Written by Edward Smith
The Business Journal conducted a survey asking business owners in the Central Valley what the Tax Cut and Jobs Act means to them. Fifteen businesses filled out the survey saying whether they were paying more, less or the same in taxes for 2018, as well as where any tax savings would be spent.
Responding businesses ranged from law firms to restaurants, engineers and architects to retailers, with staffing from two to 120.
A majority of businesses — eight— said they would be paying the same in taxes, followed by five who said they would be paying less. Two businesses said they would be paying more.
As to where any savings would be spent, nine businesses said they would direct that money into increased wages or benefits. Responses toward new equipment investments, building renovations or expansion and savings got four answers each. Respondents were not limited to one answer.
Tax liability is a complex formula and benefitting from reforms can range from deductions to depreciation write-offs for equipment purchases and hiring. Why certain businesses pay more than others that may seem identical can be answered by the fact that the finalized Tax Cut and Jobs Act was 1,094 pages. In August, the IRS released regulations on how taxes would be distributed, and accountants and advisors are scrambling to understand the document. Taking advantage of tax breaks means understanding the nuances of how each individual company operates.
Chris Mariscotti, owner of The Vineyard Restaurant in Madera, said what he pays in taxes is “dead even” with last year.
“If it’s making any difference, we don’t see it,” he said.
The biggest reason many businesses in the Central Valley may have missed out on benefits is that most business owners in the area file as “flow-through” businesses, including LLCs, LLPs, S-Corps and sole proprietorships. Profits “flow-through” to owners as income and then are used to pay expenses like wages, equipment and rent, so that that money is only taxed once, according to Michael Holtermann, certified public accountant and partner at Baker Peterson Franklin, LLP in Fresno.
The lion’s share of tax cuts last year were directed to publicly traded companies. The Jobs Act established a blanket tax rate for those C-Corporations at 21 percent, down from 35 percent for the uppermost bracket.
But, certain lawmakers wanted to include these “flow-through” businesses by adding a potential 20-percent deduction.
That 20-percent deduction is available to all businesses that are flow-through, but there are qualifications for businesses that make too much money, according to Holtermann.
The original intention of lawmakers was to make a tax form that could fit on a postcard, but that didn’t happen, he added.
“It was supposed to be a simplified process, and this process is not simple,” said Holtermann.
Between $315,000 and $450,000 is when the deduction starts to phase out, but there are expenses that can be written off to get businesses below the threshold.
Smaller business owners who are cumulatively making less than $300,000 qualify automatically for that deduction, but for bigger businesses, things get difficult.
“It complicated life a lot,” said Greg Musson, owner of Reedley-based Gar Tootelian, Inc, which files as an S-Corp. “It’s not just something that impacts taxes, it impacts the way you do business.”
They’ve lost deductions for things like meals for employees. Musson said they’ll pay upwards of $100,000 a year on food for people who may not have time to find food in a half-hour lunch.
After income level, entities are then divided between service and non-service businesses. Service businesses like doctors, lawyers or certified public accountants can do nothing to get below that threshold and are “just out,” according to Holtermann.
For other businesses outside the service industry, certain wages that contribute to production can be included to get businesses below that threshold for the 20-percent deduction.
Executives like Ali Nekumanesh, shareholder for Colorado Grill, think this rewards businesses with a lot of employees, which may incentivize hiring. In circumstances where a business owner is already considering hiring, that may be true.
The wage rules explain how certain businesses can be almost identical on paper and still be paying different amounts of taxes. For farmers who contract out their labor, they might be missing out on the deduction simply because they are not paying workers directly.
One of the other big changes came for business equipment purchases. The federal government allows businesses to write-off losses for major capital investments like tractors, manufacturing equipment or office furniture. Before, the IRS distributed those deductions right away.
For businesses, the benefit is in the timing. “I can write-off 100 percent of the depreciated value immediately rather than that amount being apportioned over five years,” said Holtermann.
Getting into that desired bracket to take advantage of the savings takes strategizing. Jay Anderson, owner of Fitness Peak in Chowchilla, said that even for small gyms, they can spend $200,000 on equipment alone. This year, the tax law spurred him to invest in new gym equipment.
“Fitness equipment is expensive,” Anderson said. “Instead of buying two or three items, we can buy five or six.”
For Anderson, a commercial treadmill can range anywhere from $6,000 to $8,000.
“We still have to pay out of pocket on the equipment, but we can write off a little bit more,” said Anderson. This allows him to own his equipment rather than lease it, meaning he doesn’t have to pay the interest. And by better taking care of it, he can extend the life.
“It gives me the cash now to operate and maybe invest in other ways to fund certain things,” Holtermann said. Sometimes it’s a good idea to buy the equipment now instead of January if a business’ profitability has put them in a higher bracket. In other cases, it may have been better to have the deduction spread out over the five years. It takes strategizing.
“Is that the best cash flow income to you?” Holtermann said.
Building purchases don’t qualify for the new bonus depreciation law, but renovations for things like new carpets do qualify.
For Charles McMurray Co., a Fresno cabinet and door distributor expanding into Sacramento, depreciation will allow them to expense and accelerate the depreciation in those structures, according to Charlie McMurray, CEO of the company. Truck and equipment purchases can be deducted quicker, but what excited McMurray was the new remodel for his office he was able to expense.
“People enjoy working in a positive, upbeat environment, part of that includes the facility,” said McMurray.
In terms of how much businesses are paying, Holtermann doesn’t expect that business owners should be worse than they were before, but they won’t be as good as they could be. Getting tax breaks could often requires investments, and businesses can often end up spending more money just to save a couple dollars.
As Holtermann said, “It’s always that battle, how much do I need to spend to get good advice versus the savings on the other end?”