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Guest: Brett Ellen, the founder, President, and CEO of American Financial Network, which is an independent financial solutions firm that’s dedicated to serving individuals and corporate clients across North America in the areas of financial planning, wealth management, risk management and corporate planning. Brett sits on the advisory board of the NHL’s Los Angeles Kings and is an active member with Business Forums International. He’s also a client of CEO Coaching International.
Episode in a Tweet: Here’s how CEOs can use the new tax laws to their advantage.
Quick Background: If you’ve just been skimming the headlines since the end of last year, you might be under the impression that the new tax laws are a gigantic gift to high-earning CEOs, entrepreneurs, and their companies.
Yes, some changes could make filing easier and taxes less onerous for you. But there’s a lot of misinformation and exaggeration floating around about just how generous the new tax laws really are.
On today’s show, Brett Ellen is back to cut through the hot air and explain how the new tax laws will really affect entrepreneurs and CEOs. Brett also discusses some of the biggest mistakes he sees people make as it relates to handling their business and personal taxes and how to put a protective moat around the castle that is you and your company.
Transcript: Download the full transcript here.
Key Insights on New Tax Laws
1. Don’t rush into any big changes.
Just because Congress rushed through a tax bill doesn’t mean you should make quick changes to take advantage of the new regs. You and your tax team have the rest of 2018 to weigh all the changes and determine what makes the most sense for your situation.
The new bill is over 1,000 pages long, and experts are still digging into its particulars. Significant changes could happen between now and the end of the year, particularly with midterm elections coming up.
Advises Brett, “Please, don’t anybody go out there and make quick changes. A lot of us really are of the opinion that as we see the turnover politically that’s going to happen probably over the next couple of years, certainly over the next 18 months, we don’t believe that necessarily all that’s come out is going to have life-long positioning.”
2. ESPECIALLY don’t rush into forming a C-Corp.
“At the beginning of the year, I had over a thousand emails saying, ‘I guess I should be a C-Corp now,’” says Brett. But while that 21% tax flow-through for service companies does sound enticing, this is one instance where the letter of the law isn’t quite set in stone.
“The new tax law specifically says, ‘Law firms, accounting firms, and financial advisors are not services for these discussions,’” warns Brett. “It doesn’t really give great clarity as to what is a service company.”
Also, tax breaks aren’t a be-all and end-all when it comes to structuring your business. On the one hand, the tax flow-through could be a benefit if your company has its own captive insurance agency. On the other, getting your money out of a C-Corp can be a big hassle.
“I wouldn’t be jumping to a C-Corp very quickly,” Brett says. “I’d really think through it, and maybe if I’m going to do it, wait until the end of the year.”
3. Look into your SALT cap and entertainment expenses.
The new tax laws cap state and local (SALT) tax deductions at $10,000 and eliminate entertainment deductions. That’s a big blow to high-earning CEOs and their businesses in high-tax states. In fact, some of Brett’s clients are already looking into relocating both their businesses and residences out of California and New York.
In part, the new SALT cap is meant to push more people towards taking the higher, simplified standard deduction of $12,000 for individuals and $24,000 for married couples. That could be great for start-ups and small business owners. But successful CEOs who are used to itemizing payments on large mortgages and gifting sports tickets to valued clients need to consider their options – including deferred income plans if you might retire to a state without income tax.
4. Build your moat.
Asked to rate the new tax laws on a scale from 1-10, 10 being “this is a huge gift to CEOs and businesses,” Brett answers, “Probably a 2 or 3. I think most high-earners are not very satisfied with what these new rules have brought up. If you were to ask the average public, most people are feeling 5, 6, 7 on it. I think it’s a big win for most moderate earners.”
That should be a wake-up call to any CEO who’s expecting to file as usual in April 2019 and wait for a larger refund to roll in.
Ultimately, you are responsible for your company’s money. But weighing potential hurdles, like the lower SALT cap, against potential advantages, like higher exemptions on estate taxes, requires having a top financial team in place.
“I think you should view yourself and your businesses as castles, and the moat around that castle protecting it is your professionals,” advises Brett. “How often have your estate attorneys, tax attorneys, financial advisors, risk managers, and asset protection people all sat around a table together, with you at the head saying, ‘This is what I want for me and my business, for my family. These are all the goals, these are our dreams.’ Put that team around the table, discuss that, walk away, and let the team work together for you.”
1. Take a breath. Don’t rush to any judgements on the new tax laws until all the details are in place and your financial team has done its homework.
2. Location, location, location. If you’re living and/or operating in a high-tax state like California or New York, then Texas and Florida just became a whole lot more attractive.
3. Hire the best people. Right now, rate your financial team and outside pros on a scale from 1-10. Do you really want anyone scoring 7 or lower wading through 1,000 pages of tax laws for your business?