:11
I’m in San Jose, California from been here for about three years. Now, a little bit about me, I spent my most of my career at Ernst and Young and Deloitte and Touche as a as a tax guy. So it’s been my pleasure to kind of strike out on my own a little bit. And our firm has got a bunch of people helping out and, and working for us. We primarily do tax and tax advisory, but we also have a small audit, practice, some advisory to kind of the traditional CPA services that you’d come to expect. Fantastic. Well, when I was introduced to you through a mutual friend a few, well, several months ago now, I was just always very impressed with your level of knowledge. And of course, you’ve got that big firm background, so that’s great too. But you know, without the big firm invoices, bureaucracy so I’m working on that part,
Jason Hartman 3:00
we’re gonna try to get those invoices and bureaucracy up, right? Yeah,
Ryan Schellhous 3:05
exactly.
Jason Hartman 3:06
Yeah, that’s that’s what happens ultimately with everything. But Hey Ryan, can we sort of take a high level view? And then we’ll kind of go down the funnel, if you will, on the GOP or formerly Trump Tax Reform Act? What are sort of some of the big nuggets that we want to know about? And then we’ll drill down?
Ryan Schellhous 3:23
Yes, absolutely, Jason. And I think that’s a great approach to kind of help get our minds around this. Like you’d said, this is the biggest reform in over 30 years. Since 1986. What’s the biggest changes to the tax code? In terms of complexity, the bill itself coming out of conference was over 1100 pages. And in terms of money, this is the biggest bill that we’ve perhaps ever had in terms of tax. From a high level perspective. There’s the way I like to think about is, how did these things get rated in terms of revenue, either up or down? Did these things cost the government are these things raising money And when you look at that, from from that perspective, the biggest items are and principally what’s been celebrated on the floor of Congress is the lowering of the corporate tax rate from 35% for most companies down to 21%. And this achieved a couple of different names right as a goal of the GOP to get it to there. But maybe more importantly, in kind of the big pictures that puts us more in line with all of our trading partners. Yeah, this is a corporate tax rate that for a long time, we kind of stood out as being much, much higher taxed to corporations than almost any other country in the world. This kind of puts us in line was just an
Jason Hartman 4:39
incentive for these companies to go offshore and do all kinds of crazy things. There are a couple of documentaries on this. I watched one of them. I think the technique that Apple and Google use to evade essentially taxes or avoid them. Maybe it’s the better word is the read the double Irish twist or something like that, you know, where they set up this entity in Ireland and Microsoft does a two they license the software and the pre intellectual rights just a big, big bunch of crap. And you know, this will make it so we’re not penalizing these companies to keep more of this money on shore. So are we gonna see a repatriation of wealth back to the US?
Ryan Schellhous 5:19
Well, yeah, and and perhaps the some of the most complex parts of this new bill deal with international taxation. So aside from the lowering of the rate, we’re moving to a territorial income system for corporations. What that really means is that under old rules, companies could be taxed on their income wherever they earned it, and all their subsidiaries would be subject to US tax. And generally, we would defer that tax until that money was brought back to the US, we’d create these structures and you know, this is what I did at Ernst and Young, I’m guilty as charged, right. The we used to set these structures up and we had kind of a playbook of places and strategies we use what it was, I learned Ireland, Netherlands, the UK became involved kind of towards the end with some of their tax reform. whole idea is that we would transfer certain types of intellectual property from big US companies to these low tax or no tax jurisdictions. And then they would exploit that IP outside the US and aren’t a ton of money. So famously, and it’s even mentioned in the conference report this bill, Apple has, you know, some more close to 200 and $50 billion sitting offshore and all these entities in cash, because it can’t bring that money back to the US without incurring tax, and maybe even more importantly accruing the tax for their financial statements. So this bill also provides a transition period, whereby apple and all the other companies that have money stashed offshore, are going to pay a one time tax of between 15 and a half and 8% of their stashed earnings. Once they pay that tax which is payable over eight years. They’re free to Bring that money back to the US completely tax free. So Apple, for example, their 200 and 50 billion, they paid $20 billion, which is a huge bill, but now they’ve got 200 and 30 billion that they can bring back to the US and do whatever they want with.
Jason Hartman 7:15
Wow, if that doesn’t trickle through the economy, I can’t imagine it can do anything else. You know, I heard this one commentator, you know, a CEO, and I didn’t catch the name because I came into the interview partway in, but you know, I was listening to CNN, in the car. He was talking about how I mean, he was obviously a liberal so he didn’t know what he was talking about. Little sarcasm there folks, but not really. You know, he was saying, well, all this is gonna do is make the rich richer, it’s just a tax cut for the rich etc. We don’t really need to hire any more people. So with all the money we save, I think, you know, it’s not going to help the economy. He says, I’m just going to go out and buy more real estate and stocks I’m thinking What a moron. I mean, he thinks that doesn’t help the economy that doesn’t trickle through. I mean, every time I buy a property, I look at how much more money I’m spending, you know, I’m hiring people to improve it to fix it up, you know, the painters, the flooring people, I mean, trickle down economics man, how do you how do you monitor see that in, and this is not a poor person. This is a wealthy CEO who actually thinks this way, I just couldn’t believe it. So lower taxes will trickle through, you know, it’ll cause more investment. investment is capital formation, capital formation creates employment, it creates wealth. You know, this is how the thing, this is how it works. folks
Ryan Schellhous 8:44
know it’s good. Right. And I think the Wall Street Journal is they’ve, one of the key aspects of this tax reform bill that we haven’t touched on yet is how quickly it came together. I was literally in conference maybe six weeks ago, outlining to the Participants at that conference that, yeah, tax reform, something everybody talks about, but never can get done. Well, they gotta go pull together these tough decisions. And then, and honestly, it all kind of started when Senator McCain walked into the vote for Obamacare repeal, put his thumb down and handed the GOP a defeat on Obamacare repeal. And that just mobilized the forces and that that’s how we ended up with the text pill we did today. There was so much political pressure to deliver us signature when by the end of 20 2017. This is where we’re at.
Jason Hartman 9:34
Now. They they did their work around they did it through tax policy, rather than through the Affordable Care Act or otherwise known as Obamacare. That has been obviously Yeah,
Ryan Schellhous 9:43
well, we’ll talk about that is one of the provisions Yeah. Okay, good. We’ll talk about that. Now. Why don’t you talk about the the mandate requirement, I guess it’s been lifted, right. So one of the principal aspects of Obamacare was required everyone to get insured, either through an employer or through the Individual exchanges or through Medicaid. And what this bill does. Interestingly, it’s not even one of the highest scoring revenue, losers to the pill. The penalty for not purchasing insurance now is statutorily set to zero. So, like you said, it’s using tax policy to a repeal of certain parts of Obamacare. Now, if you do not go get insurance, like you’re supposed to under Obamacare, you still have a penalty, it’s still calculated on your tax returns, the penalty will never be more than zero.
Jason Hartman 10:30
Love it. That’s awesome. It’s like getting a traffic ticket from one of those unconstitutional speeding cameras or red light cameras, right? You get your ticket in the mail. And instead of saying, you know, you owe 300 bucks, it says, yo, zero. You got a ticket, but you don’t know anything. Yeah, that’s it. All right. Intensive prizes. Nothing. Okay, good. Let’s get back to the big chunks. I’ll shut up about my political views. Because I’m getting some hate mail. I can tell people are already writing it. So go ahead.
Ryan Schellhous 10:58
Again, the biggest one was lowering the cost corporate tax rate to 21%. The next biggest one right after that was there was a substantial widening of tax brackets and lowering of rates for individuals. So the top rate used to be 39.4%. Now that the top rates 37%, and that trickles all the way through the rate tables, both for single people heads of household, married filing jointly, all the rates are down and all the brackets are wider. So you have to earn a lot more money in order to move up into the next tax bracket. Now,
Jason Hartman 11:31
that was a big one. So that’s a tax cut that right there is a tax cut for everybody or only most people,
Ryan Schellhous 11:39
everybody. So there are certain tax brackets that overlap a little bit from the old law. So you may not necessarily see a tax rate decrease at your exact level of income. But that’s $1.2 trillion worth of tax cuts just scored within this rate table. pension and rate decrease. So it’s a tax cut across the board for for almost everybody in terms of rate. Okay. Now, obviously there’s two parts to taxes. One is the rate and the other is the base upon which that rate is applied. And almost all these other provisions, we’re going to be talking about the base, either it’s broadening the base by eliminating deductions, or it’s narrowing the base by including other things that can be deducted from your income before those rates, which are now across the board lower are applied. Okay, go ahead. Just a little bit for your real estate investors out there who may be using their self directed IRA and incurring ubit. We’ll talk a little bit about that. No, no, there really is is
Jason Hartman 12:44
what’s that stand for, again? unrelated business income tax. Yeah, right. Yeah.
Ryan Schellhous 12:50
Yeah. And I don’t necessarily want to get into all the details about what it is on this interview. But for those who are subject to you, but they know who they are the rates that are applied on unrelated business income are now just slightly lower as well. So even those guys are winning a little bit. All right, good. Perhaps most famous as a relates to the for individual taxpayers, what we used to do is you would go through and you’d calculate all your items of income, and then you’d take certain above the line deductions, and then you’d apply either the standard deduction or your itemized deductions, whichever one was higher. Okay, so one of the things that is in this bill is the increase of the standard deduction. So more people will just use the standard deduction and will no longer be incentivized to itemize their deductions. So that’s a simplification, right? You could call it a simplification. There are some underlying policy things right? Some people may not be quite as incentivized to donate to charity, for example, because they’re still in the standard, this higher standard deduction so they wouldn’t actually see a tax benefit from a contribution to charity or something like that. But, yeah, it’s a simplification. And there will be a lot more people who can file these simpler 1040 forms now because they’re not necessarily going to be itemizing their deductions on Schedule A. Okay. Now, one of the promises that I think got ratcheted out in the political infighting and lobbying is the idea that you could file your taxes on a postcard, but that’s not gonna happen right now. Okay, not
Jason Hartman 14:24
okay. But, but it was a goal and we didn’t move in that direction, right? Granted, you’re gonna make a lot of money and people in your business are gonna make a lot of money, because we’ve got a new thing. You know, that’s the first new big thing in three decades. So you know, you’re going to be explaining it adjusting strategies for people, etc, etc. But overall, this is a simplification, isn’t
Ryan Schellhous 14:46
it? For some people, for a lot of individuals, that may be a simplification. There just be a little less paperwork they’ve got to keep track of on the international side. It’s more complex times for of what it used to be. It’s Someone’s got stuff going on overseas. You mean right? Yeah. Right. So for like the apples and Facebook’s that I’m sure no one is feeling. Sorry. Who cares?
Jason Hartman 15:08
Hey, listen, okay, Apple, Apple, the company I used to love and trust. I’m now really mad at them. They’re throttling back. Everybody’s old phone real scam. scandal finally broke. I’m glad they got nailed. Okay, so yeah, I hope to see some litigation on that one. class action. Yeah, I’m holding one of those. Yeah, I’m
Ryan Schellhous 15:26
holding one of those right now. throttled back. Wonder why it started going so much slower.
Jason Hartman 15:30
As soon as the upgrade comes out. They just kill everybody’s old phone. It’s what a disgusting, disgusting shame on Apple. But you know, no one listening is an apple executive that’s working in their tax department. Right. So you know, nobody cares about that. Very few people listening will have international affairs that they need to worry about. Most people are strictly arrest and they were taxed. Life is simple. All right.
Ryan Schellhous 15:51
Yeah. Yeah. Skip a lot of that stuff. Nobody needs to know the new definition of globally low tax and tangible. I don’t think that’s interesting for anyone. Okay, well listening right now, maybe some of the more interesting things is. So kind of like I’d mentioned before you start with income and you get rid of your above the line deductions. And then you take a standard deduction or an itemized deduction, then you used to take a personal exemption amount for the number of people in your household, that personal exemption amount is gone. And that’s actually the largest revenue razor in the whole bill is the elimination this personal exemption amount, and it’s being replaced by this higher standard deduction, as well as for the people that that exemption amount was benefiting or people had a lot of people in their household. Most of the time that that means you had several children that offset that revenue increases being offset by an enhanced child tax credit. So for those with kids under the age of 18, your child tax credit is going from 1000 to $2,000. And that’s a credit instead of a deduction. Again, a credits better than a deduction because it reduces your tax dollar for dollar and maybe more important For a lot of the people that might be listening, the phaseout income level is moving up. So a lot more people will have a chance to take the child tax credit. And that’s part of the reason they introduced that into the bill was to kind of offset the problems or the increase of tax that comes about by having no more personal exemptions. Okay, so is this an encouragement to have kids then? It’s in some respects, yeah, in some respects. Okay. Go ahead. What else few more things on the individual side, then we’ll kind of shift to some more of the headlines of the bill. You know, famously, the mortgage interest deduction remains, but the amount of interest you can take is capped to $750,000. of acquisition debt down from a million yet down from a million. Okay. There have been a lot of haggling over that. And so that’s kind of where they landed. It’s important to note this is for new debt, anybody who had you know, a million dollar loan before and was paying their grand selling Expensive extras. Those are grandfathered in even the reifies of grandfathered acquisition debt, as long as the new refinance amount is not more than the amount you owed on your old mortgage, that those are grandfathered as well. Right? Right. Okay, so purchase money or refi, so long as it’s not above or what original acquisition cost, right. And so anyway, whatever,
Jason Hartman 18:25
it doesn’t even matter, because you’re grandfathered. It’s just the old law. But this is going to have now this is going to have an interesting effect. I believe, Ryan, that overall, this Tax Reform Act is going to be massively good for the economy. I think it’s a huge stimulus, okay, overall, but, you know, okay, so say you’re winning and your life’s gonna be better, you’re gonna be more prosperous under this, and the whole economy will but if you’re going to go out and buy a $1.5 million house and live in it and have a $1 million mortgage You’re going to be a little less motivated to do that. Now, I did some math on this and you know, feel free to jump in on this. I was doing it this morning talked about it on another episode just briefly, but basically a payment on a $250,000 mortgage at four and a half percent I think I did it is about 1200 and 70 bucks a month. And so we’ll assume that maybe 1100 dollars of that is interest in the beginning of the loan, right amortized loan, that’s the deduction, you would lose that delta that $250,000. So this could put some dampening downward pressure on the high end market. Right.
Ryan Schellhous 19:37
I would expect so. Yeah. Okay. This is noted as a revenue raiser in the bill. So obviously the CBO guys, the Congressional Budget Office, guys anticipate it to have an effect as well. Yeah,
Jason Hartman 19:48
interesting. Okay, folks, go rent your high end home just like I’ve always told you to do and then buy a bunch of lower price rental properties. you rent out other people. Go ahead, Ryan, what else?
Ryan Schellhous 19:58
right there’s a limit on that. deductibility of taxes paid and this means it’s gonna hurt for a lot of folks. It’s gonna hurt the
Jason Hartman 20:04
items in the expensive places. Yeah,
Ryan Schellhous 20:07
yeah, so your state income tax property taxes, all taxes together sum together, is capped at $10,000. Wow, that that’s gonna hurt some folks. If
Jason Hartman 20:18
you’re in New York or California or Boston or New Jersey, you’re gonna get that’s gonna hurt.
Ryan Schellhous 20:25
Yeah, that that is gonna hurt some smaller bits that may be of interest to some folks. There’s a repeal of all the miscellaneous deductions that used to be in there kind of towards the bottom of Schedule A I know, that’s just tax geek language. But there were a number of deductions such as union dues, tax prep fees, hobby losses, loss on IRA, stuff like that, that we’re all subject to 2% for those are all those are all taken out. Okay, good. One of the things that people were excited about about some of the drafts of the bill is the repeal of the individual alternative minimum tax the AMD Yeah, yeah. MTX is back and is going to stick around however, and this is a huge revenue loser in the bill, the exemption amount is much higher than it used to be. So fewer people are going to inadvertently just bump into the AMT and something that the GOP has been trying to do forever with AMT is get this exemption amount scaled with inflation. So fewer people are going to accidentally look up their tax return at the end in April and be like, What does add back here in ante, that’s going to happen to fewer people.
Jason Hartman 21:34
Okay. So that’s good news, right, because fewer people will have to pay alternative minimum tax or AMT,
Ryan Schellhous 21:41
right? It’s not as good as what was initially sold right to the American public, but it’s not too bad. Okay. One of the signature pieces of this legislation, people are gonna have to bear with me because there’s a little bit of detail here is a special 20% deduction for all flow through income. Okay. There’s gonna be some exceptions to this. And I’ll kind of get into it here in a minute, Jason. But the idea is, since the corporate rate is coming down to 21%, a majority of American small businesses are operated as pass throughs and therefore wouldn’t benefit at all from this reduction in the corporate rate. So what Congress decided to do was enact this 20% deduction for flow through income. So for the tax geeks out there, like me, this is box one on the K ones, ordinary business income, you get a 20% deduction of whatever that amount is, that flows straight into your tax return. It’s a below the line deductions. So it’s kind of taken into account right before the calculation of taxable income, obviously, a huge piece of the legislation. A couple key caveats here. This amount of qualified business income that gets this 20% deduction. Everybody gets it To $315,000 of total taxable income for a married person or half of that for a single person 157,500. Okay, so if all you do is have an S corp or a partnership, and you earn $315,000 as a married person through that partnership as ordinary business, taxable income, you get a 20% deduction. And that’s the end of it. It acts funny as we move above that threshold amount of 315,000 for married people and 157,000 for single people. It act funny in two ways. That deduction goes away very quickly. And Hang Hang with me here, that companies that are in the performance of services in the fields of health law, accounting, consulting, financial services, brokerage services, or any other business where the principal asset is the reputation or skill of the employees or owners. Oh my gosh. That is a that is a tricky. I can imagine all kinds of arguments on this one and in Tax Court. Wow. Oh yeah. That’s where this is headed. So if you are one of those businesses that I just described, in your pass through company, as a married person causes you to have more than $415,000, that’s 20% deductions all gone. Okay, so between 315 and 415, it phases. But once you go above 415, the deduction if you’re in one of those businesses operating as a pass through, it’s all gone. So lawyers and accountants, doctors, they’re gonna have issues using this deduction the way they think they might get it. Okay, so let me I might be mixing up two things here. So forgive me if I am. But one of the things that people are very excited about is the reduction in the corporate tax rate from 35% to 21%. That’s huge, right? hugely significant,
Jason Hartman 24:58
correct. Yes, absolutely. The next part of that is, is that if you have an S corp, which is a flow through entity, or an LLC treated as an S corp, and you use the example of a partnership, I don’t I’m not too knowledgeable about partnerships, because I don’t do those. Maybe I have in the past, but can’t think of it with this. What have you have a small business owner who has an S corp or an LLC, or the real estate investor? Who owns a property or several properties inside an LLC with maybe an S corp election? I don’t know if that matters or not? I think it does. Well, how are they going to be taxed? Is this good for them or bad for
Ryan Schellhous 25:36
you? So it depends. First of all, let me start by saying the individual tax rates are lower. So even without this provision, if you have a profitable business, you’re going to save money. What this provision does is tries to get the people that operate an S corp any entity that’s even treated as an S corp or an LLC that doesn’t have an S corp election schedule. See businesses, this also applies. What it does is if you had, for example, after all the all the income and all the deductions, your real estate portfolio in an LLC made 100 grand, and all of your other income doesn’t push you over this $315,000 limit, that hundred grand only comes down to your tax return as 80 grand, and then you apply the appropriate tax rate. Yeah, good. Yeah. Good. What we’re gonna see a lot of just like you said is, you know, people that are doctors, lawyers, accountants, athletes, consultants, brokers, they’re gonna have a problem using this deduction at the higher income levels. So in other words, it may not be great for me for my real estate business, right? That’s right, depending on your you know, total taxable income at the end of the day, you may not see a benefit from this provision. The other kind of quirky thing that happens at the same income levels. 315 is if it’s not one of those businesses, then you have a different list. limitation that kicks in based on and I won’t get into the actual formula, but based on wages that your company pays, and assets that that company has, what they’re trying to do here, because they anticipated guys like us sitting around thinking, well, how can we avail ourselves of this? Right? They were worried about the doctor who makes way more than 315. So ordinarily wouldn’t be able to use this hive off part of his medical practice that’s maybe related to, you know, maybe puts all of the equipment into a different company, and that equipment is leased back to his practice that isn’t available to us this particular deduction. So there’s limitations on this, that they’re trying to prevent people from working around it. Moral of the story, Jason is that if you make less than $315,000, as a small business owner in one of these past two companies, you’re gonna see a benefit. above that. If you’re in one of these personal services fields, or in a company that doesn’t pay Lot of wages or doesn’t have a lot of assets, then you’re gonna see limitations. Yeah,
Jason Hartman 28:03
they’re they’re always trying to engineer things through the tax code, you know, this is it totally affects people’s behavior, at least smart people’s behavior. You know, if you’re paying attention, it better affect your behavior, because you want to align your interests with working through the loopholes and getting the best deal out of it. So no one can deny that, you know, it affects people’s behavior, any other big chunks,
Ryan Schellhous 28:28
there are a couple more big chunks. So this won’t be super applicable to the people you see here. But just for, you know, everyone’s knowledge, interest expense has been limited to 30% of EBIT, da earnings before interest, taxes, depreciation amortization, for companies that have more than 25 million in revenue, with the exception of real estate companies. So it’s meant to prevent companies from being over levered. Is that discouraging a lot of debt in your company? Is that what that’s doing? That’s right. Yeah. Okay, that’s right. For larger companies. 25 million and above. Yeah, got it in top. Revenue. What are some of the other good ones here. So one of the things that people always love to talk about depreciation, so we’re back in two worlds, we had this for a few years, and then it went away for a few years, but we’re back into the world where qualified, tangible property that you use in your business can now be written off 100%. So as soon as you buy, you can write off the entire value of that particular piece of property. Lots of exceptions, lots of things that you got to work through the key part all the times in the past, Jason that we’ve had that what we call bonus depreciation, it’s always had to be brand new equipment. What’s really awesome about this particular part of the tax bill is that does not have to be brand new. What this means for a lot of folks that might be listening is run don’t walk to when you buy a piece of property. Now you definitely should be taking a look and see, I know I just paid $120,000 for the single family home. I got a lot of assets that are bundled together that I bought for $120,000. And if you have a CPA or other qualified person divvy out for you that 120,000 into the different buckets of assets that you actually got
Jason Hartman 30:13
with cost segregation,
Ryan Schellhous 30:15
right? Cost segregation Exactly. But why that matters now more than ever before is because this provision here allows you to fully write off property even if it’s not new. So when you do cost like before, there was kind of a fun little benefit because some of the stuff would appreciate it five years or seven years. Yeah,
Jason Hartman 30:33
right. 16 years, right? A little faster than a house. But now, any of that five, seven, and for senior property, we get to fully deduct the day we buy it. Okay, so I’ve got good news for everybody listening. I just did a show with a company that is now doing cost segregation studies on single family homes. In the past this was mostly reserved for you know, Larger commercial properties, apartments etc. Because, I mean, you could always do it with your single family homes or your small duplex four Plex things. But you know, kind of didn’t make it sort of wasn’t worth the hassle, if you will, right, and the expense of going through the cost segues study, but this company does it for a much lower price. Because they have in I mean, I’ll let him speak. But I can listen to that on another episode. I just did the interview a few days ago, but basically, it’s an IRS approved computer model that does it so they can do the cost study really inexpensively. And you can get the accelerated depreciation on the various pieces of that the components of that property that can depreciate at a faster rate. But here’s my question, and this is what everybody’s asking and Ryan, I have a feeling you’re gonna be the Grinch on this one while you’re just the messenger, but I have a feeling I have a feeling you’re gonna tell us. There’s nothing in it for people who own properties currently like the properties they own. Ready? Do they get to take advantage of this? Or is it only on new purchases?
Ryan Schellhous 32:05
I’m gonna be a semi Grinch. So the way the bill is worded. First of all, before I get to answer that question, there’s gonna be a lot of technology out there that’s gonna help with cost sag. I mean, stuff we’re looking into for our firm as well. You know, it’s just a very cost effective way to only do single family homes with you know, the IRS is blessing because I think this is gonna be huge for some people to answer your question, Jason, is that it’s any property placed in service, that’s the key placed in service after September 27 of this past year. 2017. Okay, so if
Jason Hartman 32:39
you if you bought it, turned it into a rental property after September 27. Seriously, that specific? Yes.
Ryan Schellhous 32:47
Yeah, is that there must have been something that happened that day some some type of announcement or something, but yeah, September 27 2017. So if you made a purchase of a property in the fourth quarter of 2017 You’re in luck. Merry Christmas, but it but if you bought it three years ago, you don’t get this. Yeah, that’s correct.
Jason Hartman 33:05
Okay, well, now you got to do 1031 exchanges on all your properties and then buy new ones. So there you go. That’ll be good for my business. What about 1031? exchanges? Anything there? Well, yeah, there you can’t do it. Yeah, I know what you’re gonna say. You can’t do it on
Ryan Schellhous 33:20
cattle anymore, right? It’s limited only to real estate. That’s fine. And this is actually a revenue raiser. So Congress noticed that it was being used in ways that aren’t appreciating. So now it’s 1030 ones limited to real estate only. Right? Okay.
Jason Hartman 33:35
Yeah, well, that’s fine with us.
Ryan Schellhous 33:37
Okay, what else should we do a couple other things. We kind of get down to the some of the smaller items here. The section 179 deduction is expanded so you can write off more property. Now, that’s not as helpful in light of the accelerated bonus depreciation I just spoke of, but there are some properties that can be expensive under 179 that maybe wouldn’t have qualified for bonus So that’s, that’s good. Okay, well, nobody necessarily knows what 179 is. So you got to explain that, Oh, I’m sorry. That’s what everyone uses us for accelerated depreciation. Before we have this thing called bonus depreciation. So section 179. depreciation basically allows you to expense, the entire purchase of certain types of property, typically tangible property that you use in your business, if you’re a small business, kind of moving down the list here, so entertainment is no longer deductible. So entertainment used to be lumped with meals. And because Congress figured that everybody was abusing that anyway, they just said, if you’ve got meals, entertainment expenses in your business, it’s only 50% deductible for what you actually paid for it. Now they’re taking entertainment out. So if you were counting on your lawyer or accountant taking you to a, you know, out to a basketball game or something on Christmas vacation, I’d try and get that done before the end of the year because they may be less interested in doing it right.
Jason Hartman 35:00
Wow, that’s that’s sort of a big one. You know, that’s gonna affect people that sell tickets to high end events and season ticket holders and all that kind of stuff, isn’t it? Because the deductibility is going away on that stuff. Hmm.
Ryan Schellhous 35:12
I think that is gonna be one of the here,
Jason Hartman 35:14
that’s sort of a big deal. Actually, you know, that’s gonna affect a lot of things. It’s not meals, though. It’s just entertainment. Is that what you said? Just entertainment. Okay, so you can feed your clients and your, your vendors can feed you and take a deduction, but it’s only 50%, I assume, right?
Ryan Schellhous 35:30
Yes, it’s only 30%. Right. But
Jason Hartman 35:32
if they want to, if they want to take you to the ballgame, or the concert, that’s not going to be deductible. Hmm,
Ryan Schellhous 35:38
that’s correct. That’s correct. Yeah. Okay. That’s significant. It may be this is just interesting to, you know, a very limited number of people. There’s an expansion of the rules of the people that can use simplified accounting methods. So for some people, you your business got so big, you had to use the accrual method, which just added a lot of complexity at tax time. So the number of people that can continue to use The cash method is going to go way up based on those limits. A couple other smaller things here they got rid of the tax deduction for most commuting fringe benefits. So if maybe part of your commute or parking was being subsidized by your employer, that’s going to be no longer deductible to them. The corporate AMT they got rid of that that’s probably not ultimately super applicable here. Moving the moving deduction and moving reimbursements, those are both gone from the tax code. Whoa,
Jason Hartman 36:31
that’s a that’s kind of a big deal. I mean, I can’t tell you when I was a traditional real estate agent how many times I’ve worked with relocation companies and if you want to move in employee or you are an employee in your company wants to move you from you know, Seattle to Dallas or whatever, that deduction is gone for that expensive move.
Ryan Schellhous 36:50
No. So the company will still be able to deduct what they paid to move you out there, okay. You as the employee will have to include it as income now. Used to be that company got to deduct it and you got to exclude it. So kind of the best of both worlds. So now the company will get to deduct that moving expense that they paid on your behalf. Or you will have to pick it up.
Jason Hartman 37:13
Wow. Okay. That’s kind of that’s kind of significant. Yeah. Okay.
Ryan Schellhous 37:17
One of the things that, although it’s a very small revenue raiser and the bill that was politically charged is the carried interest.
Jason Hartman 37:25
Yes. Yes, man. Yes. Talk about the hedge fund. Yeah, hedge fund guys.
Ryan Schellhous 37:30
Yeah. But what I think we’ll actually start to see that kind of the trickle effect or the unintended consequences. But you know, for syndicators, of real estate deals and stuff like that, that maybe had something similar to carried interest in the LLC that they’re putting together, they’re going to have these same restrictions and which is really that they can’t treat the gains coming from their interest in the hedge fund or real estate fund, as being long term capital gains until they’ve held that interest for three years. Instead of just The one year
Jason Hartman 38:00
Well, that didn’t that didn’t happen though they didn’t change it or it’s
Ryan Schellhous 38:05
snowing. So they did. Okay.
Jason Hartman 38:06
So basically the effect there, which is interesting is it sounds like it’s encouraging hedge funds to hold assets longer. Is that true? I get that right.
Ryan Schellhous 38:16
Right, or just not allow them to get long term capital gains for something that they only held for a year. Right. So it’s urging you to hold it for a little while longer. scourging one year trades, essentially, right? Yeah. Okay. The one year in one day trade within a hedge fund that if they do it within one year, one day, all of the investors they get long term capital gains treatment, just not the managers who have their carried interest. Under old law, alimony used to be deductible, the spouse that paid alimony got a deduction, and the receiving spouse had to include that in income. Now, the law flips that so that alimony and other spousal maintenance payments are non deductible to the pay or But they’re also not includable for the person receiving it. So it is much better for the person that’s receiving the spousal payments than under old law. Okay, let me just throw one more thing in here for 529 plans, those are the edge the education plans that are on a tax deferred basis. And you can take up to $10,000 out of your 529 for private school, so that that’s kind of a big deal for some people in certain areas that you’ll be able to pay for private school with tax deferred money. But there’s a couple other things in here and if your listeners are interested that can encourage them to contact their CPA. Just before we wrap up, Jason let me just kind of run through some things that people thought might have changed, but in the end did not change. Just so we kind of cover those off. So there’s still a big tax credit for electric vehicles. All the existing credits and deductions for higher education remain the same. student loan interest remains deductible educator expenses, the on the chopping block, they remain deductible in the bill. Some people were talking about changing the requirements to have your home gain, excluded from income that which would have made it harder for you to claim an exclusion of income from the gain on the sale of your primary home. Right and not make it into the bill. One of the things that I know a lot of my clients were concerned about is one of the bills that was originally passed, required you to when you sold securities that you had a lot of you had to use first in first out
Jason Hartman 40:31
FIFO I remember that, but that felt to use any of the permissible methods. First In First Out LIFO average cost basis or specific identification. So, lots in here, Jason, thanks for having me and encourage people to chat with their supervisor there. You know, always free to look us up and give us a ring as well. We’re happy to chat with people about how it might affect them. Ryan, I just First of all, I want to thank you for coming on so quickly. Folks, let me tell you very Few CPAs are studied up on this enough and ready to talk about it so quickly. I mean, this is hot off the presses here. Okay, so this interview was pretty casual. I’m so happy that Ryan will be speaking at our upcoming meet the masters of income property event in San Diego in La Jolla, you’ll be able to meet him there in person, he’ll be speaking and sharing some of his thoughts after he’s had a little time to have these coalesce and target them specifically as strategies for real estate investors mainly, so that’ll be the major thrust of his talk. So I’m really looking forward to that Ryan but you know, thank you for coming on so soon. I mean, this thing is just hot off the presses. I’m sure you’re sleepy because you’ve been reading all this stuff and and studying it and you’ve been on every call, you know, inside your industry doing it. give out your website and tell people where they can find you.
Ryan Schellhous 41:51
Yeah, www dot Indigo spire.com and it’s mostly Indigo spire calm because shell houses really Hard to spell. Absolutely yeah check us out at www dot Indigo spire comm you can make appointments to chat with us straight on that website.
Jason Hartman 42:09
Fantastic Ryan showhouse. Thanks for joining us. Thank you Jason. Have a great day. Thank you so much for listening. Please be sure to subscribe so that you don’t miss any episodes. Be sure to check out the show’s specific website and our general website Hartman Mediacom for appropriate disclaimers and Terms of Service. Remember that guest opinions are their own. And if you require specific legal or tax advice, or advice and any other specialized area, please consult an appropriate professional. And we also very much appreciate you reviewing the show. Please go to iTunes or Stitcher Radio or whatever platform you’re using and write a review for the show we would very much appreciate that. And be sure to make it official and subscribe so you do not miss any episodes. We look forward to seeing you on the next episode. Welcome to meet the masters of income property investing. I’m your host Jason Hartman.
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