The 2017 tax overhaul limited the business deduction as a way of helping pay for the $1.5 trillion set of tax cuts, but the $2 trillion legislative package approved by Congress in March temporarily eliminated some of the restrictions as a way to help businesses cope with the impact of the pandemic.

Under the TCJA, for tax years starting after Dec. 31, 2017, business interest expense deductions are generally limited to the sum of:

• The taxpayer’s business interest income.
• Thirty percent (or 50%, as applicable) of the taxpayer’s adjusted taxable income.
• The taxpayer’s floor plan financing interest expense.

However, the business interest expense deduction limitation won’t apply to certain small businesses, electing farming businesses and certain regulated public utilities. The $26 million gross receipts threshold applies for the 2020 tax year and will be adjusted annually for inflation.

A real property trade or business or a farming business can elect to be exempted from the business interest expense limitation. However, taxpayers can’t claim the additional first-year depreciation deduction for certain types of property held by the electing trade or business.

Taxpayers must use Form 8990, Limitation on Business Interest Expense Under Section 163(j), to calculate and report their deductions and the amount of disallowed business interest expenses to carry forward to the next tax year.

Along with the final regulations, the IRS also issued extra guidance related to the business interest expense limitation. These proposed regulations spell out additional guidance on different business interest expense deduction limitation issues not addressed in the final regulations, including more complex issues pertaining to the amendments made by the CARES Act. Subject to some restrictions, taxpayers can rely on some of the rules in the proposed regulations until final regulations implementing the proposed regulations are published in the Federal Register.

The IRS has also provided an FAQ list regarding the aggregation rules under section 448(c)(2) that apply to the section 163(j) small-business exemption.

Both the final and proposed rules are complex, and companies should get professional advice on how the rules apply to them.

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Can you predict the future? I suspect most of you reading this would say no. For those that would say yes, perhaps you need some therapy (humor intended).

Imagine Your Future Financial Self

What if I asked you: “do you feel connected to your financial future?” Behavioral finance, like any young science or field of knowledge, is a work in progress. It is now moving into its second generation and attracting bright young minds furthering our collective cause in this space. Two such individuals at Kansas State University have just published a study that suggests we might be able to predict our financial future or at least impact it depending on our ability to visualize our future financial self. The more vividly we can imagine our future financial self or the more connected we are to that mental model, and the related details of financial goals, the more we influence behavioral changes that will make it more likely we will accomplish those goals.

The “future self-continuity framework” is a new psychological framework used to investigate intertemporal choices – the process by which people make decisions about what and how much to do at various points in time when choices at one time influence the possibilities available at other points in time.

Change Your Ways?

In other words, let’s say you are 20 years from retirement and your financial advisor says you are spending too much and will not have enough assets to produce retirement income so you may live at the lifestyle of your choice. This study shows a correlation to suggest that when you hear this, most of you will change your evil ways (obscure reference to Santana) to be more likely to produce the intended outcomes in retirement, while some of you will say: “damn the torpedoes!” and continue to live it up now, as long as your vision of the future financial self is compatible.

Some people view their future self as a completely different person. However, we happen to think that visualizing exercises are very productive and necessary. The more you can do this, the greater the likelihood you can produce those results. If you can see it, you can make it happen.

How can we help you? Let’s talk about your goals — and what you, your family and your business need to thrive.

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Think of it Just Like an IRA

Once the account is set up, you can contribute up to $3450 per individual and $6900 per family to a pre-tax account that will grow as tax-deferred. Think of it just like an IRA, except one that allows you use to use the funds for health care costs not covered by an HDHP. The Health Savings Account gives you control, it empowers you to regulate your own health care expenses.

Distributions are not taxable

The beauty of the HSA is that your contributions are not subject to federal tax. California does tax the account, but it is a much better tax result than relying on deducting your medical expenses as itemized deductions. When used for qualified medical costs, your distributions are not taxable. Any money remaining continues to soak up deferral until the age of 65 when they are then subject to ordinary tax. Once you sign up for Medicare Part A at the age of 65, you can withdraw on the account without any tax.

Numerous Benefits Not to Be Ignored

The true beauty of an HSA is that contributions are tax-deductible.  When you need to withdraw from the account for qualified medical costs, your expenses are also tax-free, and as long as the savings account is left to grow, the growth is not taxable.  They perform better than a Flexible Savings Account and they can be used when needed. In other words, the benefits of an HSA are numerous, abundant, and not to be ignored.

How can we help you? Let’s talk about your goals — and what you, your family and your business need to thrive.

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Ask Yourself Some Questions

Ask yourself why? Why are you doing this? Why are you Training/Planning? What brought you to this point? What do you hope to accomplish because of working with your Trainer/Planner? How will you recognize success when you see it? Can you visualize it? Are you prepared to set some goals? Have some accountability?

Be SMART with your Goals

Whether you are training to lose extra weight, to run for a marathon, or planning for retirement, change of careers, or building a comprehensive financial plan as a road map for your life, it all starts with goals. But it’s not enough to say: “I want to lose weight” or “I want to save for retirement”. For goals to be effective, they must be SMART:

Specific, Measurable, Achievable, Relevant, and Time-bound. If any one ingredient is missing, the rest of the plan won’t work. Also, we should note how each item is interconnected. For instance, Relevance and Achievability must be gauged within the context of Time. If you want to lose 30 pounds in one month, that will likely not be achievable or relevant in that time frame. Nor would it be reasonable to expect that you could amass $1 Million starting from 0, within a year, by putting in $500 a month. It may seem simple, but you’d be surprised how many people have unrealistic expectations.

Distinguish Between Needs and Wants

In a fitness plan, you typically have a target number of calories to hit per day. As long as you are burning more calories than you take in, your weight goes down. In financial planning, we work with a budget. If you spend less than the budgeted amounts of income and asset values, your net worth goes up. It just means sometimes you have to say no to that dessert, the same way you say no to that expensive vacation.

In both cases, exercising discretion in your favor helps you increase that ROI – Return on Investment.

How can we help you? Let’s talk about your goals — and what you, your family and your business need to thrive.

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Cash Flow & Leverage – Double Edge Sword

Real estate can be costly to acquire and as a result, it begs for leverage, which is directly related and impactful to cash flow. Fortunately, in the US there is an abundance of capital, and if you have good credit, you can obtain a mortgage to acquire real estate. If you don’t have good credit, chances are you will still find a mortgage but it will cost you more to service.

The goal of any real estate investor is to produce positive cash flow each month.  Think of your mortgage like a partner who put up a big chunk of cash and reduced your risk, but you must pay them one month at a time until your loan is paid off. If you want to reduce your costs of financing, you may have to put more of your own capital at risk. In turn, this may reduce the allure of a real estate investment, as it becomes riskier.

CAP Rates = ROI

Cap rate is just another term for ROI or return on investment as applied to real estate. Cap rates allow you to compare the relative economic benefits of different real estate investments. It will indicate the efficiency of that investment. The calculation is Net Operating Income (without regard to depreciation – see next section) of the property divided by its Purchase Price. Sort of the equivalent to the P/E (Price/Earnings) ratio in the case of a stock.

As an investor, the more you have to pay for leveraging the investment, the less attractive the CAP rate of a real estate investment is, indicating a higher risk to obtain a reward.

Depreciation

Depreciation has the effect of reducing or sometimes eliminating otherwise taxable income. Since investing in real estate provides significant tax benefits in the form of depreciation write-offs, the theory is you can amortize the economic benefit of the long term investment over time, allowing you as an investor to recover due to its long term features. Real estate is the only investment that offers this benefit.

If properly positioned, real estate can offer attractive features to investors and belongs as an asset class in every portfolio.

How can we help you? Let’s talk about your goals — and what you, your family and your business need to thrive.

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Lowering the Family’s Effective Tax Rate

If you have children that can operate a computer (most of them do), make phone calls, photocopies, or have other skills pertinent to your business, making them your employees has the effect of reducing your tax liability. This is so because you are downloading taxes computed at your rate, effectively deducting money that you would likely give to the child anyway, but without a deduction. This deduction reduces your Federal, state and Self-employment tax.

Besides the benefits to you, the child benefits also since the tax rate could be as little as zero if the income is $12,000 or less, the amount of the Standard Deduction.

But wait, there’s more…

As they say in the infomercials: “but wait, there’s more!”. As if the above wasn’t enough, if you operate your business as a sole proprietor or a husband and wife LLC, you can hire your son or daughter that is younger than 18, and their wages will be exempt from Social Security, Medicare and Federal unemployment tax (FUTA). The FUTA exemption lasts until age 21.

If you are incorporated, then the child’s wages are still deductible, though no longer exempt from Social Security, Medicare and FUTA.

The gift that keeps on giving…

Now, for the pièce de résistance, what if we socked away $5500 a year of your child’s earnings into a ROTH IRA and they never paid tax on that money for the rest of their lives? Would that offend you? Is it legal? Yes, absolutely! The only rule pertinent here is that your child has to have earned income, their age doesn’t matter!

A word of caution

The above-mentioned rules work beautifully when sensibly constructed. But, we should warn against carelessness. For instance, you shouldn’t pay your 2-year-old a $50,000 salary and expect to get away with it. Teenagers can be very capable and as long as you document their hours and the work they do, you should be OK.

Summary

Hiring your kids can be profitable, tax-efficient and educational for the kids. If you also make it fun for them (the younger they are, the more important fun is as an ingredient), they will be productive and worthy employees and carry that experience into their other careers or they will be more receptive to working in the business, when and if the time comes to plan a succession.

How can we help you? Let’s talk about your goals — and what you, your family and your business need to thrive.

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The Genesis of the 4% Rule 

Approximately 25 years ago, a planner named Bill Bengen penned an article called Determining Withdrawal Rates Using Historical Data. This was the first time that anyone had suggested a paradigm of withdrawals for a smooth glide path in retirement. The implication was made that 4% was a “safe” withdrawal that would ensure the retiree wouldn’t run out of money. Keep in mind this was the early 90’s, when academic papers of this kind were scarce, and there was a belief that the “stock market” could deliver an average of 7%. The theory was, if you make 7% and only withdraw 4%, your money kept growing. Around the same time, Peter Lynch (yes, that Peter Lynch) was suggesting 7% was a safe withdrawal rate.

What is the Desired Withdrawal Rate?

A comfortable withdrawal rate is one that is derived after taking into consideration the following factors:

• Life expectancy
• Living expenses in retirement, discretionary & non-discretionary
• Assets starting with and projected growth rates.
• Income& savings rates
• Inflation rate

As you can see, this is a much more complicated answer than a specific rate that can be thrown out as a rule of thumb, as if one size could fit all. In fact, it is a factual and more scientific answer, because everyone is different and one size does not fit all.

It has been said that some folks spend more time planning a 2-week vacation than they do their retirement, which could last over 3 decades. Do you have a roadmap for this long trip?

The only way to feel comfortable about your retirement is to test the numbers using a variety of assumptions, subjecting them to scientific methods and analyses that will flush out and expose risks, and identify opportunities along the way.

We would strongly encourage to abandon the use of rules of thumb. Your unique withdrawal rate is whatever makes you feel comfortable. We work to separate fact from fiction, probable from unlikely, emotion from science.

How can we help you? Let’s talk about your goals — and what you, your family and your business need to thrive.

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We have seen many businesses go through this, some by design, and others by default. I promise not to preach but here are a few simple ideas to keep in mind. They may come in handy to keep things in perspective.

1. Have the right team – “Great things in business are not done by one person. They’re done by a team of people.” This is critical; talk to your CPA, Attorney, Banker. Have strategy meetings. Listen and take notes, give yourself enough time to process and have a focused plan of execution.
2. You don’t have to clone yourself – You did not start out knowing everything you know now. The new head honcho will get there. The important thing is to be philosophically aligned on the major elements.
3. Strengthen the numbers -scale means opportunity and everyone gets motivated by that. The financials will lead to better valuations and more options to grow.
4. It’s not about you, it’s the Market – Listen to logic – understand you may not know it all and your business may be worth more or less than what you think, and it may not matter what you think, it’s about the market.
5. Don’t let them kick you out – Don’t be that guy – you don’t want to stick around too long. It does present a number of problems.

Engage with your clients – if you run a service business, they are all thinking: ‘what happens to me if something happens to you?’ They will be encouraged, relieved and impressed that you have been so thoughtful.

How can we help you? Let’s talk about your goals — and what you, your family and your business need to thrive.

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