Every business owner to be successful, must do hard things. There is nothing in life that is gained without hard work and doing hard things. Is it hard to do hard things? Yes.
C.S. Lewis said, "It is hard; but the sort of compromise we're hankering after is harder — in fact, it is impossible.... We are like eggs at present. And we cannot go on indefinitely being just an ordinary, decent egg. We must be hatched or go bad." In other words, we must do hard things to break through our shell or go bad from inaction. We encounter various pieces of shells as we work on our businesses and must break through them.
Jennifer Miller wrote on her blog, “We have every labor saving device known to man, and we still complain about having to do laundry or wash dishes (in machines!) We don’t walk, we drive. We don’t play sports, we watch other people play them. We don’t climb mountains, we watch the Discovery Channel. We don’t do hard things. Instead we like to sit back and critique other people who do hard things.” What a sad state it is for those who even consider doing hard things.
Angela Duckworth, an author and psychologist, has studied what is the predictor of those that make it through hard things without quitting. She has studied West Pointe cadets, spelling bee champions, sales associates, Ivy League graduates and more only to discover that the best predictor of success through hard things is what she calls GRIT or defines as passion and perseverance. She defines passion as “consistency over time” and perseverance as “following through.”
As we do things, even hard things, on purpose, consistently, and follow through on our commitments to our customers, our employees and our families we will grow and be better than where we started.
Steve Young, during his first semester at college and on the football team wanted to quit and come home. His father told him; “You can quit…but you can’t come home because I am not going to live with a quitter.” Steve trusted his father, stayed on, did hard things and has had a great career as a result. He said of his father’s answer – “It was tough but it was loving.” While a father’s tough love started a great career for Steve, we can all learn that we are better off not quitting and seeking smart counsel from trusted partners and advisors when we want to give up. Our own determination and their encouragement can lead us to success.
Business owners, and individuals, must do hard things to grow.
Someone asked me once to make a list of everything that a business owner should know. I made the list and the first thing I put on the list was to know who you are and what you do.
Knowing who you are is more than just a mindset. It is having some self-confidence and esteem for yourself such that you are okay standing in front of a mirror or a customer. Knowing yourself is being honest with what your strengths are and your weaknesses. It is knowing what your values are and living life by them. It includes your interests and temperament, your activities and your life mission. It is admitting that you don’t know or can’t do. It is wanting to know and wanting to do. It is doing something about not knowing and not being able to do. It helps you be happier, make better decisions, resist social pressure, be more understanding of others, and helps you feel more alive.
Entrepreneurs frequently make the mistake of making themselves the business. While great for the ego, this is a terrible practice. If you die, the business dies. If you want to sell the business, you have to sell yourself. Knowing that you are not your business and acting as such is part of knowing who you are.
Knowing what you do allows you to serve. You know who you can serve and the results that come from your service. You are not everything to everyone but you are something to someone. Sales become easier because you know if what you do can help them or not. It allows you to say “no” when asked to do something you don’t do.
Knowing who you are and what you do sets you up for growth and success.
Now that congress has made final the latest tax act, I thought I would take a moment to share with you a summary of the changes so you may understand how they may affect you. These are in place 2018 until 2025.
Income Tax Rates
The 39.6% tax bracket has been removed and the rates have been condensed.
The system for taxing capital gains and qualified dividends did not change except the income levels for the 15% rate will start at $77,200 for married filing joint and $38,600 for single filers. The 20% rate will start at $479,000 for married filing joint and $425,800 for single filers.
The Standard Deduction
The standard deduction has been modified making it $24,000 for married filing joint and $12,000 for single filers. This will make the standard deduction more attractive than itemizing for many taxpayers.
Congress has eliminated the personal exemptions through 2025.
Pass Through Income Deduction
With the exception of accounting, law, consulting, health, athletics, financial services, brokerage services or any business where the principal asset of the business is the reputation or skill of one or more of the owners, taxpayers will be able to deduct 20% of “qualified business income” (net income, gain , deduction and loss with respect to the qualified trade or business. It does not include reasonable compensation of an S Corporation shareholder.) as well as 20% of REIT dividends, qualified cooperative dividends and qualified publicly traded partnership income. This exclusion phases out for single filers with taxable income in excess of $157,500 or $315,000 for married filing joint returns. Business owners in the exception category may use the deduction if their total income is less than the phase out amounts.
Child Tax Credit
The act increased the child tax credit to $2,000 per qualifying child ($1,400 refundable). A new $500 credit for qualifying dependents who are not qualifying children was also introduced.
The act has removed the overall limit on itemized deductions through 2025. However, they did make some changes to specific deductions:
Mortgage Interest – Home Mortgage Interest deductibility is reduced to $750,000 of acquisition indebtedness.
Home Equity Loan Interest – This interest is no longer deductible if the funds were not used for improvements on the secured property.
State and Local Taxes – Up to $10,000 of state and local income taxes and property taxes can be itemized.
Charitable Contributions – The act increased the income-based limit to 60% from 50%. Charitable deductions made for college athletic event seating rights are no longer allowed.
Miscellaneous Itemized Deductions – These were subject to a 2% floor under current law and included brokerage fees, attorney and accountant fees, and unreimbursed employee business expenses. Under the act, these are no longer deductible through 2025.
Medical Expenses – The threshold for deduction was lowered from 10% of adjusted gross income to 7.5%.
Alimony – For agreements executed after 12/31/2018, alimony and separate maintenance payments are no longer deductible by the payer and no longer included in the payee spouse’s income.
Moving Expenses – No longer deductible except for armed forces on active duty pursuant to an order.
IRA recharacterizations – The act removed the ability to undo an IRA to ROTH IRA conversion.
Estate, Gift and GST Tax – The estate and gift tax exemption was doubled to $10 million and indexed for inflation.
Alternative Minimum Tax – The exemption was raised to $109,400 for married filing joint and $70,300 for single tax payers. The phaseout thresholds were increased to $1 million for married filing joint and $500,000 for single filers.
Individual Mandate – The penalty for not having a qualified health plan has been reduced to zero from a maximum of approximately $14,000 per return (Effective after 2018).
From a business perspective, the act included many provisions that impact businesses. They are as follows:
Corporate Tax Rate – The double taxation trap of corporations remains real but the graduated tax rate has been removed and replaced with a flat rate of 21% beginning 1/1/2018. The Corporate AMT has been repealed too.
Depreciation - 100% bonus depreciation has been extended but will phase down over the coming years to 20% in 2016. Luxury automobile depreciation limits have also been increased and Section 179 expensing has been increased to $1 million with a new phaseout of $2.5 million.
Cash Basis Accounting – Business taxpayer may elect to use the cash basis/cash method of accounting if their three year average annual gross receipts is $25 million or less. Businesses that meet this rule will also not have to account for inventories and may treat them as nonincidental materials and supplies. Uniform Capitaization Rules do no change under this act.
Business Interest Deduction – Business interest is limited to the sum of business interest income, 30% of the adjustable taxable income for the tax year and the automotive floor plan financing interest for the tax year. Any disallowed business interest deduction can be carried forward indefinitely. If the business meets the $25 million gross receipts test above or are in real property development, construction, rental operation, leasing or brokerage trade or business or farming can elect out of the limitation.
Net Operating Losses – These are now limited to 80% of the taxable income and may carry forward any unused NOLs forward indefinitely.
Like Kind Exchanges – Section 1031 transactions will be limited to real property that is not primarily held for sale. This applies to all transactions started after 1/1/2018.
Entertainment Expenses – All expenses related to business entertainment are no longer deductible.
Meals Expense – Meals provided by the employer through an eating facility (onsite cafeteria, etc.) will be deductible at 50% through 2025 and not deductible thereafter. Travel meals and business meals where entertainment is not the purpose may still be deducted at 50%.
There were other items included but these are those that apply to our clients to the best of our knowledge.
If you are interested in learning what your taxes might be under the new rules, using a prior year return as an example, please let us know that you are interested in engaging us for that analysis.
This blog allows you to experience the raw, gut wrenching drama of human conflict through accounting in each of its three stages: preparing to do battle, the thrill of victory and the agony of defeat.