Monday, February 5, 2018

Tax Cuts & Jobs Act creates winners and losers

The Tax Cuts And Jobs Act has created winners and losers - sometimes on the same team.  Take Sally Beauty Holdings (ticker: SBH).  This is a company whose 35% federal tax rate should fall to 21% under the new law.  This should boost SBH after-tax profits by roughly 22% or $48 million.  Since stocks are priced based on profits, it stands to reason the SBH stock should rise and handsomely benefit executive management that are rewarded with stock and stock options.

However, much of SBH’s rural sales reps will be on the losing side of the new tax law.  A typical SBH traveling sales rep might earn $60,000 per year, but could incur $20,000 in unreimbursed business travel expenses.  Thus, this rep really only earns $40,000 per year. 

Under the old tax code, the typical rural SBH sales rep could deduct the $20,000 of unreimbursed business travel expenses (stuff like 25,000 miles on their personal car and hotel and meals away from home) as a Miscellaneous Itemized Deduction on Schedule A via Form 2106 for Unreimbursed Employee Business Expenses.  So, the SBH rep that really only netted $40,000 from their job, only paid taxes on the $40,000.

However, the new tax law completely eliminated all Miscellaneous Itemized Deductions on Schedule A.  Now the SBH rep has to pay income taxes like they earned $60,000 even though they spent $20,000 to earn that paycheck.  This will result in roughly $4,000-$5,000 in higher taxes for the SBH traveling sales rep.

So, under the old tax law, the SBH sales rep that makes $60,000 in W-2 wages had a real net pay of $40,000, less $4,000 federal tax, less $4,500 in payroll taxes might have had $31,500 in spendable income.  Under the new tax law, that spendable income may fall 13-16% to around $28,000. 

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