Impact of the new 20% Pass-through tax deduction for Coaches
Note: I am neither a CPA nor a qualified tax consultant. So, anything in this article should be treated as informational only.
If you are a coach and are filing your income as a LLC or a Sole-Proprietor, you are probably wondering how the Tax Cuts and Jobs Act Pass-through deduction affects your taxes for 2018. The official IRS text for the deduction can be found here. What I have attempted here is to simplify it down to a quick summary:
The official name for this deduction is Tax Cuts and Jobs Act, Provision 11011, Section 199A - Qualified Business Income Deduction. It is popularly known as the Pass-through deduction
The Tax and Jobs Act reduced the corporate tax for 'C' corporations to a flat 21%. Since more than 90% of the businesses report their business income on their personal tax return and are not a 'C' corporation, the Pass-through deduction was introduced to give these businesses a similar break. It is pretty awesome actually!
This deduction allows you to take a straight deduction of "up to 20%" of your Qualified Business Income. What is Qualified Business Income? Read on. Why "up to 20%" ? Well, laws are never simple :-) So, read on...
A Qualified Business Income is an income that you received through your coaching business. So, this does not apply to you if you are an internal coach working for a company and receiving salary. Essentially, if you get a 1099-Misc for your coaching services, that is considered a Qualified Business Income(QBI). You don't need a LLC to use it. (There are some others which also constitute a QBI but you would be better off reading the IRS link above to learn about those.)
So, if you made $100,000 in coaching income in 2018, is that your final QBI? Mostly no. IRS says that you have to deduct any expenses, losses etc. from it and whatever remains is your QBI. So, let's say that your business spend was $5,000 and you had to write off some client non-payment of about $1,000. Then, your QBI would be $100,000 - $5,000 - $1,000 = $94,000.
Ok. I understand QBI. What about the "up to 20%" deduction? Stay with me. If you are filing single and your total taxable income does not exceed $157,500 ($315,000 if married and filing jointly), you can take a straight 20% deduction off your QBI. So, let's say you are filing single and you had an additional income of $30,000 through a dividends and interest come, then your total taxable income would be $30,000 + $94,000 (QBI) = $124,000. Since this is less than $157,000, you can take a straight 20% deduction off the $94,000 QBI. So, enjoy the deduction of $18,800 and you can skip the rest of the article!
So far so good. So, when does the full 20% not apply? Good question. If your total taxable income exceeds the thresholds above, then IRS has made it a bit of fun for you to navigate. Stick with me Coaches. IRS says that if your total taxable income exceeds the thresholds above, the deduction could be anywhere between 0% and 20% depending on whether your business is a "Specified Service Trade or Business" (SSTB) or not. If it is not a SSTB, you're good. You can use the flat 20% deduction. If your business is a SSTB, then there are certain limits.
So, is "Coaching" defined as a SSTB? IRS defined SSTB as "a trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of its employees." The closest that Coaching can come to is "consulting". Although Coaching and Consulting are two very different things in actuality, IRS probably sees them as one. One would never know till IRS provides any further guidance. So, if your income is above the thresholds, then the SSTB clause could apply to you. One could also argue that "dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of its employees" also applies to coaching. However, the law clarified that this refers to celebrities getting income for product endorsements because of being a celebrity. So, coaches are off the hook on that one :-)
Hopefully this gives you some clarity on what the implication of this deduction are for your coaching business. Here's to a fun April 15th, 2018!
So What?
When I coach clients, they often tell me that even with the best intentions and plans, a string of negative thoughts often blocks them from making any progress. One of my recommendations to them is that they follow what I call the ’So What?’ approach - best illustrated with an example.
Let’s say that you have an interview coming up and you’re dreading it since your last one wasn’t that great. Now, your mind goes, “Oh god! This interview is going to be a disaster! I have 5 back to back interviewers and they’re gonna grill me. Last time, I fumbled and could not pick myself up again." These thoughts put you in a negative spiral and you are now fighting the negativity rather than focusing on the interview.
So, what should you do? Rather than going down this spiral, when the first thought hits you, you should just counter with ‘So what?’. Keep doing that for the next thought and the next and the next.
Thought: Oh god! This interview is going to be really tough. There are these five interviewers and they’ll grill me. Last time, I fumbled and could not pick myself up again
You: So what?
Thought: If I don’t do well, I won’t get the job
You: So what?
Thought: If I don’t get the job, I will have to apply to another one
You: So what?
Thought: I’ll have to start the process all over again
You: So what?
Thought:Hmm…(trying to figure out the next question)
This process questions some of the basic assumptions that involuntarily drive our thoughts. Assumptions that often go unchallenged since the mind is in a rush to make conclusions. By asking ‘So What?’, this process is slowed down and it forces our brain to question those assumptions. Things which earlier looked really bad do not look all that bad anymore and those which looked good looks even better! Every time you say ‘So what?’, the energy in the thought reduces and YOU are more in control.
After a few successions of ’So what?’, you will realize that the stakes are not as high as you thought it was. That feeling puts you at calm and you can now focus on winning the situation rather than fighting the negative thoughts.
Try it today. If you don’t, so what?
So, what is coaching?
Photo by Emily Morter on Unsplash
I am often asked by my potential clients and others - ‘What exactly is coaching?’. My response has been varied but the one that has stuck the most is this simple story.
Let’s say that you have had this nagging thought for the past few days that you need to do an outdoor activity. You’re not sure what that activity is but it has to be outdoors.
Now, you have this special magic box that you know can help you get to an answer. You pull out this magic box and tell it about your nagging feeling. The question box engages you with some powerful questions and through this process of questioning, you come to the realization that what you really want to do is to go on a hike on the Mist Trail in Yosemite. The magic box also helps you visualize what the destination at the end of the trail would look like. You smile and thank the magic box.
One fine morning, you put on your hiking shoes, stuff your backpack with food and water and head out for the trail. Once you reach the head of the trail, you look around but you don’t see any path that you can follow. All you see is a lot of debris. Confused, you pull out your magic box and tell it that you need help finding the trail. The magic box helps you see through the debris where you clearly see your trail! Excited, you embark on the trail all the while keeping your focus to look through and clear the debris - as the magic box suggested.
As you proceed on the trail, you find that you lose your focus often and need some help to get back on the trail again. You reach out to your magic box once more and it helps you to refocus so that you can be on track. Through this constant guidance from the magic box, you soon complete your hike and you finally find yourself at the end of the trail. Here, the vision of the destination that the magic question box helped you paint comes to life and the nagging thought in the back of your head finally gives away to a feeling of achievement!
What you witnessed was “coaching” and the “magic box” is your coach.
Daily habits worth a try
1. The habit of getting tough things done first rather than keeping them on the back burner.
2. The habit of grounding yourself every day. Remind why you do what you do. This purpose is your personal purpose and has nothing to do with what others might impose on you.
3. The habit of daily gratitude for all the things, no matter how small, that you’re lucky to have.
4. The habit of doing focused work in 20-minute intervals. No matter what your life situation is, you are able to get 20-minute slots of work done throughout the day.
5. The habit of saying ‘So What?’ when negative thoughts enter your mind. Keep asking ‘So What?’ repeatedly till the energy of the negative thought diminishes.
The Inaction to Action Recipe
March 24th, 2018. A sea of about 200,000 protesters walked through the streets of Washington D.C. to protest gun violence. Besides the obvious exhibition of the First Amendment, “March For Our Lives” was also a striking example of how ordinary people can move mountains under a combination of certain circumstances and preparedness. Teenagers — who had a day prior spent perfect teenager lives were leading a national movement crossing all demographics, geographical and economic boundaries. The trigger for their action was the shooting of 17 students at their high school — Marjory Stoneman Douglas High School in Parkland, Florida.
What lead them to take these actions? What gave them the power to galvanize the country behind them while many before them have stood on the sidelines? This article attempts to learn from this event and create one recipe for converting our inaction to actions.
Know your end product
When you set out to cook a new dish, you need to have a very clear understanding of what the end result would look like. You cannot expect to aim for a sandwich and end up with a cookie. The Parkland survivors had a north star — “End Gun Violence”. It was so clear that they had no difficulty in marshaling their resources and the resources of the entire country towards their cause.
What will your end goal taste like? What will you call it? Visualize every aspect of it.
Choose the right Ingredients
Every recipe needs the right ingredients. Without them, the best chefs in the world can only manage to cook mediocre fare. Here are some ingredients you need to convert your inaction to action:
Heaps of Motivation
Without motivation, nothing will move. It is that engine that kick starts an action. The sight of their classmates mowed down by the barrel of a gun motivated the Parkland survivors to bring an end to gun violence. In Psychology Today, Tina Seeling gives this simple structure to evaluate our motivations. You have to identify that motivation for an end goal that you seek. Maybe it’s the desire to manage a large organization, maybe it’s the desire to make a social impact in this world. Maybe it’s a desire to get a peaceful good nights sleep. No motivation is too large or too big. It’s your own personal motivation. Go find it!
A shot of Urgency
The teenagers at Stoneman Douglas High always desired a peaceful world and an end to gun violence. However, what spurred them into action was the sense of urgency that developed immediately after the shooting. Without this sense of urgency, the movement would have died even before it began. In your life, once you figure out the motivation, progress will be tepid if you don’t give it a shot of urgency. Looking for a career change, create a sense of urgency. Looking to complete that presentation, create an artificial sense of urgency. In matters of action, NOW is the most powerful word you have. Use it!
Generous amounts of Self-Belief
Inaction to action does involve a fair bit of uncertainty the antidote to those uncertainties is self-belief. The Parkland survivors were dealing with powerful organizations and decades of failed attempts when they decided to take the issue head-on. However, it was their faith which pulled them through. Now, self-belief may not always be easy to come by and lack of faith could be a deterrent to self-belief itself. Hence, blind self-belief is often a great kickstart strategy. In this excellent Forbes article, Margie Warrell gives an excellent advice on “Acting as if…”. In your attempt to reach out to a prospect, let your self-belief push you through to action. If you are debating on whether to get on the stage to make a presentation but the only thing stopping you is your confidence, let your blind self-belief push you through.
Not only are quality ingredients important, but you need to sequence them right too. Starting your cooking by putting salt in hot oil is going to get you something very unappetizing. When you build up motivation, urgency, and faith — make sure that you don’t put the cart before the horse.
Let a clear goal lead you to motivation. Then build urgency and follow it up with blind faith.
Choose the right tools
You cannot cut veggies with a spatula. A sharp knife is indispensable. The Parkland survivors knew their tools. They understood how to leverage social media and grassroots activism wisely. Without knowing how to reach hundreds of thousands, the movement would have died with a whimper. For you to move from inaction to action, you have to know your tools. For your career move, you’ll need to understand how to use LinkedIn. For selling your services, you’ll need to understand inbound lead-gen tools. The only way to build expertise in these tools is to start using it. As you start using it, you’ll see movement towards your action.
The right amount of heat
If you simmer your dish when you need to boil, you’ll end up with an uncooked dish. Similarly, if you fry it while you need to slow cook it, you’ll end up with burnt food. Both are unappetizing options! The Parkland students did a burst of media interviews soon after the shooting incident, then worked in the background towards the March 24th event and then went full steam during the rally. In your own lives, as you move from inaction to action, apply the right heat. When you are building expertise towards a new skill, you are on steady medium heat. As you go creating some branding, you are on fire. Temper your heat and you’ll have enough energy to see you through action. Too much or too less, you’ll either prematurely kill your efforts or let it die a slow death.
Add your secret sauce.
My wife’s pasta tastes different than any other pasta I have eaten. She will not reveal her secret recipe. That’s her secret sauce. The Parkland survivors had a secret sauce -Witnessing gun violence from the brink of death, their youth, and their social media savviness. They used it to their advantage. In your quest to move from inaction to action, add your own secret sauce. It could be the emotional cover letters that you can write. It could be your ability to reach out to contacts. Your secret sauce is uniquely yours and you don’t have to reveal it. That’s why it’s called a secret!
Don’t forget the garnish
You always remember the well laid out garnish on a good meal. It is a distinctive feature of the meal and sometimes of the chef. The Parkland survivors left a unique signature with the 6-minute silence during the rally or the #enoughisenough hashtag. As you start your actions, think about what unique signatures do you want to leave with your actions. Maybe you always deliver an inspiring quote. Maybe your presentations are always full of interactive graphs and pictures. Identify them and make them your signature. It’ll not only leave a lasting impression on others but will provide an unique energy for future actions.
Celebrate Success
When you’re done preparing your signature meal, you don’t want to just put it in the refrigerator. You want to share it with family and friends and enjoy your creation and also the journey. Similarly, when you achieve success in your actions, celebrate! Make sure you contemplate on your journey from inaction to action, your learnings and how you have grown as a person. Enjoy the moment of success and then get ready to do it all over again!