In this episode of the Creating Wealth podcast, Jason Hartman begins on location at the bottom of the Grand Canyon to discuss the details of the upcoming Meet the Masters of Income Property event, the closing of the 5 Year Plan contest, and the raffle that has opened concerning tickets for January’s event. He mentions the significance of a book he read by former US president Richard Nixon, as well as detailing information about the Grand Canyon and the helicopter that took him to the bottom.
Hartman then talks to CPA Ryan Schellhous, the founder and principle of IndigoSpire CPAs and Advisors, regarding the new GOP tax reform plan. The two start with an overhead look at the plan and then delved into the specific components that the plan had to offer as they determine who was going to benefit from the reform and who might not. Schellhous explains who the biggest revenue raisers and losers are going to be under the new bill, as well as the important factors that will affect individual tax filers.
Visiting the Grand Canyon
Jason Hartman begins the podcast from the bottom of the Grand Canyon after traveling via UC 130 helicopter, a $2.5 million vehicle that burns nearly one gallon of fuel per minute and carries seven passengers not including the pilot. He is approximately seventy miles east of Las Vegas and ten miles into the canyon with the Colorado River nearby providing an amazing view. He states that he will post some photos of the trip on his website.
Accompanying him is Drew Baker, a client and repeating guest on the podcast who arrived in Las Vegas last night and offered to accompany Hartman into the base of the canyon so that there would be an opportunity to look up.
Hartman mentions that the trip reminded him of a book he read several years ago, In the Arena by former president Richard Nixon. The book detailed Nixon’s life and the highs and lows of the sometimes-difficult life he faced. In the text, he detailed his first trip to the Grand Canyon as a child, where he thought that nothing could be more incredible than looking down into the canyon from the southwest rim, until he hiked to the base of the canyon and looked up.
Hartman was reminded of a quote he heard by Sophocles stating,
“One must wait until the evening to see how splendid the day has been.”
He agrees, stating that it’s hard to appreciate the lows in our lives in comparison to the highs, but when we do so, we truly appreciate the high times we have. He details his own experience of looking up from the bottom of the canyon at peaks 4000 feet into the air, nearly a mile up.
Baker also recalls seeing the top of the Grand Canyon, and paying admission to see the landmark ten minutes before sunset. He mentions that he felt the need to jump up and down for a time because the canyon looked so much like a painting that it didn’t appear real.
Hartman directs the topic to Dr. Ron Paul speaking at the upcoming Meet the Masters event, now only two and a half weeks away. Baker mentions seeing Ron Paul speak in 2007 while he was campaigning and was a fan of him ever since. It was one of the reasons why he and Hartman became friends, being that Hartman was not a fan of any of the presidential candidates at the time, aside from Ron Paul.
Baker noted that he also had the opportunity to meet Ron’s son Rand Paul at the Nixon library some time ago.
Hartman mentions interviewing another speaker at the upcoming Meet the Masters event, Danielle DiMartino-Booth, this morning regarding her opinions on the GOP tax reform plan. Thus far, she does not seem to be a fan of it, but there will be more said on the topic during the event in two and a half weeks. DiMartino-Booth received a standing ovation at the last conference she spoke at.
Meet the Masters Raffle
Hartman offers his thanks to listeners who submitted their 5 Year Plan contest video. The contest came to a close on December 26th, but Hartman now has a raffle available to enter in order for listeners to win two free general admission tickets. The Meet the Masters event is now sold out of elite tickets, but some VIPs are still available. For more information about the raffle, please visit www.jasonhartman.com/contest.
Overview of the GOP Tax Reform Plan
The Creating Wealth guest Ryan Schellhous, founder and principle of IndigoSpire joins the podcast to discuss with Hartman the details of the new GOP tax reform plan.
With listeners in 165 countries, Hartman mentions that this reform is going to trickle through the whole planet, as the first real tax reform in three decades. He states that the majority of people are going to benefit from this plan, and Ryan Schellhous is here to explain how.
Hartman states that the single largest expense in our lives are taxes, so as individuals and business owners, we cannot afford to be bored or uneducated about taxes. We have to learn about these things.
Ryan Schellhous is joining out of San Jose, California, where he has lived for around three years. He states that he spent most of his career at the Ernst & Young office. He has since struck out on his own and his company IndigoSpire primarily handles taxes and some audit practice as well as traditional Certified Public Accountant services.
Together, Schellhous and Hartman plan to take an overview look at the GOP tax reform plan before delving into some of the important details involved that will affect individuals as well as companies.
This has been the biggest tax change since 1986, and the bill itself contains over 1100 pages, so there is a good deal of new information to become familiar with.
Lowering Corporate Taxes
The first detail of the GOP tax reform plan Schellhous introduces is the lowering of corporate taxes from 35% to 21%, a goal of the GOP intended to put us in line with trading partners. Previously, the US stood out as a country with much higher taxes for corporations than most other countries. These high corporate taxes influenced business owners to go offshore and ship work to other countries in order to skirt around the US corporate tax rate. Companies like Google and Microsoft have done this.
Schellhous predicts that the newly lowered corporate tax will influence companies to keep more of their work in the country, and as a result, keep more of their money onshore.
Previously, intellectual property was transferred by big businesses to low or no-tax jurisdiction. It exploited the IP outside the US to bring in more money. The Apple brand, for example, has close to $250 billion stored offshore and cannot bring it back into the United States without incurring significant taxes.
Under the new bill, a transitional period is provided where companies can pay a one-time tax of around 15.5%, which is payable over an eight-year period and the money can be brought back into the United States with no further tax.
In this example, Apple would pay a $20 billion tax, and then they’d be free to bring the other $230 billion back into the US.
Hartman mentions hearing a commentator on CNN, a wealthy CEO, who was talking about how he believes that all this is going to do is make the rich become richer, rather than helping the economy. He stated that he is planning on buying more real estate and stocks, and does not believe that money will trickle through the economy.
Hartman gives an example of when he purchases property and has to pay people to fix or maintain aspects of it. This stimulates the economy by paying US workers to perform work.
Schellhous mentions how quickly the new tax bill came about, despite all of the talk of how impossible it would be and how much time simple changes would take. He attended a tax-conference six months ago and now the GOP tax reform plan is the law of the land.
He also notes that because of the GOP tax reform plan, the healthcare mandate under the Affordable Healthcare Act has been lifted. Originally, everybody was required to have health insurance or be fined for it during tax season. The bill now has the health insurance penalty at zero, meaning that if a person does not have health insurance, the penalty will still be calculated during taxes, but will never reach more than a $0 fee amount. Hartman likens this to receiving a speeding ticket with no fine attached to it. The ticket is there, but no money is owed.
Widening of Brackets, Lowering of Rates
Schellhous states that the next biggest tax move is the widening of tax brackets and the lowering of tax rates for individuals. Previously, the rate was at 39.4% and now it’s at 37%. This trickles through the rate tables for singles, heads of household, and married filing joint taxpayers. Also, in order to move into higher tax brackets, more money has to be earned than previously. This is practically a tax cut for everybody. Certain tax brackets overlap, so individuals might not see a decrease at their exact income level, but the reform has generated $1.2 trillion worth of tax cuts.
There are tax cuts across the board for almost everybody by rate. It’s important to note that there are two parts to taxes, rate and the base on which the rate is applied. In this situation, the base can be broadened by eliminating deductions or narrowing by including more things to be deducted.
Schellhous mentions that real estate directors with self-directed IRAs that are subject to UBIT, or unrelated business income tax, the rates applied are going to be a bit lower as well.
What used to be done for individual taxpayers is calculating all items of income, taking certain above the line deductions and applying either standard or itemized deductions depending on which is higher. Now with an increase of standard of deduction, people are no longer incentivized to itemize their deductions. A lot more people are able to file a simple 1040 form and will not need to use Schedule A forms under the new GOP tax reform plan.
Complications for International Companies
When it comes to the complications of the new GOP tax reform plan, Schellhous states that because it’s a new thing, CPAs are going to be explaining a lot of the new concepts to people, but that it is actually simplified for individuals and domestic businesses.
On the side of international businesses, the new GOP tax reform plan is going to be more complex.
Hartman points out that nobody feels sorry for these companies, and mentions that Apple has put itself in hot water due it’s recent scam involving the deliberate slowing of older devices to pressure people into upgrading. This is one of the reasons why people do not have any sympathy for companies like this when it comes to the new tax code.
Taxes involving domestic businesses are going to be a lot simpler by starting with income and getting rid of above the line deductions. There used to be the opportunity to take a personal exemption amount, but that has gone. As Schellhous mentioned, there’s now a higher standard of deduction.
News for Individual/Joint Tax Filers
Schellhous states that there is a new benefit for people with children. The child tax credit has gone from $1,000 to $2,000 per child, and it’s a tax credit rather than a deduction. The phase out income level is moving out so that more people have the opportunity to claim the child tax credit.
Hartman mentions that this might be an encouragement for people to have children in some respects.
Mortgage Interest Deductions
On the individual side of taxes, Schellhous states that though mortgage interest deduction remains, the amount of interest is now capped to $750,000 of acquisition debt, down from $1 million. If you’ve got an old debt, it’s grandfathered in, though. Even refinancing of grandfathered debt, as long as the amount isn’t more than the original mortgage, it’s still grandfathered in.
Hartman states that this is an interesting effect and he believes that this GOP tax reform plan is going to extremely good for the economy and provide a huge economic stimulus.
However, if you’re planning to buy a $1.5 million house with a $1 million mortgage, you’re likely going to be less motivated to do so.
With a $250,000 mortgage at 4.5% will cost about $1,270 per month. It’s assumed that $1,100 if this payment is interest at the beginning, and with the new tax plan, that delta would be lost. This might dampen the high-end market to a degree. Schellhous states that this is a revenue raiser, and is likely to only hurt the elite.
Hartman still advises listeners to rent their high-end homes and buy cheaper properties to rent out to tenants.
State, income, and property taxes all together are now capped at $10,000. If you happen to live in New York, California, New Jersey, or the like, this move might cause a bit of unease. Also important to consider is the repeal of miscellaneous deductions at the bottom of the Schedule A form including unions fees, hobby losses, and losses on IRA that were subject to 2% are now gone.
The Alternative Minimum Tax
Schellhous notes that the alternative minimum tax is back and is going to remain, however, the exemption amount is now much higher. Fewer people are going to inadvertently run into this issue. Fewer people will have to pay it, which is good news. It’s not as good as it was initially planned to be, but it isn’t bad.
Pass-through Businesses Deductions
There is also a special 20% deduction available for flow-through incomes under the new GOP tax reform plan. Schellhous explains that because the corporate tax rate is coming down, the majority of American small businesses operated as pass-throughs wouldn’t benefit from this drop. They’d receive this special 20% deduction for flow-through income. In box 1 on the K1 details the ordinary business income, and the deduction would write off 20% of what that total is. It’s a below the line deduction that would be applied right before the calculation of taxable income.
This deduction applies to up to $315,000 of total taxable income for a joint filer, half of that for a single. In a partnership, if you earn $315,000 as a married person, you’re entitled to that 20% deduction. If you make more than that total, the deduction acts differently. For companies performing services, like health law, accounting, brokering, and consulting, the deduction goes away if more than the cap is earned.
Hartman mentions that he’s excited about the reduction in the corporate tax rate, but poses a question about how these taxes work if a business owner has an S-corp or LLC treated like an S-corp.
Schellhous states that the individual tax rates are lower, even without the provision. If you’ve got a profitable business, you’ll save money. This provision tries to get people that operate an S-corp or LLC with no S-corp to have a decent deduction. For example, if after all of the business’s income is taken into account and the deductions are over $100,000 and the rest of the income doesn’t push the business over the $315,000 limit, it is only marked on the return as $80,000.
Another thing at this income level is that if a business isn’t one in the serving industry, different limitations come in based on wages that the company pays and the assets that they have. What’s attempting to be accomplished is keeping people from attempting to work around these tax revisions. For example, if a doctor makes much more than $315,000, he might hive off his medical practice and put his equipment into another company in order to skirt around the tax law. Overall, if a small business of this sort makes less than $315,000, they are going to see a benefit. If the business makes more than this threshold, they are going to see some limitations.
All in all, the GOP tax reform plan could prove to be a driving force for economic growth.