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Sorrell Law Firm, PLC 7575 E. Redfield Rd., STE 217 Scottsdale, AZ 85260 (480) 776-6055

2017 Tax Cuts and Jobs Act: Understanding the QBI Deduction

Pass through entities, such as LLCs taxed as an S-corporation or a partnership, are the backbone of the American small business community, and benefit most from sweeping changes in the 2017 Tax Act. First, the 2017 Tax Act substantially reduces individual income tax rates, which are the rates that apply to income flowing through to the small business owner.  Further, new tax law allows small business owners to reduce their taxable business income by 20%. Thus, for example, a married couple owning a small business with $200,000 of taxable income would pay an effective tax rate of only 18.3%!

To qualify for the QBI deduction, the business must be a qualified business, the definition of which excludes service providers (lawyers, CPAs, doctors, financial planners, realtors, consultants, etc.).  However, these excluded businesses receive the QBI deduction if their adjusted gross income does not exceed $315,000 for joint filers, $157,500 for individuals (over which amounts the QBI deduction is gradually phased out).  Wages paid to the business owner are not reduced by the QBI deduction. While owners of qualified businesses are not subject to these income limitations, there are other limitations that could apply. The QBI deduction is applied to the aggregate of all business income/loss for all businesses the taxpayer owns, and is limited to: 1) 20% of the QBI for each separate business, and 2) the greater of (a) 50% of the W-2 wages the business owner received from each separate business[1] or (b) 25% of the wages the business owner received from the business plus 2.5% of the qualified property owned by the business. Qualified property is defined as depreciable property owned and used by the business.  Qualified property is valued at its original cost basis and remains qualified property over its depreciable life not to exceed 10 years.

The structure of the 2017 Tax Act as it applies to small businesses reflect congressional efforts to incentivize investment into capital assets. The economic effect of which increases demand for assets such as equipment, machines, furniture, and real property. Increased demand results in more manufacturing, which leads to more jobs thereby reducing unemployment; when demand for labor increases, prices for human resources increase leading to higher wages. More production results in an overall growth of our economy and GDP. Further, lowering the tax bill on small business owners will put more money into the hands of middle class Americans which, with more disposable income, results in more spending and investing at the grass roots level. This is clearly a tax plan designed to grow the American economy by lowering the tax bill on small business owners and promoting business investments into property, plant, and equipment.

Because of the way the QBI deduction is allowed and limited, business owners should consider separating ownership of various profit centers.  For example, a doctor that owns the building out of which she operates is subject to the QBI income limitation. If the doctor spins ownership of the building into a separate LLC and leases the building back to the medical practice, then the QBI income applicable to the medical practice does not apply to income arising from the real estate leasing entity.

For the foregoing reasons, it’s wise for business owners to visit with their business and tax advisors to review how the 2017 Tax Act will affect them, and to consider reorganization options to maximize their ability to benefit from our new tax laws.

[1] The 50% of W-2 wages provides incentive for the business owner to pay themselves a wage subject to the Medicaid and Medicare portions of employment taxes. Flow through income from S-corporations escape employment taxes thus the new tax laws added the W-2 limitation to make sure the QBI deduction feature is not abused.  
Sorrell Law Firm, PLC 7575 E Redfield Rd # 217, Scottsdale, AZ 85260 (480) 776-6055 2017 Tax Act

House of Representatives Releases 2017 Tax Act Reform Bill

Below is a summary of the U.S. House of Representatives 2017 Tax Act as it relates to individuals.

Tax Rates: The 2017 Tax Act compresses the current 7 tax brackets (10%, 15%, 25%, 28%, 33%, 35%, AND 39.6%) into four tax brackets: 12%, 25%, 35% and 39.6%. The 12% tax bracket applies to all taxpayers except for those whose marginal rate is in the top bracket, in which case the 12% rate is phased out for the top earners.

The 25% tax bracket starts at $90,000 for married taxpayers ($45,000 for single).

The 35% tax bracket starts at $260,000 for married taxpayers ($200,000 for single).

The 39.6% tax bracket starts at $1M for married taxpayers ($500,000 for single).

Standard Deduction and Personal Exemption: The current standard deduction of $12,700 for married taxpayers ($6,350 for single) is increased to $24,000 for married taxpayers ($12,000 for single).  The standard deduction increases to $18,000 for single taxpayers with at least one child. However, there will no longer be personal exemptions (currently $4,050).

Small Business Owners: Individuals owning a closely held business will pay a maximum rate of 25% for a portion (about 30%) of their business income with the remaining 70% taxed at the individual tax rates.  Capital gains, interest income, and dividend income retains its character as under current law.

Child Tax Credits: Child tax credits (currently $1,000 per child) are increased to $1,600 per child, plus non-child dependents are allowed a $300 credit. Credits are a dollar for dollar reduction in your tax liability (not a tax deduction, but rather a credit acts like a tax payment and could result in a refund if you otherwise have no tax due).  Under the new law, the refundable portion of the tax credit will remain $1,000.  These credits are phased out for married taxpayers exceeding $230,000 ($115,000 for single).

Itemized Deductions: Current law phases out itemized deductions for higher income taxpayers with complex formulas. The 2017 Tax Act repeals the phase outs.  Current law allows mortgage interest deductions for up to two homes on debt not exceeding $1M.  The 2017 Tax Act allows mortgage interest deductions on only one primary residence with a limit of a $500,000 mortgage. Current law allows deductions for state income and property taxes.  The 2017 Tax Act limits these deductions to state and local taxes paid in connection with a business activity, plus property taxes up to $10,000. The current itemized deductions for casualty losses are repealed in the 2017 Tax Act.  The 50% limitation for cash contributions to public charities is increased to 60% allowing a larger deduction for charitable giving. Tax preparation expenses will no longer be deductible under the 2017 Tax Act, as are deductions for medical expenses.  Likewise, alimony payments will no longer be taxable to the payee nor deductible to the payer.  Further, there will be no deduction for unreimbursed employee expenses.

Sale of Principal Residence: Under current law, taxpayers may exclude from income gain on the sale of their principal residence up to $500,000 for married taxpayers ($250,000 for single) if they reside in the home for 2 out of 5 years.  Under the 2017 Tax Act, to receive the exclusion, the taxpayer must hold the residence as a primary residence for 5 out of 8 years, and the exclusion is phased out for high income taxpayers ($500,000 for married taxpayers, $250,000 for single).

IRA and Retirement Plans: The current law allows taxpayers to convert qualified plans into “Roth IRAs,” then invest aggressively and if they make substantial gains, they retain the Roth IRA with all the gains, free of tax; however, if their aggressive investments lose money, they can retroactively reverse the conversion to recoup the costs of converting to a Roth IRA. The 2017 Tax Act closes this loophole.  

Overall, the 2017 Tax Act lowers taxes on all individuals under $500,000 of income, and simplifies some of the more complex rules while closing unnecessary loopholes.

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Sorrell Law Firm, PLC 7575 E Redfield Rd # 217, Scottsdale, AZ 85260 (480) 776-6055

The Argument Colin Kaepernick Failed to Make

A Mediation Plea to Change the Narrative of Social Injustice

Can good, compassionate, non-racist Americans agree with Colin Kaepernick’s message about social injustice yet be turned off by his delivery? Kaepernick justifies his delivery as the best way to promote his political concerns to as many people as possible. One could similarly argue that firing a machine gun into a crowd is the best way to kill as many people as possible. Does that make it right? I’m not equating the two acts, but the rationale is parallel. Does this pave the way for Nazis to heil Hitler spreading their hate message during the Anthem? Might supporting Kaepernick’s delivery set dangerous precedent in this regard? America’s division on this issue seems directed at how Kaepernick protested and not what he protested.  Kaepernick claims white men have no place to dictate how black men protest political views and suggests that disproval of his method of protest is itself racism. Are white men dictating how black people protest or is this a matter of the first amendment not applying to the workplace?  Now that the country is so deeply divided on this issue, it seems we lost focus of what we should be talking about and instead we are arguing about the means for that discussion. Regardless of whether you agree or disagree with the means of Kaepernick’s message, America is best served by first acknowledging that social injustice exists, and working together as a nation towards progress.

Maybe the more effective plan would have been for Kaepernick to hold a press conference – maybe an interview on ESPN – explaining his valid concerns. Get team management on board. Before the Anthem the announcer says, “Let’s all support Colin Kaepernick taking a knee in silence in his effort to bless America with awareness of today’s social injustice; he shares with us his vision of our cherished American melting pot bonding together with commitment to further our progress and leading the world as an example of how people of different races and religions can live together in harmony.” Then he stands, holds his hand on his heart during the Anthem, and wins some football games.
Can you imagine the offers for press conferences, radio interviews, local/network news, television shows, comparisons to Martin Luther King; he would enjoy a super star platform to spotlight his vision. That’s what I wish he did. But he didn’t. What he did is viewed by many as highly divisive, taints the social injustice discussion, and sets dangerous precedent for future protests irrespective of the message. For these reasons, rational learned people should reject the premise that merely disagreeing with Colin Kaepernick’s means of protesting is itself racism.
Colin Kaepernick’s detractors claim he has no voice to claim he is being oppressed when making tens of millions playing football. That argument ignores his position.  He doesn’t argue he is oppressed; he argues for awareness that the police seem to unfairly target and mistreat black men. His message expands to the concept that black America suffers from many social problems needing attention.
Can we say in good conscience, “all Trump voters and Americans opposing the knee revolution are racists?” No, that’s a divisive and sweeping generalization lacking relevance and reason. Nor can we deny the injustice black America faces.  The recent explosion of police officers criminally charged, including murder, is shocking. Likewise, the rate of acquittals supported by overwhelming evidence suggests the then leadership in America may have race baited facts, and rushed to conclusions to deliver false narratives; perhaps those leaders bear blame for manufacturing a seemingly modern race war.
No matter your opinion, can we agree to the fact that social injustice exists and Americans are better off by acknowledging it, understanding it, and growing as a nation to overcome its presence?
Will Americans reach social justice by claiming all [insert group here] are racists?  Is that the way to smooth talk America into supporting your cause? No. Can we agree that although most recent criminal charges against the police were acquitted after considering the facts, there exists bigotry and unfair treatment towards African Americans, and any amount of unfair treatment is unacceptable?
It’s been argued that unfair treatment of black Americans is partially because black Americans are statistically more likely to commit crimes. Opponents of that position argue that black America is simply more likely to be charged for their crimes because of the structure of our criminal justice system. Consider the war on drugs where some researchers postulate that Caucasians were not less likely to use drugs, but rather the type of drug the law declared problematic was more prevalent in black communities resulting in more men of color being imprisoned. Even if black Americans are statistically more likely to commit crimes, it is not mutually exclusive to the conclusion that effective change is needed. Indeed, observing this statistic supports the notion that better understanding the causes of social injustice should be the focal point of today’s discussion. Why is this not the question people are asking?  Is there something about inner-city culture that fosters high crime rates or is our criminal justice system designed to criminalize people of color more so than Caucasians, or both?
The progressive movement forwards the radical idea that all Americans (and maybe illegal immigrants as well) should get free college. As unrealistic as it may be, perhaps there is a more reasonable version focusing its benefit on oppressed communities.  Can late-night television and entertainers change the culture of inner-cities by spreading the message that education is good and can lead to an enriched crime free family life in middle America with a house, steady employment, little league, and the PTA? Hollywood should be spreading this message instead of its barrage of “we hate President Trump” that serves to further the divide. Perhaps this is not the message in part because the message has no teeth when education seems out of reach to so many. Many students identifying with an oppressed community understand the value of education but don’t have the same opportunities or access to resources that more privileged students have. Does our education system contain systemic and institutional policies that make it harder for them to succeed?
This message will be better received in black communities if it were supported with an offer from President Trump to include in his tax plan guaranteed loans to oppressed communities for junior college and trade schools. These Americans could then have both opportunity to convert their loans to grants, and obligation to earn that grant by working for a state, federal, or municipal government for some period after graduation. This serves to provide free college and training to new high school graduates while enriching our government function with a young, eager, educated work force. The result, hope; more opportunity for inner-city Americans to be educated and trained for lifetime employment helping to reduce the despair that sometimes leads to gang affiliations and drug use.
I don’t have the answers to this difficult problem, but I believe that working together with rational action plans will be infinitely better for America than lobbing names, blames, and labels at each other. Please, America, let’s grow up.
What changes are necessary to reduce social injustice?  When a person looks at a black/white/orange person, they should see an American and not a redneck who probably voted for Trump and deserves to get shot, or a black man probably on welfare, or a religion causing them discomfort.  What can we do so that Americans don’t see race and religion, and don’t treat others in manner consistent with radical generalizations?  Please, main stream media, let’s abandon the divisive name calling and personal attacks and instead adopt a nationwide conversation to brain-storm suggestions focused on engineering hope!
If I were President, I’d start the conversation with the following message to Hollywood: “I invite anyone truly interested in helping those communities in need to work together, with me, toward solutions designed to change the American experience and combat social injustice. Let’s work together, not against each other; you spread the message that school is good and I will make education for inner cities part of the tax bill. From there we will consider other solutions to overcome social injustice in all phases of American life. This is just a start; please join me to bring America together.”
When negotiating, a party is more likely to convince her opponent to consider her argument if the opposing party first believes that she understands its position. Maybe America needs to step back and each side, without agreeing, acknowledges the positions and concerns of the other side. This process is likely to result in common ground.  Let’s unite to that common ground as our bridge, no matter how small it may be.  From there we build on small successes until that that bridge is sufficiently strong to heal our nation’s social injustice problems. This may take years or decades, but beginning the process now is in the best interest of all Americans.
America can and should be the beacon of light leading the world by example for how people of all races and religions can live together peacefully and seamlessly. We can attain that leadership if America changes its social narrative from the prevalent name calling blame game, to a solutions focused discussion asking whether social injustice has been institutionalized in America, and if so, considering macro-level solutions to effect needed change.
Sorrell Law Firm, PLC 7575 E Redfield Rd # 217, Scottsdale, AZ 85260 (480) 776-6055
The point of this editorial is not to convince anyone to agree with specific opinions, nor am I taking sides. Rather, I seek to advance the belief that anything designed to sincerely start a partnership between all Americans must begin with: 1) acknowledging all views and concerns, on both sides, 2) admitting we all share in the blame, all of us, and 3) agreeing to change the narrative of America from hating those with opposing political ideologies to a discussion about mutual goals, and then working together to further our nation’s progress in combating social injustice. All Americans benefit from unity among our many races and religions. This is our heritage, and we can only do this by working together. After all, some smart cookie once said we are “stronger together,” and together we can “make America great.”

The Truth About Trump’s Tax Plan

With internet news comes rumors and hyperbole; what makes tax reform different?  Nothing.

Social media is swarming with articles and tweets of how Trump’s tax plan will punish the middle class to fund tax cuts for billionaires. True? argues that those making $8.5M per year receive massive $1M tax cuts while middle class taxpayers save only $1,000. Of course, the top earners to which MSNBC refers currently pay upwards of $3.7M per year in taxes (wow!) while the lower income earners are paying close to $5,500.  CNBC claims the top earners save 27% under Trump’s plan while lower income earners save only 10%.  USA Today ran this exact same article. Do these numbers pencil out?

Let’s look at a single parent with one child earning $75,000 per year.  Under current law that taxpayer gets $8,100 of personal and dependent exemptions and a standard deduction of $9,350 resulting in taxable income of $57,550, and a tax liability of $6,970 (accounting for a $1,000 child tax credit). Under president Elect Trump’s tax plan, the same taxpayer is allowed a standard deduction of $15,000 but no personal and dependent exemptions (Trump eliminates them as part of his simplification initiative). However, Trump allows a child care deduction[1] ranging from $7,000 to $12,000 (let’s use the average, $9,500 for our calculations) resulting in taxable income of $57,550. Trump’s tax rate is only 12% resulting in a tax liability of $6,060. This is a savings of $910 per year (or 13%).Continue reading

Sorrell Law Firm, PLC 7575 E. Redfield Rd., Suite 217 Scottsdale, Arizona 85260 (480) 776-6055

What is Tax Policy?

The purpose of taxation is to raise money for our government. When designing our tax system Adam Smith resolved certain principles as guidance: Smith required our tax system to be equal (in proportion to each person’s share of the tax base), certain (so people knew exactly how much they owe), convenient (so the tax assessments arose as the taxpayer’s received the income), and efficient (a low cost of collection leaving the largest portion possible for government spending needs).Continue reading

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