Have you spoken with your CPA about the pass-through tax deduction? If not, then you might be missing out on the opportunity to write off a significant portion of your business income. In this episode, Gene Marks and special guest, Hal Rosen of Haynie & Company, discuss how small business owners who run sole proprietorships or S-corps can benefit from this substantial tax break.
Podcast Key Highlights
- The Advantages of Hiring a Licensed CPA to Prepare Your
- CPAs are more familiar with business-related tax laws and
- A CPA will make sure you don’t miss any potential deductions
or overpay your income taxes.
- CPAs are more familiar with business-related tax laws and
- The Small Business Pass-Through Tax Deduction
- Pass-through businesses, such as sole proprietorships,
partnerships, and S-corporations, are eligible for a deduction of up to 20% on
their business income, or QBI (Qualified Business Income).
- If your QBI exceeds a certain threshold, you may not be
eligible for the full 20% deduction.
- Business owners who didn’t take advantage of this deduction
on their previous tax returns can amend up to three years back.
- Pass-through businesses, such as sole proprietorships,
The views and opinions expressed on this podcast are for informational purposes only, and solely those of the podcast participants, contributors, and guests, and do not constitute an endorsement by or necessarily represent the views of The Hartford or its affiliates.
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Gene: Hey everybody and welcome. This is Gene Marks here on the Small Biz Ahead podcast. I’m bummed Jon Aidukonis is not here with me today. I can’t believe he’s missing out on this conversation about tax deductions. My gosh, what a coincidence that for some reason he was unavailable. No, I’m just kidding. He actually had a prior appointment, could not make this conversation, but that’s okay. Because listen, I’m the accountant here and I’ve got a colleague and a partner in crime here that is also an accountant and a CPA, Hal Rosen, who is joining us today. First of all, Hal, let me first of all, thank you for taking the time out of your day and joining me for this conversation.
Hal: Well, it’s good to be here. I always like to help small business people. It’s at the heart of my practice, is what small business people do. So I’m glad to help.
Gene: I am glad to hear that. Now, Hal, you’re a partner at Haynie & Company, we will give the website as part of the show notes. But I believe it’s hayniecpas.com, H-A-Y-N-I-E-C-P-As.com. Is that correct?
Hal: Right. And CPAs, because there’s a former part of the company that spin off, that’s hayniecpa.com. So that sometimes is confusing. So we have the s on the end of CPA.
Gene: And you are a CPA as well, correct?
Hal: That’s correct.
Gene: That’s right. For how many years now?
Hal: It’s been 43 years since I got my license.
Gene: Oh my goodness. That’s a long time. Wow. I mean, did you take the CPA exam on a stone with a chisel, to put in your answers or?
Hal: It was all manual. We didn’t have computers when I took that.
Gene: Yeah. Yeah. Actually mine was as well. I got my CPA in the ’80s and I don’t even practice accounting per se, I don’t do tax returns. I was never a good CPA, Hal, for me, if it’s close enough, it’s good enough. And that’s probably not the way you want to be if you’re a good CPA. But I’ve kept my certificate over the years. I worked so hard for it and I’m proud of it. And I do use it for writing and all that. It’s a great profession. And so you’ve been doing this for, God, four decades is amazing. You’re based in Salt Lake, is that right? Salt Lake City.
Hal: That’s right. Salt Lake City.
Gene: That’s great. And tell me about your practice. Are you a tax guy or you’re a general financial guy? Do you deal mostly with small businesses?
Hal: I deal mostly with small businesses. I’m part of the tax department. I’m phasing out of taxes right now. In the last about a year and a half, we’ve been implementing an automated bookkeeping system in using technology to get out of manual entry and let computers and the machines do more of what they can. I’ve used QuickBook since DOS version one, I actually have my original diskettes framed on a bookshelf here. So I got on the QuickBooks bandwagon right from the beginning. And lots of other CPAs at the time were saying, that’s a joke of a program, it’s not right, it doesn’t do things the correct way. In other words, journal entering all the changes and fixing everything that way. But I looked at it and said, well, it’s right for my clients.
Hal: Because it’s inexpensive, I can fix their mistakes in a hurry. It’s user friendly. Now the DOS version was very plain, but it was lightning fast. And so it was just great for my clients. And so I’ve just built up a practice over the decades of using QuickBooks and helping clients with QuickBooks.
Gene: I have to ask you, being that you’re in that technology word, and we are going to get into the topic of the day, which is the qualified business income tax deduction of small business, pass-through deduction. But before we get into that topic, you mentioned QuickBooks, part of into it is TurboTax. And there’s a lot of competitors for tax preparation software that both individuals and small businesses use. Just very quickly, what are your thoughts about tax preparation software? Can it replace a CPA for a small business? Do you ever advise a small business owner to just get TurboTax or H&R Block, or do you not advise doing that? What are your thoughts on tax prep software for the small business owner?
Hal: I have never advised either one of those. Yeah. It used to be, I would see lots of clients that had figured their taxes on TurboTax and they get frustrated because they weren’t simple and they’d come in to see me and I developed a philosophy that the IRS loves TurboTax.
Gene: Why is that?
Hal: It’s because I found people on average overpaid their taxes by $3,500 by using TurboTax.
Gene: Oh my goodness. Wow. Okay. That’s a warning.
Hal: TurboTax tries to help people, but when you get into businesses and such, and this is why the people came to see me in the first place is, they just didn’t know all what was going on. And they ended up double counting income, they ended up leaving off expenses that should have been deductible. And if you got W-2 income and maybe some interest and you’re trying to use TurboTax, it’s probably just great, except, there’s one thing I don’t like about it. If you print out the return, the return’s like 125 pages. If we printed out that same return, it’s probably 20. They think they’ve got to print all these schedules and schedules that could fit on five pages, they expand it to 25 or 50 or whatever.
So for the right people, they can help. But if you’re in business, you really need somebody like us that can help you, that knows what’s going on. And that’s what we see, and that’s how we help people. That other company you mentioned, I would never recommend them because they bought out my tax software company that I’d used for decades. And in four years, destroyed a wonderful company.
Gene: Oh gosh. Well, I’ve just gotten emails from both of those companies, and they’ve now pulled out of those sponsorships for this podcast. So thanks a lot, Hal, I appreciate. No, I’m just kidding. They’re not sponsors.
Hal: One of them, I didn’t give by names.
Gene: That’s fine. It’s good advice that you can give to your clients, and I’m in full agreement with you. I do think, for some people, even some small businesses, they can get away with using a tax prep software, but it’s like anything else. I think you need to have a human set of eyes that really knows the business owner well and knows all the facts to really provide the best type of tax advice. Now, one of the biggest areas of taxes in the past, at least since 2017, has been this qualified business income deduction. What’s it called? The small business pass-through deduction.
And what I wanted to do, Hal, is I wanted to sort of give you the floor. You can insult my intelligence, what little of it that there is, and assumes I know nothing about this deduction. But it’s a huge one for small business owners that run pass-throughs, because so many of us have S-Corps and partnerships. So tell us about this deduction and I’m going to ask you to also advise us on what we should be asking our accountants about this deduction. Is to make sure that we’re taking full advantage of it? So the floor is yours.
Hal: Okay. So let me just add, besides pass-through entities like partnerships and S-Corps, it also works for sole proprietorships. In other words, a Schedule C on the 1040, does not work for C-Corps. It’s only for those entities that pass-through to the owner, saying a Schedule C is a pass-through entity as well, it’s just a single person owner. It is a godsend to small businesses. It is huge. Essentially it gives a deduction up to 20% of the income of the business and it’s called qualified business income, or we call it QBI deduction. So when you compute your income, whether you’re a Schedule C or partnership or S-Corp, normally, most businesses get a deduction that flows through. Well, it happens on your 1040, not on the business return, of 20% of that income. Now it may be up to 20% because there’s some caveats in there and there’s some limitations, but that is just an incredible deduction for these small business people.
Gene: So let me stop you right there. So basically if I made a $1,000 in my business last year and say it was an S-Corp, a partnership, or even a proprietorship, basically, before this deduction, that entire $1,000 would then show up on my individual return and it would all get taxed $1,000. But now because of this deduction only $800 shows up, right? Because there’s a up to a 20% deduction I can take, which is it’s enormous for small businesses.
Hal: You put in small numbers. Let’s talk maybe a more typical business. Let’s say it’s a business that made $150,000.
Hal: That’s a $30,000 deduction. That’s huge.
Hal: I mean there’s limitations. One, it depends on what type of business you’re in. So if you’re like me, an accountant, we’re limited over a certain level of income, which depends on if we’re married or single. If our income’s over $340,000, if we’re married or half that for a single individual, then that phases out fairly quickly. Accountants, attorneys, doctors, dentist, what you might call professionals or licensed individuals like us that are in the business of serving the public, are limited on that type of thing. Except for architects, for some reason, architects got an exemption.
Gene: That’s weird.
Hal: I don’t know why. But most businesses, most of my businesses, business clients qualify, from restaurant owners. I’ve got a client that services forklifts. I mean just all kinds of business, real estate, real estate rental, those types of things.
Gene: If I can ask and not to interrupt. But what about, because we do have quite a few freelancers and independent contractors that listen to this that might have a Schedule C, like proprietorship income on their return. Do they qualify as well?
Hal: Yes. Yes. And up to those limits, the $170,000, and these get modified for inflation every year. But for 2022, $170,000, if you’re single or double that if you’re married, you don’t have that limitation, a doctor, dentist, attorney, one that’s in personal services, still gets to claim it. It’s just when you go above that, it phases out. So it’s available for anybody that’s in business, depending on what your income is and what your tax is, there may be even a limitation there and you don’t get the full 20%. But I would say 90% plus of my clients get the full 20%, so it’s unusual that you don’t.
And let me give you an example. I’ve got a client, they own two restaurants in Idaho, in the Boise area. They’re Hispanic restaurants. This couple, they work hard, they work really hard. They didn’t go down when COVID hit because they had drive-through service. They made an excess of $800,000 on these two restaurants, that’s $160,000 deduction they got off of this.
Gene: Mm. That’s amazing.
Hal: A few years ago we made them into an S-Corp. And so we fixed, they were taking too much W-2 pay out of it. They ended up saving, I think about $75,000 in 2018, which was the first year this was available. That’s just incredible savings. And I’ve seen this across the board with so many of my clients that it really has helped.
Gene: Is it a complicated calculation to make? Has it been more difficult for you as the accountant for a lot of these clients to take full advantage of this?
Hal: Well, this is where software does come of in, and I use a software that’s a sister to TurboTax. So I can’t slam TurboTax too bad, but we use one for professionals. And it does most of the calculations, although we’re often having to check them, sometimes I’m surprised and we’ll go back and look at stuff. But it is a somewhat complex calculation if you don’t have the software that’s doing it because let’s say I’ve got multiple businesses and two of them had losses and one of them had a gain.
Hal: Well, those losses get netted against the gains before the QBI is determined. So you can’t exclude it. Or let’s say I had a loss last year in my business and this year I’ve got a gain. Well, that last year’s loss gets netted against this year’s gain before QBI gets to calculate it.
Hal: So there are some things like that that figure in.
Gene: Right. So that was my next question actually. So what if I own multiple businesses? How does the QBI deduction come into play?
Hal: They all get netted on, I think it’s Form 8889. Is they all go on to that form and you net down to what is the net income. So losses get applied against gains.
Gene: Got it.
Hal: And then it’s calculated.
Gene Marks: Got it. Next question is, if I wanted to make sure that my accountant was on the ball and taking this deduction for me. Say I was going to look at last year’s tax return, just to make sure, where would I look? Where would I find this deduction?
Hal: Okay. Don’t look on your business return. So if you’re filing a 1065 partnership or 1120-S S-Corp, you’re not going to find it there. It flows through to your 1040. So if you’re on Schedule C, that’s on the 1040. So that’s where you want to look and you should have that Form 8889 that’s in there, and you’re going to see it before you get taxable income on your 1040. So you’re going to have income, you’re going to have itemized deductions, that all comes off and then you’re going to see the QBI deduction coming off before taxable income is calculated and taxable income is what determines what tax bracket you’re in and the calculation of your actual income tax.
Gene: Got it. All right. Couple more questions, and I’ll leave you go, because this is great stuff. If there was a mistake made in prior years, say my accountant wasn’t doing their job and didn’t take advantage of the deduction for whatever reason. What can a business owner do?
Hal: You could amend back three years. Typically, we say three years after you file your return of the due date to your return. So if I filed, and we’re talking the due date of the 1040 here, which has generally been April 15th. Except for the last two years, and even this year, it’s April 18th. You look at that, if you extended your return and then you look at, let’s say I filed in October, then three years after that filing date, I can amend that return and go back and claim that deduction.
Gene: Got it. All right. That’s great. Final question. And I don’t want to get political here, I just want to share the facts with our audience. There was some talk of limiting this deduction in what some of the more recent legislation in Washington, particularly The Build Back Better Bill. There was some talk about, for business owners that make more than $400,000 a year, this deduction would start phasing out. Is there anything we should be aware of or any business owners should be aware of about the future of this deduction that you might know, or that might be giving you concern?
Hal: Well, with Congress, you’ve always got to be watching. And you’re right, The Build Back Better Bill, which had all kinds of change is impacting our small business owners, did not pass. And I don’t see anything that I’m hearing that’s working on that in Washington right now. I think it’s dead, there’s certain parts of that may come back up separately or may be resurrected. But this is an election year, the end of this year. And that tends to stop Congress in making big changes. And so, I’m not seeing it right now. I think we’re back in business with the way we had it. And it was really nice to not get a tax bill in December this year like we’ve seen so many years in the past. It’s really hard to plan. I mean, Build Back Better, when that was introduced about almost a year ago right now, that just threw a kink into tax planning for last year. Nobody really knew what to do because it was so many drastic changes, but it didn’t end up being very many, which we’re all celebrating that are in public accounting.
Gene: Hal Rosen is a partner at Haynie & Company, which is www.hayniecpas, with an s, dot com. That’s H-A-Y-N-I-E-C-P-As.com. Hal, thank you so much for this conversation. This is perfect. We just talked specifically about this one deduction that all business owners should be aware of. And I think you’ve given us all the information we need to talk to our accountants. So thank you so much for joining us.
Hal: You’re welcome. I’m glad to be with you.
Gene: My name is Gene Marks and thank you guys for listening as well. You’ve been listening to The Hartford, Small Biz Ahead podcast. If you need advice, tips, any help in running your business, please visit us at smallbizahead.com or sba.thehartford.com. Again, my name is Gene Marks. Thanks for listening. We’ll be back with another podcast edition soon. Take care.
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