Taxes…Information is Power!
By Aaron Diehl
Taxes: Information is Power!
Okay so social situations may not be my most comportable arena and yet when the information is that important, i’ll put up with anything to find a better solution. It’s part tenacity, part sense of humor.
I feel I can confidently say that I’m not the first person to be bored when I hear about the discussion of taxes. Out of sight out of mind? Just a once a year pain we all have to face – but that just goes to show how uninformed I was about the benefits of understanding the tax code, even at its most basic overview.
Do You Know What You Are Missing
I attended the ULI – Oklahoma Luncheon regarding Tax Reform and two things went through my mind: how many people do I not know here, and how has the recent tax return actually impacted
projects in Oklahoma? Nerd Alert: yes the first one addresses my naturally socially-awkward anxiety about group settings of people I don’t know and the other is my bizarre academic curiousity about things I don’t understand. I’d seen headlines from other sources that the recent Tax Reform had produced some significant benefits for those in the Commercial Real Estate field. But the question remained: how is this specifically affecting Oklahoma?
Okay so the scope of the discussion was very much heavily based on a common understanding of general Accounting and investment terms and acronyms. Challenging to follow, and with a little bit of deductive reasons it becomes easier to follow along. That being said, this is just my summation of my understanding, and I would highly recommend discussing anything with a CPA or tax professional before acting on any of the ideas that are discussed here.
Here are some of the biggest take always… as I understood them
1. Corporate Tax reduced from 35% to 21% – Admittedly I was in favor of a higher corporate tax rate reasoning that it would help support a stronger middle class. Truth is: there’s not enough data to support that conclusion. The corporate Tax accounts for about 1/3 of the tax revenue generated in Oklahoma. So if people are the largest generator of tax revenue, which would have the greatest impact of influencing the economy: an individual Tax Cut or a Corporate Tax? Individual tax cut may spur individual sales, and it is just as easy to argue that we can encourage new business by reducing the cost to DO business. I don’t know that I have a firm position on this one yet, although I see the upside to the recent tax cut in the short run. I am curious to see which organization benefit the MOST from this reform like the real estate sector, the energy sector, small business, manufacturing, etc?
2. You can no longer deduct Interest expense on a home equity loan. Home purchases up to December 31st, 2017 will be able to deduct the interest from their loan on their taxes. Homes purchased in 2018 will not. This sounds like an odd compromise. I’m assuming the original idea was to remove the deduction completely, and instead it was limited to those in 2018 and beyond. This will affect family’s discretionary spending and their debt-to-income ratio. I see how this had wide stretched arms throughout the housing market.
3. Different tax ramifications for an asset and interest held for under/over three years. It looks like the rule of thumb is under 3 years will be taxed as a short-term capital gain (much higher rate). Now there are a variety of instances where the time held for an asset, an entity, and an interest/stream-of-income can overlap and change the dynamic as well as the impact.
4. If your asset creates jobs, you have an opportunity to catch a break. A great question came up (wish I could take credit for it, but just glad I was in the room to hear it). There are payroll and contractor deduction available and there are even more benefits for those that have employees actively on the payroll. So that could be as simple as the guy who manages a parking lot, to the person that is actively managing a larger property.
5. Carry over asset – if a 51%+ owner of an entity sells his or her shares, the Oklahoma entity would typically cease to exist and the remaining partners would have to immediately start a new one in order to maintain operations, until now. Now a majority partner can sell all or part of an ownership interest without having having to dissolve the original entity or company. This sounds more like a convenience until you consider that means only ONE tax return instead of having to file TWO and continually track them.
Here’s The Diehl… The current tax reform was the culmination of deal that started in 2016 that has gone through an overwhelming number of edits and amendments to be what it is today. It is heavily detailed set of guidelines that still needs a lot of clarifications for the nuances of the businesses in Oklahoma – even from the guys that understand it. I’m in favor of finding the right team of professionals to help me navigate the ins and outs here. It seems like if done right, there are several opportunities to save more in the long run. And if done wrong, then its not just the implicit loss, but the explicit expense to repair and re-file. LAME!
If there are 3-4 account that are willing to meet and provide a bit more insight into what works best for your business, the cost to complete, and the patterns for success – is it worth it?
WE LOVE REAL ESTATE.