The deadline for submitting your taxes has passed. Hopefully, you’re finished! No matter how things netted out for you, we can agree that one of the most costly, contested and ridiculous versions of Kabuki theater on the planet has just gotten crazier.
Because everyone has a different world view of this issue, I thought it just might be interesting to simply provide a tapas bar of small bites about the taxes, the economy to amuse and bewilder. The big question is how this might affect people in our industry.
• As I predicted late last year – many middle-class employees have “under withheld” their taxes because they heard about the “tax cut”.
Many should brace for a shocker when it comes to tax refunds. The IRS has reported that for the 2018 returns, they are refunding 17% less than prior years. Some may argue that this is because people didn’t accurately calculate the amounts they should withhold. But as most average people know, this activity is a guessing game and with the new tax code, even more of a mystery. If you are really doing it right you should have a zero refund as you don’t want to give the government an interest free loan, however most people over withhold because they don’t want to take the chance of owing the IRS when they file their returns. Many people also look at their refund as a bit of a “bonus” each year and a way to force themselves to save money. This change in refunds is very unpopular with many wage earners and leaves the average guy feeling that the new “tax cut” has left them on the curb while large corporations and the wealthy are cleaning up.
• Under the new tax code, states like New York, New Jersey and Connecticut have received a limit of $10,000 tax deduction for state and local taxes (SALT).
This includes real estate taxes, personal property taxes and state / local income taxes. Many entrepreneurs with pass through businesses no longer have the ability to write off the taxes of their business property tax. The US Treasury Inspector General estimated that nearly 11,000,000 taxpayers will be negatively affected by the limits on SALT deductions and could lose $323 Billion as a result. Ouch!
• The standard deduction almost doubled to $12,000 for individuals and $24,000 for married couples filing jointly.
This could be good for you but for those who had taken personal exemptions and itemized deductions, you could end up with HIGHER taxable income.
• Amazon will be paying $0 Federal Income Tax for the second year in a row despite being a $793 Billion company with $11.2 Billion in profits.
Netflix will probably pay nothing in taxes despite a record $845 Million in profits. General Motors paid only 5.5% effective rate. I’m sure your business will experience the same (aka – sarcasm!)
• The “pass-through” provisions are providing some tax breaks for small business owners except those earning more than $157,500 individually or $315,000 for married couples. However, the vast majority of this tax break goes to the biggest businesses which make $1 Million and up.
• The tax cut program was supposed to stimulate hiring, increase wages, spending power and the general economy. Instead it has funded record stock buybacks and stimulated a dividend spree benefitting investors and corporate executives over the employees.
Sarah Huckabee Sanders said in a January press conference that “Over 70% of this tax cut will be returned to the workers”. Guess what? It hasn’t and over the past year S&P 500 companies have given shareholders over $1 Trillion in the form of stock buybacks and dividends while real wage growth was zero.
• Some large companies did indeed give their employees a one-time bonus allowing them to give some benefit to the employees without raising the company’s fixed costs – unfortunately the employees are paying a higher tax rate on the bonus as supplemental income.
• The Treasury Department stated the tax cut isn’t paying for itself.
The $1.5 trillion tax cut is not stimulating the general economy which pushes additional tax revenue into the Treasury as it was sold by the politicians. As described by Jim Tankersley in the New York Times, “One way to think about it is from the perspective of a small-business owner. Let’s say you run your own bakery. You sell bread for $4 a loaf. Today, you sold 90 loaves, for $360 in revenue. You expect that, because it’s a busier day at the bakery tomorrow, you’ll sell 100 loaves then, earning $400. But you’d like to sell even more than that, so you lower the price to $3 a loaf to encourage additional purchases. Congratulations! You sell 125 loaves. Your revenue goes up, to $375. That’s more than you brought in the day before. Your price cut, though, has not “paid for itself” — because you ended up bringing in less revenue than you would have otherwise and your cost of goods went up. In other words, you brought in more money than the day before. But it’s less than you would have made if you hadn’t cut the price.” See how that works for your business!
• On February 11th, the US national debt eclipsed $22 trillion on February 11, the highest mark in history.
Since President Donald Trump took office, the US has added over $2 trillion in new federal debt. That is less than the $3.46 Trillion added between Obama’s inauguration in January 2009 and February 11, 2011, but Obama had to address the financial crisis and Great Recession. The irony is that Trump added the debt in a strong economy and it is more than the $676 Billion added under Bush and the $617 billion added under Clinton.
• Maury Cartine of Marcum Group tax and business services in NYC disclosed that Donald Trump would have personal net savings on his taxes of $22,500,000 primarily from eliminating the alternative minimum tax, PLUS another $1 Billion in shelving the estate tax.
As with all things related to taxes and politics, everyone’s opinions and experiences revolve around how things affect them personally. When I look at the situation I think the best thing for the restaurant and foodservice industry is putting more spendable income in as many consumers hands as possible. Millions of hard working middle class people spend more than a handful of multi-millionaires – and they pay more taxes. I know for sure that if you are a billionaire or a CEO of a big corporation you are a happy camper. Small business owners and their workers… I’m not so sure.
If you have any questions or just want to discuss your business please contact me at dsederholt@ragnarpartners.com
