A dogbiz Conversation With Dog Pro CPA Marie Poliseno
Our clients have questions and concerns about how the new tax bill will affect them and their businesses, and we’ve been watching the conversation and debate about the topic on dog pro social media sites, including our Dog Walking Academy grad FB page.
We thought it was time to bring CPA Marie Poliseno of Dollars & Scents into the conversation. Given her background in the high-powered financial world (including working on Wall Street for 30 years) and her current focus on working exclusively with dog pro businesses, we figured Marie (also a grad of Jean Donaldson’s Academy for Dog Trainers) was the perfect person to explain what the new tax code means for us dog pros.
dogbiz founder Veronica Boutelle sat down with Marie at Clicker Expo in Irvine, CA last month to get the lowdown. The following is a transcript of their conversation, edited for clarity.
Veronica: Thank you so much for agreeing to share your expertise to help us unravel all of this for our clients, grads, and readers. Regardless of one’s politics or how one feels about the larger implications of this tax bill for the country, there are specific effects on dog pros we all need to understand.
Marie: Yes, there are 8 specific things dog pros should know about this bill.
Veronica: Eight. Okay. Where should we start?
Marie: Let’s start with the good news.
Veronica: That sounds good to me. I think we could all use some good news. What have you got?
Marie: There are three pieces of good news for dog pros. The first applies to all dog pros, the second and third to dog pro business owners.
Impact #1: Individual Income Tax Rates (Good news)
Depending on how much you make, dog pros will likely see their tax rates lowered. If you are married and filing a joint return and your combined total income is approximately $150K, your tax rate will decrease by approximately 3 percentage points. Between $150K and $300K, your rate will drop somewhere between 1 and 4 percentage points. For single taxpayers with total income of approximately $87,500, your tax rate will decrease by approximately 3 percentage points. Between $82,500 and $200,000 your rate will drop somewhere between 1 and 4 percentage points as well.
Impact #2: Self-Employed Business Deduction (Good news for many)
Many service businesses like dog training, dog walking, dog daycare, etc., will see a 20% deduction in taxes because 20% of your business income will not be taxed for income or self-employment taxes. That’s a huge savings.
The magic income number to enjoy this benefit as a single person is to make $157,500 or less. If you file jointly with a spouse, it’s $315K. So if you earn at this rate or lower (from your business plus any other income, such as from a part-time job) you will be able to deduct 20% of your business income and pay no tax on that portion of it.
Veronica: This is good news for a lot of smaller dog businesses, especially one-person shows. But what about dog pros taking more home?
Marie: If your income is over $207,500 filing singly or $415K filing jointly with your spouse or partner, you don’t get this benefit—all your income is taxable. Anything in between these levels and the magic numbers will be taxed on a scale, so you’ll see some benefit but not the full 20%.
Impact #3: Depreciation Deductions (Good news)
It used to be that if you bought equipment for your business (say a computer or agility equipment, for example), you could write off 50% of the cost in the first year as what’s called bonus depreciation—but only if the equipment was actually new. This didn’t apply to used stuff. Or you could write off the entire cost in the first year if you had enough net income to support it.
Veronica: Can you explain that last part in lay speak?
Marie (laughing): Okay. Let’s say you spent $10K on equipment but you only netted $5K for the year—you were just getting started. In that case, you’d only be able to write off $5K of the new equipment you just bought.
Veronica: Got it. And now?
Marie: Now you can take 100% of any equipment you buy—new or used—and write it off as bonus depreciation in the first year, no matter how much or little you made. Not only is this a great write-off, it also serves to lower your taxable income. So if you find yourself nudging over one of those magical numbers—the $157,500 or $315K we talked about in Impact #2—you’ve got a good excuse to invest in that new MacBook Pro or agility equipment to keep yourself below that threshold.
Another piece to this is what’s called qualified leasehold improvements. Here’s what that means: Before, if you rented space for classes or a daycare and you modified or improved your space, you had to write that expense off over 39 years! Now you can write off all of it—all 100%—in the first year if you have net income to support doing so.
Veronica: Sounds like there are a few things changing in our clients’ favor. I’m glad to hear that.
It’s been challenging to figure out what’s really going to happen, with all the contradictory commentary swirling around. Are there any misconceptions you’re hearing from dog pros that we should address?
Marie: Yes, there’s one big one:
Impact #4: Standard vs. Itemized Deductions (Misconception)
When you file your taxes, you have a choice: Take the standard deduction (a fixed amount based on your filing status) or itemize your deductions. The new tax bill almost doubled the standard deduction. This relieves you from having to substantiate the deductions by gathering receipts and all the other paperwork necessary in order to itemize deductions, because the government allows you a set amount as the standard deduction without requiring supporting documentation.
At the same time, though, the new bill repealed the $4,050 personal exemption for each individual and their dependents. Basically, the government allowed you to deduct this amount from your income for each person in your household in addition to the standard or itemized deductions you could take. The net net is: You now have an increase in the standard deduction and a decrease in the personal exemption. The result is not a doubled benefit as some have said.
So here’s an example. In 2017 if you were married and filing jointly and you and your spouse were the only two people in the household, you would have two personal exemptions worth a total of $8,100 that came off the top of your income. Let’s further suppose you took the standard deduction for this filing status, which amounts to $12,700. In total, you would have deducted $20,800 from your taxable income in order to compute your tax.
Now in 2018, the standard deduction for married filing jointly is $24,000. At first blush that sounds like it is double what it was last year. And it is, but now the $4,050 per person that you used to be able to claim as an exemptions is gone. So now you can deduct $24,000 total. That’s still a net benefit of $3,200 over last year, but it’s obviously not double the way it may have seemed.
Okay, that example is helpful. What about one for single dog pros?
Marie: You bet. In 2017 if you were single, you would have one personal exemption worth $4,050 plus the standard deduction of $6,350, so in total you would be able to take $10,400 off the top of your taxable income. In 2018, the standard deduction for single taxpayers is $12,000 So you get a net benefit of $1,600, but again some people are jumping for joy thinking that it’s just about the standard deduction going up.
On the other hand, others are concerned about losing their itemized deductions. This is partially a real concern, based on the kinds of deductions they were able to take up until now. Certain types of itemized deductions have either been wiped out completely or limited.
Veronica: Alright. We’re starting to dance around some of the bad news in the bill. We’ve been bracing ourselves with the good stuff. What are the downsides?
Marie: There are some changes that will have negative impact on some dog pros, yes.
Impact #5: Real Estate & State Income Taxes (Bad news for some)
If you live in areas with high real estate taxes and high state income taxes—states like CA, NY, and NJ—and you choose to itemize deductions instead of taking the standard deduction, the amount of real estate and state income taxes you can now deduct will be limited to $10K. That’s a real blow to people in these states who are used to being able to deduct the full amount of these costs.
People in other areas will benefit because the new standard deduction will probably get you more than itemizing these expenses did in the past.
Impact #6: Business Expenses for Employees (Bad news for employees)
If you’re a dog pro working for someone else as an employee, you used to be able to deduct any expenses related to your work that your employer did not reimburse you for. For example, using your own cell phone on the job or driving your own vehicle as a dog walker. The new tax bill wiped this deduction out.
Veronica: Ouch. That’s going to impact a lot of dog walkers, daycare staff, pet sitters, etc.
Marie: Yes, it is.
Veronica: What else should we know?
Marie: Just two more things that may impact a smaller portion of dog pros:
Impact #7: Mortgage Deduction (Bad news for a few)
If you purchase a home with a mortgage higher than $750K, and you itemize deductions, your mortgage interest deduction will be limited to the interest you paid on the first $750K of your mortgage. (Old mortgages are being grandfathered in—you’ll still be able to deduct interest on your full mortgage up to $1M.)
Impact #8: Entertainment Expenses (Bummer news)
Entertainment expenses are no longer deductible. You can still deduct 50% of any meals, but you can’t deduct things like tickets or other fun stuff. So if you want to treat your staff at the holidays, throw an office party instead of heading to the bowling alley or theme park.
So as you look across these eight areas of impact, Marie, what’s your summary? What’s your takeaway about this tax bill for dog pros?
Marie: I’d sum it up this way: It’s a good time to own or start a dog service business. There are some good advantages right now for small business owners. It’s a great time to purchase equipment, or take the leap on a facility. On the flip side, employees have a lot to be upset about, particularly the loss of unreimbursed business expense deductions. A quick warning: This does not mean that employees can change their status to independent contractors, just to take advantage of business expenses that ICs can take but employees cannot. My advice to dog pro employees is, if you’ve ever thought about going out on your own, this is the time to do it!
Veronica: I can see that. I’ll add, of course, that any employees considering doing so must keep in mind that they’ll need to start those businesses from scratch—remember that the dogs you serve are your employer’s clients, not your own.
Veronica: One more question before I let you go. We’ve know that many of the changes for small business owners and employees are temporary, that they phase out. As dog pros, what should we understand about how all of this affects us over the coming years?
Marie: Many of the provisions we just discussed sunset in 2025. So while the current law is enacted, my advice to my Dollars & Scents clients and to all dog pros is this: To the extent there are benefits available to you, take advantage of them now.
Veronica: Marie, thank you so much for lending your expertise to help us all understand the implications of these changes for our industry and our businesses.
Marie: My pleasure!
Marie Poliseno is the Managing Partner of Dollars & Scents Accounting Services. She is a Certified Public Accountant (CPA) who works exclusively with dog pros, as well as a professional dog trainer (CPDT-KA) and honors graduate of the SFSPCA Academy for Dog Trainers (CC). To work with Marie to create a plan to get out of a tax pickle or avoid a future one, e-mail [email protected] or visit www.dog-pro-cpa.com to learn more about her services.