FINANCIAL LITERACY, INVESTING

The Golden Rule: He Who has the Gold Makes the Rules

Joseph A. Davis, CDFA®

January 23, 2018

2018 has started with a bang! We have sweeping tax reform & a government shutdown. Last Friday the Senate did not confirm enough votes and shut down. As I write this the government just extended funding for an additional 3 weeks. What a joke! This is the fourth time, to my recollection, that this has happened. While this is troubling and there is a lot of finger-pointing and backbiting going on, ultimately, this does not absolve individuals of the financial responsibility they have to improve their financial situations. In fact, it proves my point, now more than ever – that the average American needs to step up. All of us.

This morning, I saw a brief article which indicated the top 1% of the world population maintained approximately 80% of the wealth for 2017. My gut reaction? Who cares? While this may be troubling for some, it does not bother me. Why? Simply because I do not believe that money is a finite resource. A large portion of the population seems to think that taxation & regulation will “give money back to the people.” The reality is that the wealthiest people in the world will simply use those new regulations & taxes to improve their wealth.

In many ways, life is simply a game. We are all players and use our financial education to improve our wealth and those around us.

In many ways, life is simply a game. We are all players and use our financial education to improve our wealth and those around us.

While you may or may not agree with me, I feel like in many ways, life is simply a game! We are all players and use our financial education to improve our wealth and those around us. You can win as long as you understand the basic rules of the game. That is, he who has the gold makes the rules. And if you haven’t been paying attention, the rules just changed…

The Tax Cuts & Jobs Act* has brought sweeping tax reform. Love it or hate it, it’s here. While some argue these breaks are only for the rich – I suggest you start thinking rich. Meaning, you should study the changes to learn for yourself how you can benefit. For example, becoming self-employed or starting a business has become more attractive than ever!

“Study the tax changes to learn for yourself how you can benefit.”

A brand-new deduction specifically designed for owners of pass-through entities could be the blessing you need to get your business off the ground. What is a pass-through entity? Pass-through entities are:

  • Sole-proprietorship
  • Partnerships
  • LLCs
  • S-Corps
  • Limited Liability Partnerships

We called these pass-through entities simply because the business income “passes through” the owner’s 1040, typically on a schedule C. The most frustrating thing about pass-through ownership has typically been the self-employment tax at 15.3%. While this has not changed, beginning in 2018, certain pass-through entities could qualify for the new deduction of up to 20% of the net business income. Regular C-corporations are not eligible for this tax break, but do benefit from the new lower corporate tax rate.

What does that mean for me? Well, say in 2018 you own a small landscape company that shows, after expenses, a profit of $50,000. This landscaper could potentially have up to an additional $10,000 deduction that he didn’t have the previous year. That’s awesome.

Say in 2018 you own a small landscape company that shows, after expenses, a profit of $50,000. This landscaper could potentially have up to an additional $10,000 deduction that he didn’t have the previous year.

This deduction is available beginning in 2018 and is scheduled to last until 2025. It will end on January 1, 2026 unless the rule is extended by Congress. How can we qualify for this?

  1. Have self-employed income via one of the entities listed above. Income such as dividends, interest, wages and income outside the US does not qualify.
    2. You must show Qualified Business Income – the deduction will not be available for companies who do not have taxable income & the deduction cannot exceed 20% of your taxable income.

If your 2018 income is less than $315,000($157,500 for single filers) then there is nothing else to do. If your income exceeds these amounts then the deduction becomes more complex. As this article is directed towards those individuals striving to reach accredited investor status, I’m going to stop right here. Deductions for non-service providers or individuals with income over $315,000 or $157,500 for single filers have additional requirements that they must meet. Consult your own personal tax advisor or call us for more specific details.

“As we move into 2018, perhaps it’s time to consider looking at self-employment or moving to a small business.”

So what’s the point? As I mentioned before, the rules just changed. Remember the golden rule, understand the game & find new ways to build your wealth. While I can’t tell you what the best path is for you, I do speak at length on what I feel, is the perfect investment trifecta:

  1. Business ownership
    2. Equities
    3. Real Estate

As we move into 2018, perhaps it’s time to consider looking at self-employment or moving to a small business. Set short-term goals, understand the tax rules, get a mentor & educate yourself so that you can reach accredited investor status. 2018 is better than ever if you’ve been thinking about making the leap to improve your financial education, start a business or improve your investments.

 

*Davis Financial LLC, BEAM Asset Management, LLC and Securities America and its representatives do not provide tax or legal advice. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results.

 

Securities offered through Securities America, Inc., Member FINRA/SIPC. Joseph Davis, Registered Representative. Tax services provided by Tax Smart Pros. Advisory services offered by Beam Asset Management. Joseph Davis, Investment Advisor Representative. Davis Financial LLC, Beam Asset Management, Tax Smart Pros and Securities America, Inc. are separate, unaffiliated entities. CA Insurance Lic. #0I00447.
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Securities offered through Securities America, Inc., Member FINRA/SIPC. Joseph Davis, Registered Representative. Tax services provided by Tax Smart Pros. Advisory services offered by Beam Asset Management. Joseph Davis, Investment Advisor Representative. Davis Financial LLC, Beam Asset Management, Tax Smart Pros, Fit Divorce Planning and Securities America, Inc. are separate, unaffiliated entities. CA Insurance Lic. #0I00447.