3 New Tax Loopholes Eliminate Taxes for Entrepreneurs | Big Beautiful Bill Explained

3 New Tax Loopholes Eliminate Taxes for Entrepreneurs | Big Beautiful Bill Explained Speaker 1: The government does dumb things. That's their job. And most of the time, the government does dumb things that are not good for you. But once in a while, the government does something stupid that directly benefits you. When that happens, it's your job, maybe even your responsibility to take advantage of that because every other time you're gonna be paying for the dumb things that benefit other people. So when they do something that benefits you, you better take advantage of that. That's why it's important. That entrepreneurs know what's in the new tax bill because there are some very interesting tax changes that will directly impact how much money you make and more importantly, how much money you keep when you build a profitable business and sell a profitable business. Now, I'm not gonna get political on you today. This is not the time for us to look at what's good and what's bad. We're just gonna look at the facts and how it affects us as entrepreneurs. We're gonna look at the provisions in what's called the One Big Beautiful Bill and see what opportunities exist for us as business owners. And then at the end, if you stick around, I'll give you my personal opinion on this bill. The first big thing that you should know about is the cash-based accounting limit. What the heck does that mean? Nobody's talking about this in the headlines, but if you sell physical stuff, if you sell on Amazon, if you're in e-commerce, this is the biggest thing. In the new tax plan. You see, back a few years ago, there was this thing that I called the reverse tax loophole. Basically, if you were selling physical stuff and you had inventory, you had to pay tax on that inventory. So not only did you not have the money because it was tied up in inventory, you also had to pay tax on that money. It was awful. It was very hard to manage that type of a company with those rules in place. Well, the provision in the One Big Beautiful Bill makes it possible to write off all inventory as long as your business is under $50 million a year. Let me say that again. If you have inventory, if you sell physical stuff, you can now write that off as an expense up to a business size of $50 million. Now, here's the fine print of it. You have to run your accounting on cash-based accounting rules versus how most people do their physical product brand books on accrual accounting. Most tax advisors or bookkeepers or controllers will tell you that you should run accrual accounting because it's a more accurate view of what's going on in the business. But this bill says that your business has to run on cash-based accounting in order to take advantage of this provision. And if you do it, you can write off all of your inventory. A few years ago, I had a famous accountant who was famous for helping entrepreneurs write things off and take advantage of the tax code. He was on one of my stages and on my podcast, and he was asked, what is the rule on when you can deduct inventory from your books? And he was like, I'm going to have to check that. This bill makes it clear that if your business runs on cash-based accounting and you're under $50 million, you can now write off your inventory. That means if you're having a profitable year and you get to November, December, it means instead of paying taxes on all of your profits, you could place a really big inventory order for the next year and get way ahead of the next year. That's fantastic. It's the biggest breakthrough for internet entrepreneurs in this bill and almost nobody's talking about it. This second big provision in this bill is the Qualified Small Business Stock Exemption. Why do they make it so hard to understand? The Qualified Small Business Stock Exemption says that if you sell a business for up to $15 million, you might be able to pay no tax on it. Unknown Speaker: Huh? Speaker 1: If you want to have an exit sometime in the next ever, this provision says that the first $15 million. You might not have to pay tax on that. It used to be that you paid a 28% tax on all capital gains. This says you were just gonna take that for everything over $15 million. Now, I sold my company back in 2017 at a $16 million valuation. There was some stock trading and we didn't get all that money because of holdbacks. Basically, my partner and I each walked away with about $5 million. I had to pay a 28% tax on those earnings. That was about one and a half-ish million dollars. So the first thing that I did was look for ways that I could write things off and not pay those taxes. And what that really meant was investing into things for the tax benefit, even though it wasn't a very good Investment. You can probably guess how that went. Not very well. Well, today under this bill, I wouldn't have to look for ways to write off any capital. Instead, I would keep the whole $5 million instead of $3.5 million. That's a big swing. In fact, that's a life-changing swing. A million and a half dollar difference is a really big deal to a small entrepreneur. So if you are building a business and if you want to have an exit one day, You got potentially a 28% raise on the amount of money that you will keep when you sell your business. However, there are a couple of must-dos in order to qualify for this exemption. Number one, it has to be a C-corp. So if you are an S-corp, you don't qualify for this. Now, there is a way to transfer an S-corp into becoming a C-corp, but you gotta wait a full five years To then sell that business and take advantage of the $15 million exemption. However, there are tax breaks if you hold the business for three years, four years, and then it's zero after five years. This is incredible. This is allowing founders and entrepreneurs like us who started something small and then go get a big windfall for it to be able to keep up to 100% of it, but it's gotta be under The structure of a C-corp, not an S-corp. There's one other thing that you have to do in order to qualify for this exemption. And that is that you have to establish basis. Basis is basically your investment in the business. And that needs to be documented. It needs to be established because otherwise it's impossible to calculate what the capital gains would be. So if your basis, the amount that you invest in the company is $50,000 and then you have a $5 million exit five years later, it basically says that $4,950,000 is now tax free. Oh. I love me some tax-free money. The implication of this is massive because I have a client who wants to sell his business over the next two years or so. And his target has been that he would walk away with $2.5 million. So he would have to sell his business for $3.5 million or $4 million to walk away after tax with the amount of money that he wants to live for the rest of his life. Well, now his business is big enough to sell for that today. So he can go right into preparing to exit his company. Instead of waiting a few more years, he can think about retiring or his next thing now. He just bought himself a couple of years of freedom because he doesn't have to pay 28% taxes when he sells this business. The other implication of this is if you decide to raise capital, if you decide to bring on investors, you can show them how the first $15 million worth of returns could be tax-free. In other words, if somebody invests into your startup or your e-commerce brand and you sell for $15 million or less, that means that there's no capital gains on those earnings. It means if you sell over $15 million, everything up to the first $15 Could be tax free. This is a huge advantage for investors. In fact, it might be the reason why somebody invests in your company versus investing into Apple stock. Because as a startup, you now have this beautiful, qualified, small business stock exemption, which makes the gains on your company possibly tax free. This is a huge win for those of you who raise capital early in your business. The third provision that you should know about is QBI, Qualified Business Income Exemption and Section 179. Again, I don't know why they make this so complicated, but the QBI basically says that if you're an S Corp, you're now not going to be taxed on the first 20% of your profits. This is fantastic. This was included in the original Trump tax cut of 2017. Well, now it's made permanent. It was scheduled to expire. So if you have an S-corp, this is a huge relief that this is going to be permanent. There's also some provisions in there that change the way that QBI is calculated that look like they're probably gonna be favorable. For those of us who have S-corps. Now remember, if you wanna sell your company, you might wanna move that over to being a C-corp. And we also got news that the new 21% tax rate on C-corps is now permanent. There are now almost equal benefits to having an S-Corp and a C-Corp. It really comes down to, do you want to sell your company one day? If so, you might want to consider moving over to a C-Corp. Section 179 is very interesting. It's basically accelerated write-offs for any equipment and some investments. It used to have a limit of $1.2 million. That's now been raised to $2.5 million. Most people will tell you that this doesn't apply to small entrepreneurs. But there's actually some interesting uses of this. For example, cars, yeah, cars may now be 100% deduction. Now, check out how this works. Let's say you buy a car but you finance it and you put $1,000 down for $100,000 car. Now, you have a $99,000 write-off. You just don't pay tax on that. And you're gonna make payments over many years to pay that off. Now, would those payments also be a write-off if it's a company-owned car? Man, how many cars can I buy? I have also seen people use this for software. What software? Anything internet-based related. Could that mean websites? Could that mean lists of buyers when you acquire a company? And as a result, there are some things that people will classify as software that they will then take 100% deduction on. Now, I am not a tax advisor or an accountant, and I don't play one on the internet. I'm just telling you what I've seen. And I have seen people qualify things as software and then write 100% of it off. So if you were to invest in a business or buy a business or buy a business's website, could it be software? Some people say that it is. And as a result, you might qualify to be able to write off up to $2.5 million of software or cars Or other equipment. For example, I know somebody who produces a food line and they went in on a piece of equipment with their manufacturer. They can write the whole thing off now. So there are very interesting interpretations of this Section 179. And obviously, you should talk to someone smarter than me to see how this can be used in your business. Pretty cool. So you can kind of see how the cash-based accounting limit and the Qualified Small Business Stock Exemption and QBI and 179. If you know all of these and you use all of these, There are some really creative things that you can do, but you got to understand the provisions and you should probably talk to somebody to help you see how this can be applied in your business. Now, there's a couple other ways that this bill will affect those of us who are entrepreneurs. And the first is the raising of the debt ceiling. In the short term, raising the debt ceiling by $5 trillion, is gonna be good for entrepreneurs and it's gonna be good for the stock market. It may not be good long term, but in the short term, markets love liquidity. And for a short time, this keeps the party going. This keeps the short term parade going on and it's going to be great for the stock market. We'll see what happens long term with that, but raising the debt limit is very good for markets and it's very good for the short term economy. Of course, there's the risk of inflation and there's the risk of fiscal instability, but in the short term, This is a relief for most of us. And finally, the provision of no taxes on tips, no taxes on overtime, no taxes on social security. These are fantastic for the middle class. And the middle class is who buys most of our products and services on the internet. And since this is a direct cut to the middle class, you can expect them to have more money and spend more money. There is an interesting way that this might influence those of us who are freelancers or entrepreneurs. You might see people Work for less, but more tips or find ways to classify things as tips. For example, on YouTube, you have the super thanks button. That's a tip. So you might see creators or you might see only friends models or you might see other gig economy workers prefer tips. To memberships or subscriptions because up to a certain point, you don't got to pay tax on tips. So that's what's in the one big beautiful bill. Those are the ones that are going to affect you the most. And if you understand those provisions, there's a lot of interesting flexibility that is available to us as entrepreneurs. But what do I think about it? Well, My opinion is that deficits are bad. Deficits hurt the middle class and the poor over the long term. Deficits tend to benefit the rich at the expense of the poor. And deficits are the number one driver of inflation. And inflation makes it hard for entrepreneurs like you and me to make decision about what is best for their company. I also think that every dollar kept in the hands of an entrepreneur versus the hands of a politician is a good thing. I think governments waste money, and every dollar that is in the hands of people or entrepreneurs is a better use of that money. So deficits are bad, but money in the hands of people is good. What I hope happens is that this collective conversation that we're having about deficits and debt and interest on the debt, I hope that this forces us to have hard conversations about cutting spending. And my hope is that having money in the hands of entrepreneurs creates so much growth that we're able to reduce the deficit over time. That's me being cautiously optimistic about this bill. But in the short term, There are some big wins for those of us who own businesses. For everybody else, you might want to become an entrepreneur to take advantage of all of this. Hey, what do you think of the Big Beautiful Bill? Let me know in the comments of this video and let me know if you've had any interesting conversations about how these provisions can be used in your business. I'm already looking at how I could take advantage of the Qualified Small Business Stock Exemption with my investments and as I raise capital because this kind of changes everything. Hey, let me know what you thought in the comments. Thanks for being here. I'm Ryan Daniel Moran with Capitalism.com. I'll see you on the next video. Take care.