By Scott Hawksworth
There’s been plenty of ink spilled about the politics of the Trump Tax Reform bill (the “Tax Cuts and Jobs Act”) passed in December 2017. This isn’t one of those articles.
Instead, let’s take a deep dive into how the tax reform bill will actually impact the lives and livelihoods of firearms dealers. Because in fact, these changes in tax law have massive implications for the consumers firearms industry.
So let’s get started …
If you own a business that deals or manufacturers firearms, or offers related goods and services, this tax reform law will affect your finances both at the business tax level, as well as the personal income tax level.
This is true regardless if your business is incorporated as a pass-through entity (LLC or partnership), as an S-Corp, or as a C-Corp.
Corporate Tax Rate Change
What is the Change: The big change grabbing all of the headlines about this tax reform bill is that the corporate tax rate, that is, the the percentage of income that C-Corp businesses directly pay in tax, is going down dramatically, from 35% to 21%.
Does It Affect You: If your firearms business is an “Inc.”, that is, organized as a c-corp, then this is a really important change for you. Alternatively, if your firearms business is a sole proprietorship, an LLC, a P.C., or an S-Corp, then this has no direct impact on your business. In general, larger businesses are C-Corps, so if you’re a small business owner, chances are, this doesn’t affect you.
If So, How: Corporations pay taxes on their income before they can make distributions to their owners, or reinvest in their businesses. The percentage that they pay each year is being lowered dramatically. That means that there are extra dollars to go around, and business owners and executives can choose whether to distribute those extra dollars to the business’ owners, pay down business debt, or reinvest those dollars into growing the company.
Passive Entity Deduction
What is the Change: Lest you think that only businesses organized as C-Corp’s are getting a tax break under the new law, passive entities (for example, LLC’s, LP’s, LLP’s, S-Corp’s, and P.C.’s) are also getting a really significant tax break. They get the opportunity to deduct 20% of their taxable income under the law (a fancy way of saying their tax liability goes down 20%).
Does It Affect You: If your business is registered as a pass-through entity [https://en.wikipedia.org/wiki/Flow-through_entity] this change applies to you. If you’re an unregistered business, for example a sole proprietorship, or your business is registered as a C-Corp, it doesn’t affect you.
If So, How: If you’re a pass-through business owner, you just got a 20% discount on your 2018 business profits. There’s a few important limitations here, however. The 20% deduction just applies to “business profits”. That means it doesn’t apply to the portion of your business’ income that is attributable to your wages as a worker at the company. Also, the 20% deduction caps out at $315,000 of annual income for some business types (but the cap is unlikely to limit most firearms industry businesses).
Accelerated Business Expense Deductions
What is the Change: If you’ve bought new equipment, like a new computer system, for your firearms business you know that, historically, you don’t get to deduct the full amount of that equipment in that year. Instead, you had to amortize (AKA spread out the deduction) the expense over a few years. That changes under the Trump tax reform law.
Does It Affect You: If you bought something substantial for your business (like a computer, business equipment, a delivery vehicle, etc.) after 9/27/2017 (or you buy something before 1/1/2023) you’ll get to immediately deduct the full cost of the equipment on your business’ taxes in the year you bought it. Note that this excludes buildings.
If So, How: The way this change in the law will impact you is best explained with an example… Let’s say your firearms business made $10,000 in profits in a given year. And in that same year you bought a $10,000 new computer system. If that happened before 9/27/2017 you’d only get to deduct 20% of the computer system ($2,000) that year on your taxes. So you’d still owe taxes on $8,000 ($10,000 – $2,000) in business profits. Now that the new law is in effect, however, If that same scenario happened in 2018, you’d pay no taxes. That’s because you could deduct the full $10,000 you spent on the computer system against your profits ($10,000 – $10,000 = $0 tax liability).
Personal Financial Impact
In addition to impacting your firearms business, the new Trump tax reform law also impacts your personal income taxes in a number of ways.
Income Tax Rate Reduction
What is the Change: Probably the most notable change for individuals in the Trump Tax Reform Bill are taxes to the individual tax brackets, and the rates Americans pay within those brackets. The short story is that almost all Americans will, at least at the top line, see a deduction in the percentage of their income that they pay.
Does It Affect You: Almost certainly. If you pay taxes, and earn more than $9,525 per year then you’ll see the percentage that you owe will go down by a few percentage points. And if you make over $150,000 per year, then you’ll also benefit by having the ceiling of your income tax bracket raised, which means double savings.
If So, How: This is pretty straightforward. Americans pay taxes as a percentage of their net taxable income. That percentage is based on their income bracket. The Trump tax reform bill lowers individual income tax rates in two ways: it lowers the percentage owed in each bracket, and it raises the amount of income you can earn and still qualify for a given income tax bracket.
Doubling of the Standard Deduction
What is the Change: After this change in the law, you’re a lot less likely to hear someone justify a purchase by saying “it’s a deduction” as they whip out their personal credit card. That’s because the tax reform law doubles the standard deduction, which means very few Americans, going forward, will bother to itemize their taxes and make use of personal “deductions”.
Does It Affect You: Yes. Unless you have a really big mortgage, make a lot of charitable contributions, and otherwise take advantage of every little itemized deduction, going forward, you’re likely to use the newly doubled standard deduction, and probably save on your taxes in the process.
If So, How: The IRS gives you the option when filing your taxes to track all of your personal expenses in a number of “itemized deductible” categories, or just choose to deduct a flat fee called the “standard deduction”. Itemized deductions consist of things like your mortgage interest payments, charitable donations, state, local and property taxes, and large medical expenses. If the total of all those things exceeds the “standard deduction” then you can deduct those “itemized deductions” from your taxes. Under the new tax reform law, the “standard deduction” is going from $6,350 individuals / $12,700 couples, up to $12,000 individuals / $24,000 couples. That means, that the vast majority of Americans, including firearms industry folks, are going to stop needing to track things like their mortgage interest and charitable donations, because the newly raised standard deduction is almost certainly going to be the better option for them.
Eliminates Personal Exemptions
What is the Change: If doubling the standard deduction sounds great because it will lower your taxes, this next change goes the other way. The Personal Exemption is a $4,050 deduction the IRS gives you off your taxes for each dependent you have in your family. That is, if you’re single with no kids, you got a $4,050 deduction (1 x $4,050). By contrast, a married family with four kids got a whopping $24,300 deduction (6 x $4,050). All those personal exemption deductions go away under the Trump tax reform law.
Does It Affect You: Yes. The personal exemption was given to everyone. So, the loss of it, also affects everyone.
If So, How: If you’ve got a small family, this change doesn’t hurt that badly. In fact, it’s more than offset by the doubling of the standard deduction (see section above). But if you’re a family of five or more, the $11,300 in extra deductions you are gaining via the standard deduction, are more than offset by the loss of your personal exemptions.
Local & State Deductions Limited to $10,000
What is the Change: Americans pay lots of different types of taxes beyond their annual check to the IRS… the biggies are state, local, and property taxes. Under the old law, you got to deduct from your Federal tax liability those other taxes that you paid each year. Under the new law, deductions for state, local and property taxes are capped at $10,000 per year.
Does It Affect You: If you live in a state like California, New York, New Jersey, Illinois, Texas, or Pennsylvania that has high state, local or property taxes, and you itemize your taxes then there’s a good chance this affects you (not sure if you itemize? If you earned less than $100k, you probably don’t). [http://money.cnn.com/2017/12/20/pf/salt-deductions-new-tax-plan/index.html]
If So, How: Under the new law, you can’t deduct more than $10,000 per year in state, local and property taxes on your federal tax return. If you pay more than $10,000 and you itemize your deductions, your taxable income will increase as a result of this change.
Other Personal Changes
This new law is 479 pages long. So, we can’t cover everything that will affect firearms dealers in a single article. But there’s a few other things that enough people will immediately have questions about that we need to touch on them. Here’s some quick notes on those subjects…
Summary: Most firearms dealers are small business people, the sort of folks that won’t have a pension waiting for them upon retirement. For you, changes that impact 401k, SEP-IRA, and Roth IRA’s matter, a lot. The good news, is nothing significant changes in terms of the availability or deductibility of small business and individual retirement plans under the Tax Reform Law.
Summary: Most firearms industry folks didn’t have to worry about dying with more than the $11.2 million dollars that currently passed to your heirs tax free under the existing estate tax. But for those of you who did, the new law now exempts up to $22.4 million dollars per family.
Alternative Minimum Tax
Summary: The Alternative Minimum Tax (AMT) is basically a second formula the IRS uses to calculate your taxes. If you have a high income, and a lot of deductions, the AMT formula will kick in and act as a sort of floor, which you cannot lower your tax liability below. The new Trump tax reform law makes the AMT apply to fewer people, and takes the bite out of those it does still apply to. Specifically, it raises the income exempted from the AMT from $54,300 individual / $84,500 couples to $70,000 individual / $109,400 couples. And it raises the amount of income you can earn before those deductions phase out from $160,900 all the way up to $1,000,000 for couples. [https://www.factcheck.org/2017/12/guide-tax-changes/]
Child Tax Credit
Summary: If you’re a parent, you get a deduction each year on your taxes for each of your kids. The amount of that deduction is going from $1,000 to $2,000 per kid under the new law. Additionally, you used to only be able to claim the tax credit if you earned less than $75,000, now the cap is $400,000. The increased child tax credit should help offset the loss of Personal Exemptions (discussed above), which particularly hurt big families. [http://money.cnn.com/2017/12/16/news/economy/child-tax-credit/index.html]
Mortgage Interest Deduction
Summary: If you own a home, you know that under existing law you get to deduct the interest you pay on your mortgage from your taxes up to a mortgage of $1,000,000. Going forward, you can only deduct the interest on the first $750,000 of your mortgage (however, existing mortgages are exempted from the change). [https://www.forbes.com/sites/zillow/2017/12/18/tax-reform-with-750k-cap-on-mortgage-interest-deduction-would-leave-1-in-7-u-s-homes-eligible/#ed97c855983f]. And if you take a home equity loan out going forward, you can’t deduct the interest you pay on that at all. [https://www.marketplace.org/2017/12/22/business/tax-bill-2017/tax-reform-home-equity-interest-deduction-affect] This effectively makes having a big mortgage more expensive, so it should slightly depress the value of homes worth over $1,000,000. That’s either good news, or bad news, depending on whether you’re an existing or prospective homeowner.
Overall, the Trump Tax Reform bill, passed in December 2017, should provide a significant growth boost to the firearms industry. Significantly, the bill not only increases incentives for corporate investment through lowered corporate rates, but it also lowers tax liability for virtually all small business owners (who are the backbone of the firearms industry in America).
Moreover, as most consumers receive an effective tax cut, they will have increased discretionary income which may drive increased firearms sales growth at the retail level. As we enter 2018, the economic outlook for the firearms industry should be cautiously optimistic.
This article is not intended to provide tax or legal advice, and should not be relied upon as such. Every situation is unique. Consult with your personal tax professional and attorney for advice about your specific situation.
About The Author: Scott Hawksworth writes on behalf of Tactical Payments, a merchant services company that exclusively provides credit card processing solutions for the firearms industry.