The new tax law ushered in some big changes, leaving many business owners confused over the best way to make the most of their returns. If 184 pages of tax law sounds like a snoozefest to you, you’re in luck. Today, we have David Danic, CPA and Director of Tax Services at Summit CPA Group to clear things up. David’s sharing his notes and highlighting some important tax savings strategies to work on between now and the end of the year.
From 4K TVs to buying season sports tickets, pre-selling services, team bonuses, parties and in-office lunches, some ideas will help you maximize deductions, while others will not. Find out what the new tax law means for your business, why consulting language in contracts might be a bad thing and how to maximize your spending, retirement plans and R&D activities to save come tax time.
Buy your tickets for an upcoming event before the end of the year, and enjoy a little tax break in 2019.
Carl Smith: Welcome to The Bureau Briefing. Before we get started, I want to thank our sponsors. They are amazing. Thank you to Mailchimp. If you need a marketing platform, Mailchimp is so much more than just email. They help you with Facebook ads, with Google ads. You just got to check them out and the way that you can slice and dice the campaigns, it's beautiful. 10,000ft. You know if you need insights into your projects and your people, 10,000ft is the resourcing tool that can help you with that and also GatherContent. Content is always the thing that drags every project down. When you use GatherContent, you can get a handle on it. And now, let's get on with the show.
Speaker 2: Welcome to The Bureau Briefing, a podcast by the Bureau of Digital, an organization devoted to giving digital professionals the support system they never had. Each episode, we're going to talk to a member of our community doing awesome, inspiring things. Now for your host, Carl Smith.
Carl Smith: Hey everybody and welcome back to The Bureau Briefing. You know it's that time of year where things start to change a little bit. Your neighbors start to put up lights, you're starting to think about the Christmas party, but there's a bigger issue, and that's how much money are we allowed to spend on stuff we might not need and call it a tax break? And that's why I'm excited to have here today, the director of tax services and that's his title, because he told me, of Summit CPA, Mr. Dave Danic.
David Danic: Hi Carl. Everything's going well. Busy time of year over here because all of your listeners are starting to call their tax accountants to figure out what's going on.
Carl Smith: So how many 4K TVs can you buy and call it a tax break?
David Danic: I think that's a pretty easy one, a lot. Just make sure they're in your office that is a dedicated space for productivity and then you're good to go.
Carl Smith: Okay. What if you're a distributed employee?
David Danic: Once again, 4K TVs are great. You know, just put it someplace that's not where your kids are playing the Xbox.
Carl Smith: What about the PS4 ... Okay. I'm going to stop doing this. I'm glad that we have you on the show.
David Danic: [inaudible 00:02:42] nights ago.
Carl Smith: As I may have just displayed, a lot of times shops aren't really sure what to do and I have gotten so much different feedback and you were at Owner Summit last year and you were hilarious in the way that you distributed the information but it was great content and it was in a way that everybody could understand. So I thought, let's get you back on the show, and let's really talk about what we need to get done between now and the end of the year and also, what do we need to do before it's tax time?
So when you're talking with your clients, what are some of the things you tell them to be working on between now and the end of the year?
David Danic: Yeah, sure. There's a ton of tried-and-true tax tips that still apply this year, even though there is the big scary tax law change. You bring up the PS4 and Xbox and the 4K TV and this happens a lot. And I'm say, go ahead and pay for those and get it done before the end of year to get the deduction but I always give this other warning, saying, look, I'd rather you have five grand in your pocket than five grand worth of a TV that you didn't need. You know I always try to just say, tax breaks are great but only buy it if you're going to use it. And if you have a perfectly good TV already, keep the money and invest it back into your company.
Carl Smith: Right, mom.
David Danic: I know, I know, it's lame but that's sometimes what I get paid to do.
Carl Smith: Well no, it's so many companies I think start off the next year kind of in the hole, because they had an accountant who told them, spend everything you can. I used to have that accountant and it was a lot of fun until payroll, that first payroll of the next year and you're like, “Oh crap. Who wants a nice TV?”
David Danic: Well it's an easy thing for a tax accountant to say, do this and I'll save you X amount of dollars. And then it really comes across as we're providing some value of paying less in tax. But at the same time, I want to be an advocate for the client say, “Let's watch out for payroll next month as well." But a lot of the rules of like accelerating deductions and deferring your income, especially if you're this cash basis tax payer, still applies even with the new tax law. So yeah, if you know you're going to have these capital needs next year for a team or you're going to be hiring four people and you need to buy some hardware, yeah, go do it. And then you might as well take advantage while you can.
Carl Smith: Now what about, I know some shops, and I used to do this, we would have clients that were looking to unload budgets. And they would want to prepay for work that hadn't necessarily come in yet.
David Danic: Yeah, it's a nice dance between the two parties because the other side of accelerating deductions is deferring your income. So that's the fancy way of keeping checks in the desk for the past three weeks of the year and saying, you're on vacation.
Carl Smith: Yes!
David Danic: And then depositing them on January 2nd. So that ... well okay. I'll just say, yes, that is still a way to do it. But now a lot of people are paying electronically.
Carl Smith: True.
David Danic: We don't see many paper checks any more. So it is a dance, but we always talk about, hey maybe delay sending the invoice as late as you can, especially if you know the customer is such a fast payer that maybe it will take a while to at least get through the system. Yeah.
Carl Smith: We had a client, a big health care client, and they rushed us through this estimate and I told them I was going to double it because I was nervous and they said they didn't care, because were billing actual, so basically invoiced them close to $200,000 and just figured that we would, when we got the check, we'd hold on to it, right? Well they called somebody at the company, it wasn't me, and just got wiring information, right, and I didn't know this and then on December 31st we got a $200,000 deposit.
David Danic: I know, and then you're like, “Crap, 35% is automatically [crosstalk 00:07:21].”
Carl Smith: [crosstalk 00:07:20] I worked so hard and it was, ah whatever. What about that? If a shop has been down and they're trying to kind of kickstart the year, if you know that you're not going to have a lot in taxes, is that something that's cool to do, to just try to pre-sell services?
David Danic: Yes. I think that's a fine strategy especially if you need to get cash flow in the door. And really, now is a good time to do it, and I say now in terms of 2018, I have a feeling most of the listeners here are going to realize a tax benefit from the new tax law. I probably would have had a different answer at the end of last year when tax rates were maybe 10% or 15% higher than they are today. But, again, this is where lame tax accountant client [inaudible 00:08:17] comes into play, I said look if you have a chance to sign a great contract, just take the cash, we'll plan accordingly.
Carl Smith: Yeah. I'm just sitting here thinking about other things that you know you're gonna do the next year. I mean ultimately you're just, it's just kind of a shell game, right? I mean if you spend more money now, you're still gonna get taxed on it later, right?
David Danic: Yeah, it's the whole principle of saying “Do I want $1,000 in my pocket now, or $1,000 later?” So if I save $1,000 in taxes today, what am I doing with that extra $1,000 in taxes. And if I know my profit margins are, let's say 30%, I know I'm getting a 30% return on those tax dollars that I saved. And sooner or later, year after year, it's actually gonna catch up and that deferring of taxes is gonna help pay for itself. But it has to happen year after year, after year. If that makes sense.
Carl Smith: Right, because I mean the IRS is basically the house in Vegas, right? I mean we're not gonna win, we can't. And if we really try to win, then we're gonna end up in that back room where Bugsy went down, right?
David Danic: Yeah, that's right, the whole Al Capone got busted for taxes, nothing else. But all things considered, yes, the IRS is the house, that's a good way to put it. But they have rules in play that if you follow some good strategies you can at least pay them as little as possible.
Carl Smith: Another thing that I remember us doing was, and we didn't do this on purpose for taxes, but it was just that idea of end-of-the-year bonuses, to help dilute the responsibility across the team.
David Danic: Are you saying bonuses in terms of amongst the ownership team, or just really across the whole staff?
Carl Smith: Really across the whole staff. We would find, based on what we thought we were gonna have to pay, we would try to boost up everybody's morale with that or a great end-of-year party, or things like that. We once did go to Vegas, and I found out later it was a problem but I gave everybody $1,000 in cash, and said they had to spend it in Vegas, they couldn't take it back with them, and then I later found out that there was really no way to account for that money, and blah blah blah, and whatever.
David Danic: Yeah, I'm gonna steer the conversation away from that, Carl, to save you any [crosstalk 00:10:56] but that's a good way of doing it, and that's really more of a management decision, in terms of saying you know what, if I do wanna lower my tax bill, and I wanna give a little bit more to the team for their hard work, yeah let's do it before the year and give them a bonus. Is that going to inspire them to do great work for me? Then yeah, let's do it. But you talked about the holiday party, I'm getting a lot of questions about that, actually, because the new law changed meals and entertainment deductions.
Carl Smith: Oh, right!
David Danic: Yeah, so that was a little scary. They're like okay, can I still take my favorite customer out to eat? Is that gone? No, that's not gone. That's actually pretty similar to last year, just make sure you keep the receipt. Write on the receipt that you talked about business and who was there and move on. And actually, holiday parties are still 100% deductible. So don't shy away from having a good time this year, because you can still get the full deduction, so that's been really nice.
Where people are getting stung though, is that maybe you bring in dinner for the staff once a week, or these lunch for the staff once a week. That used to be 100% deductible if you were doing it for the convenience of yourself. You know what, hey, I got the team in house, we're having a good time, we're eating and you know what? They don't have to take this huge lunch break and break up the productivity that they're having, that's now 50% deductible. So, a little bit of a loss there, and that might be a pretty large part of some agencies' budgets if that's a part of their culture.
Carl Smith: Yeah, for sure, especially bigger product companies, right?
David Danic Mm-hmm (affirmative), yeah.
Carl Smith: Like when you've got, granted they don't ever seem to pay taxes anyway, I don't think that's necessarily changed, but when you talk about these companies that yeah, they always bring in lunch, they always do that sort of stuff. Now what if they do a lunch and learn? Because if they're bringing it in as an education as well as a food expense ...
David Danic: Yeah, it's still deductible but it's not as much as they used to get. So, again, instead of getting the full deduction now you're just getting 50%, very similar to taking out the favorite customer to a steakhouse.
Carl Smith: So when you're saying people are getting stung, are they like, they anticipated that 100% and now they're finding out it's 50%?
David Danic: Yeah, that's right. So if you have tens of thousands of dollars of these expenses, that adds up to a few more thousand dollars of tax that [crosstalk 00:13:45] paying this year versus last year. So it's just little thing like that add up, where you're like wait a second I paid this last year, now I'm paying this this year? What happened? And we can usually explain it away.
Entertainment, that's different too. You're gonna buy season tickets for the Jaguars in '19, you used to be able to deduct that, but not anymore. So that's a big bummer. So a lot of college programs and professional sports team decreases in season tickets because you can't write that off anymore. So, yuck. But you weren't gonna go watch the Jaguars anyways, they're pretty terrible this year.
Carl Smith: Ah, okay Lions fan.
David Danic: I know, I [crosstalk 00:14:35]
Carl Smith: I see what you're saying there, I see what you're doing there. If ever a greatness was snatched from the jaws of defeat, it was not us. Kind of went the other way there.
And that's the thing, I'm kind of buddies with Shad, with our owner, and I'll just tell him like "Hey it's not that people are canceling their season tickets out of frustration we just don't get the tax break anymore, I'm sure you understand".
David Danic: It's a good business decision.
Carl Smith: It's a business decision. Oh man, it hurts so much. Let's move along. So what other things between now and the end of the year, how do you recommend people get ready, not just paperwork and stuff like that but what other types of strategy should they be thinking about?
David Danic: Yeah we talked a lot about some pretty common things so far, but the one that I am working with our agencies a lot right now is this new deduction for pass-through entities, and just saying that term kind of bores me. But what's it mean, you've probably heard of the term partnership and S-corp and all that and I'm guessing probably 90% of the listeners here are structured in that capacity. And so they're curious if they're going to get this new deduction that Facebook, Amazon, GM got. So the big story was the big corporations got this huge tax cut. From 36%, 37%, down to 21%. But what about the little guys like us? So that's why congress put in this new deduction. But they put some hurdles on it, which was really a bummer, because when it first was written we're like okay, accountants can't get it. Lawyers can't get it. Professional athletes, performers, consultants, things like that. And then they put this blanket, other specified service trades are excluded from taking this deduction. And we're like oh, when we're reading this we're like what the heck is all this about, because I would say how would you define yourself?
Carl Smith: It's so vague.
David Danic: It's so vague. I would say, yes, I'm a service business, right? I help my clients, I'm providing a service of designing a website, or if I'm an SEO shop, yes, I'm providing a service. So we were really concerned for the summer, saying if we don't get much more guidance, what are we supposed to do here? So luckily the IRS came out with about 184 pages of tax law goodness.
Carl Smith: You poor bastard. I know you [inaudible 00:17:18] but oh my God ...
David Danic: Tax Twitter is so cool, you really got to hang out on tax Twitter, too.
Carl Smith: I'm starting today. So 184 pages, what did that explain?
David Danic: Yeah so what it said, so this whole blanket of who a service business is, the IRS took a very narrow view of it, which is good for everybody. They said that a service business is really, or a specified trader business, is someone like a celebrity chef. The example they used was if I have a restaurant, say I'm Wolfgang Puck. I can get this deduction for running my restaurant. But if I license my face to put it on some frozen meatballs at the grocery store, that licensing revenue is really what that specified service business is.
So we were really stoked to say, you know a lot of our agencies, SEO shops, design shops, can take this new deduction. So as I'm talking with potential clients and our current clients, saying hey am I gonna qualify for this 20% break? I have to say, let's default to yes, and if we think that we have some consulting language in our contracts or whatnot, let's think about revisiting how we brand our services so we are not excluded from this deduction, because consultants are pegged as someone who can't take it.
That's another one I was like, well I'm a consultant, you know? I help someone solve a problem. So we've been advising our customers and our clients to say take a look at your statements of work, take a look at your contracts to really watch the word consulting, and really focus on, in your contracts, what's the deliverable I'm giving? Because when you focus on that deliverable, such as a new website or a new logo or whatnot, then I'm getting away from just the bland saying I'm just consulting and helping your solve a problem.
We're supposed to get more guidance from the IRS in the next few months, it's probably not gonna come before I have to file tax returns next year, but we're going to try to be more on the liberal end of saying, yeah, I think most people can qualify here.
Carl Smith: So you're saying you're a liberal, okay, I got it.
David Danic: [crosstalk 00:19:54] there you go.
Carl Smith: I like it, I like what you're doing. So this is really interesting because I know from conversations with Gabe, who runs I think the [inaudible 00:20:04] said Matchstick legal now, if not, I'm in trouble. But Gabe and Josh, we've talked about this, because they always want the contracts to talk about time as the deliverable. If you are any level of fixed bid time or materials, even value based, but make it about the team, because that lowers your liability quite a bit because did you deliver the time? Yes. So now if you make it about the product, did you deliver the website? Yes. It's interesting to look at what that balance would be between liability for that deliverable versus tax break.
David Danic: Yeah, very good point, and this is where attorneys and accountants really dislike each other because [crosstalk 00:20:49] stuff like that. You know-
Carl Smith: Gabe said he was gonna kick your ass, he said "I see that Danic guy, I'm gonna punch him square in his nose"
David Danic: I probably deserve it from Gabe with some of the things I bring up. But I-
Carl Smith: Aww.
David Danic: I think it's a very good discussion point with your advisor on saying, maybe I can say it's gonna take X amount of hours to, based upon delivery of this product. I'm just coming up with potential solutions on verbiage, there. But this is all new territory. This was the biggest tax change in thirty plus years, so we're all experts on trying to navigate this behemoth.
Carl Smith: Yeah, and 20%, that's a lot.
David Danic: Oh it's a really nice tax cut. I don't-
Carl Smith: Yeah what's gonna happen? The bridges are gonna fall apart?
David Danic: Your next guest will talk about the political ramifications. But as you can understand-
Carl Smith: I prefer social political ramifications, sir.
David Danic: Okay, sure, good. But you know it's no surprise that when the Trump presidency came aboard, and the Republicans were in control of congress, it's no surprise that they want to lower taxes. And they want to lower taxes for corporations, and businesses, so they can hypothetically hire more people, invest more in equipment, and the like. And the tax law did exactly that.
What our clients want to do with that tax break is up to them. I've seen some pretty cool solutions, so like I had someone say, you know what I'm going to donate my savings to charity. And we calculate that from year one to year two.
Carl Smith: Oh, interesting.
David Danic: And they'll still be able to, it fits their methodology of which way they lean politically, or socially, so it's cool.
Carl Smith: I can't remember who it was, it was a large company, but they're getting a $10,000,000 tax break as a result, and they said they're donating it to climate change research. And now they're getting all this free publicity for saying that, so it's also a great PR move, right? And I know I'm gonna catch hell from listeners about why are you saying that, because it's true. I mean this big organizations, yes maybe they have a heart, but they also have a brain.
David Danic: They do.
Carl Smith: And they know that if they can share how wonderful they are, which many of them are, that it's a great thing. Now watch it's going to end up being somebody I know at the company and I'm gonna be in total crap. But seriously, it is one of those things, and I think that's a great way to look at it, right. So that's a fun thing to think about, though. Well maybe not fun, but-
David Danic: Well, you know it's a-
Carl Smith: How you position what you're selling in order to get that tax break.
David Danic: Absolutely. Yeah I think that's a must-do task for members of the Bureau to talk to their accountants and just ensure that they're really analyzing if they're going to be able to take this deduction, and I think most will be able to do, and I think that was the congressional intent, on the way they wrote these things.
Carl Smith: So how long does it take the IRS to actually review? I mean it seems like there's so much change that it's gonna be tough for them to really focus, I'm not saying to fudge stuff, but it just seems like they're gonna be really backed up.
David Danic: Yeah I can't, yeah that's a good way to say it, no I can't fudge things, but in other clients they wanna play the audit lottery. The audit rate is so low because they've cut the resources of the IRS, it's going to be a mess. Like we still don't know how we're supposed to report on a tax return, they haven't released the draft forms yet for certain things of these new deductions. So expect longer times on waiting for refunds, but in terms of saying audits, the audit rate's still gonna stay the same, and probably even decrease just where they're devoting their resources.
Carl Smith: I had an accountant once who, he was showing me what I was gonna get back, and I looked at him and I said "Am I gonna go to jail?" And he was like "Well not for long". I was like wait, whoa, whoa, rewind. Not for long? What the hell.
David Danic: It is [crosstalk 00:25:30]
Carl Smith: But you do have those lawyers who are like, how risk averse, or the accountants, how risk averse are you? And I'm like, I don't like that question coming from my accountant.
David Danic: Yeah, I try not to ask that. But it is fun to see, to work with different clients and how they have a different methodology on how they do their tax returns. And no, not many people go to jail. Who was it, Wesley Snipes [crosstalk 00:25:54] for taxes? But they're going after-
Carl Smith: Well he should have gone to jail for Blade II if you're asking me.
David Danic: There you go.
Carl Smith: Good God, why would you do that? So what else Dave, we're coming up towards the end of-
David Danic: Because he needed the money to pay his taxes.
Carl Smith: Oh, there you go, that's probably exactly what it was, I'm sure Willie Nelson was one of the producers of that, then. So what else should people be thinking about? What are the other things, obviously this tax break and how you're wording your agreements and all that, that's huge, that's great to know. But any other things to be thinking about between now and the end of the year?
David Danic: Yeah I think, you know again lame accountant coming in to be responsible but I really think our clients should be focusing on maxing out the retirement plans. We're seeing a lot of our clients have good years this year, so try to devote some money to the retirement plan. It's a great tax savings tool, and at least will get the ball rolling on something that you probably haven't, if you haven't started it it only takes one push to get it started and then it's kind of just routine.
I think I had a blog post on the Bureau but I want to mention it here, we're visiting a lot of R&D credit activity for our agencies. And they might not think that they're doing any research and development, I'm not developing a new air conditioner, or a widget or something like that. But a lot of modification of existing software, to make it more useful for you internally, can qualify. And also if you're using some new innovative programming languages or whatnot, or doing something that hasn't been done before, from a technological perspective, which we view as software development, being in that realm, ask your accountant to see if some of those activities may qualify. Even if it's a little bit, like it's always fun, you talked about that big refund that you had a few years back. Let's say that refund went up by $5,000 or $10,000. And that's a lot of money, but it doesn't look like a lot of money on a tax return. But if I went to your house and stole $2,000 or $5,000 from your wallet you'd be like what the heck. So don't let those little changes that, or a little bit of legwork on a tax return deter you from looking at some of these other tax savings that can add up.
Carl Smith Yeah and don't let Dave anywhere near your house, good Lord.
David Danic: Yeah, that's right.
Carl Smith: And why do I have $5,000 in my wallet? I've got two teenage daughters, I don't have that kind of money in my wallet.
David Danic: Okay, yeah.
Carl Smith: No I hear what you're saying and I think that makes a lot of sense, and we've heard from so many shops in the Bureau that they qualified for the R&D credit and it's one of those things at events that eyes light up like what? And you can actually, can't you go back a few years?
David Danic: Yeah we've gone back and amended three years of tax returns to-
Carl Smith: That's what I thought, yeah.
David Danic: To get some of your past activities. We obviously love if you're super organized and you're tracking all your time to the penny and you have all your projects and your tasks marked as R&D, but if you don't we can still do some interviews of staff to see if some of those old projects qualify. So don't be scared.
Carl Smith: That's awesome. Well Dave thanks so much for being on the show, and I'm excited, my understanding is you're gonna be at Owner Summit, we're trying to find a place to get more of this tax information out to everybody.
David Danic: Yeah back and better than ever. Back by popular demand, are you serious?
Carl Smith: Yeah, no, serious. You were tied with Will and with ... oh, it's killing me right now, but you were tied for the top talk. And I was just like oh my God, what if he was delivering something that wasn't boring as hell?
David Danic [inaudible 00:29:51] that's high praise but I'll take it.
Carl Smith: What if he was actually delivering amazing information? No, I'm just kidding. But it's a gift for you to be able to get on stage and not only are people listening because there's money involved, but you make it fun. How do you make taxes fun, I don't know, but you do it.
David Danic: Well when you decide it's your career path-
Carl Smith: Thanks for being on the show, man.
David Danic: That's all you can do is to make it fun.
Carl Smith: There you go.
David Danic: It was a great pleasure being here, Carl. Great chatting with you, and hope to see you soon.
Carl Smith: Yeah, well you will, you'll see me in February, if not before. And I will talk to you then. And for everybody listening, thank you so much, and I hope you get a big return.
This podcast is for informational purposes only, and doesn't constitute tax, accounting or legal advice. For advice on how the tax credit applies to your business and unique situation, consult a tax advisor, accountant or lawyer.