[Pass-Thru Entities Questions Thread]

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ConcernedKid
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[Pass-Thru Entities Questions Thread]

Post by ConcernedKid » Wed Dec 20, 2017 2:18 pm

Please forgive me in advance if this is in violation of the prohibition on discussing proposed legislation. I didn't want to take over any other threads and I can't seem to find an in depth pass through entity discussion. I am technically a self-employed attorney. I negotiated my independent contractor status with my firm to take advantage of increased solo 401k space, to get a HSA eligible health care plan (I purchase my insurance on the exchanges so 2019 won't be fun), to take actual car repair costs as a business expense (I have an old clunker and work from home. 90% of my driving is to go to depositions, court hearings, etc.), and to take the home office deduction. I have an agreement with my law firm to take a percentage of my collections. The firm does not pay for anything for me. My business entity is an LLC that is taxed as a sole prop. I max out my solo 401k space, Roth IRA and a HSA account.

My question for the forum is - do I qualify for the 20% pass through deduction? I have heard conflicting info as it relates to professional service pass through entities. Is the income exception for making under $157k single/$315k MFJ before or after contributions to my solo 401k, HSA, etc.

Also, how does the pass through deduction work for people with rental properties (not mega corporations). Let's say you have a couple of rental properties that bring in a modest amount of cash flow but you do not pay any wages associated with the properties. Do you get a deduction of 2.5% of the purchase price per property? Is the deduction tied to any income limitations? Please excuse the questions. I don't have time to get into a CPA before this takes effect.

betablocker
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Re: Pass Through Entities Questions Thread

Post by betablocker » Wed Dec 20, 2017 2:30 pm

I'm also curious if anyone has seen a good analysis on larger pass through corporations (beyond the $315k pass through deduction limit) that are service providers becoming C-Corps. Seems like the lowered tax rate for earnings retained in the company added to the ability to deduct SALT taxes and no AMT make converting from S-Corp or LLC attractive. Wouldn't you want to increase your salary-at least up to the 24% tax bracket limit and then retain all other earnings as investments within the firm? As I read it there are some issues if you end up stocking up lots of investments in the C-Corp. If over 60% of earnings come from passive investments you lose the ability for dividends to qualify for the lower rates. I also don't know how the personal service corporation test might effect the decision. Any information on this would be much appreciated. I'm talking with a tax lawyer soon and will be happy to share what I learn.

betablocker
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Re: Pass Through Entities Questions Thread

Post by betablocker » Wed Dec 20, 2017 2:31 pm

ConcernedKid wrote:
Wed Dec 20, 2017 2:18 pm
Please forgive me in advance if this is in violation of the prohibition on discussing proposed legislation. I didn't want to take over any other threads and I can't seem to find an in depth pass through entity discussion. I am technically a self-employed attorney. I negotiated my independent contractor status with my firm to take advantage of increased solo 401k space, to get a HSA eligible health care plan (I purchase my insurance on the exchanges so 2019 won't be fun), to take actual car repair costs as a business expense (I have an old clunker and work from home. 90% of my driving is to go to depositions, court hearings, etc.), and to take the home office deduction. I have an agreement with my law firm to take a percentage of my collections. The firm does not pay for anything for me. My business entity is an LLC that is taxed as a sole prop. I max out my solo 401k space, Roth IRA and a HSA account.

My question for the forum is - do I qualify for the 20% pass through deduction? I have heard conflicting info as it relates to professional service pass through entities. Is the income exception for making under $157k single/$315k MFJ before or after contributions to my solo 401k, HSA, etc.

Also, how does the pass through deduction work for people with rental properties (not mega corporations). Let's say you have a couple of rental properties that bring in a modest amount of cash flow but you do not pay any wages associated with the properties. Do you get a deduction of 2.5% of the purchase price per property? Is the deduction tied to any income limitations? Please excuse the questions. I don't have time to get into a CPA before this takes effect.
I'd also add a question about how the AMT might effect that deduction.

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JamesSFO
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Re: Pass Through Entities Questions Thread

Post by JamesSFO » Wed Dec 20, 2017 2:32 pm

Curious as an attorney as well how the 20% rate works for LLPs/LLCs since the bill is now law it should be discussable

betablocker
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Re: Pass Through Entities Questions Thread

Post by betablocker » Wed Dec 20, 2017 2:41 pm

ConcernedKid wrote:
Wed Dec 20, 2017 2:18 pm
Please forgive me in advance if this is in violation of the prohibition on discussing proposed legislation. I didn't want to take over any other threads and I can't seem to find an in depth pass through entity discussion. I am technically a self-employed attorney. I negotiated my independent contractor status with my firm to take advantage of increased solo 401k space, to get a HSA eligible health care plan (I purchase my insurance on the exchanges so 2019 won't be fun), to take actual car repair costs as a business expense (I have an old clunker and work from home. 90% of my driving is to go to depositions, court hearings, etc.), and to take the home office deduction. I have an agreement with my law firm to take a percentage of my collections. The firm does not pay for anything for me. My business entity is an LLC that is taxed as a sole prop. I max out my solo 401k space, Roth IRA and a HSA account.

My question for the forum is - do I qualify for the 20% pass through deduction? I have heard conflicting info as it relates to professional service pass through entities. Is the income exception for making under $157k single/$315k MFJ before or after contributions to my solo 401k, HSA, etc.

Also, how does the pass through deduction work for people with rental properties (not mega corporations). Let's say you have a couple of rental properties that bring in a modest amount of cash flow but you do not pay any wages associated with the properties. Do you get a deduction of 2.5% of the purchase price per property? Is the deduction tied to any income limitations? Please excuse the questions. I don't have time to get into a CPA before this takes effect.
It is applied to your adjusted gross income. Here's a quote from an excellent paper written by a group of tax experts. From page 9 when discussing the 20% deduction: "But keep in mind, taxable income is calculated after taking into account other deductions, like the standard deduction or itemized deductions. As a result, individuals with even more actual economic income could still fully qualify for the deduction." This is definitely worth a read: https://papers.ssrn.com/sol3/papers.cfm ... id=3089423

betablocker
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Re: Pass Through Entities Questions Thread

Post by betablocker » Wed Dec 20, 2017 2:57 pm

The other advantage of c-corps is that you get a 50% tax break on any dividends paid by unaffiliated companies. So load up on dividend payers in your C-Corp. You're only paying 10% taxes on it.

Gleevec
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Re: Pass Through Entities Questions Thread

Post by Gleevec » Wed Dec 20, 2017 3:54 pm

betablocker wrote:
Wed Dec 20, 2017 2:30 pm
I'm also curious if anyone has seen a good analysis on larger pass through corporations (beyond the $315k pass through deduction limit) that are service providers becoming C-Corps. Seems like the lowered tax rate for earnings retained in the company added to the ability to deduct SALT taxes and no AMT make converting from S-Corp or LLC attractive. Wouldn't you want to increase your salary-at least up to the 24% tax bracket limit and then retain all other earnings as investments within the firm? As I read it there are some issues if you end up stocking up lots of investments in the C-Corp. If over 60% of earnings come from passive investments you lose the ability for dividends to qualify for the lower rates. I also don't know how the personal service corporation test might effect the decision. Any information on this would be much appreciated. I'm talking with a tax lawyer soon and will be happy to share what I learn.
Im starting to wonder about this as well, is it feasible to make a C corp for consulting income done as a "side business", where main work is still on salaried W2?

Chicago60
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Re: Pass Through Entities Questions Thread

Post by Chicago60 » Wed Dec 20, 2017 4:22 pm

I believe lawyers and other specified professionals are excluded from the pass through entities eligible for this provision.

Stormbringer
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Re: Pass Through Entities Questions Thread

Post by Stormbringer » Wed Dec 20, 2017 4:35 pm

Chicago60 wrote:
Wed Dec 20, 2017 4:22 pm
I believe lawyers and other specified professionals are excluded from the pass through entities eligible for this provision.
I *think* that only applies above the threshold ($315,000 married, filing jointly).
"Compound interest is the most powerful force in the universe." - Albert Einstein

Stormbringer
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Re: Pass Through Entities Questions Thread

Post by Stormbringer » Wed Dec 20, 2017 4:46 pm

ConcernedKid wrote:
Wed Dec 20, 2017 2:18 pm
Also, how does the pass through deduction work for people with rental properties (not mega corporations). Let's say you have a couple of rental properties that bring in a modest amount of cash flow but you do not pay any wages associated with the properties. Do you get a deduction of 2.5% of the purchase price per property? Is the deduction tied to any income limitations? Please excuse the questions. I don't have time to get into a CPA before this takes effect.
My understanding is that for investment real estate, the 20% deduction applies up to 2.5% of the initial tax basis (e.g. purchase price) of the property. So you paid $1M for the property, up to $25,000 of income would be subject to the 20% deduction, and anything above that would at your normal income tax rate.

If I am understanding this correctly, this HUGELY (yugely?) favors leveraged real estate over free and clear ownership. You would never want your income to exceed 2.5% of the initial tax basis. Once it does, buy another leveraged property to push up your tax basis. Also, since it sounds like the tax code evaluates the 20% deduction on an entity by entity basis, it may be less desirable from a tax perspective to have one LLC per property.
"Compound interest is the most powerful force in the universe." - Albert Einstein

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Noobvestor
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Re: Pass Through Entities Questions Thread

Post by Noobvestor » Wed Dec 20, 2017 4:47 pm

This is simplified, but not hypothetical: what's the general impact for someone with combined employee, investment and pass-through income?

* $80,000/year in ordinary wages
* $20,000/year in LLC pass-through business income
* $20,000/year in taxable dividends

Are there any calculators live yet for this kind of thing? They mostly seem to be wage-based. Mainly curious how the LLC income will be taxed.
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Chicago60
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Re: Pass Through Entities Questions Thread

Post by Chicago60 » Wed Dec 20, 2017 4:50 pm

Stormbringer wrote:
Wed Dec 20, 2017 4:35 pm
Chicago60 wrote:
Wed Dec 20, 2017 4:22 pm
I believe lawyers and other specified professionals are excluded from the pass through entities eligible for this provision.
I *think* that only applies above the threshold ($315,000 married, filing jointly).
I "think" you are correct: http://www.abajournal.com/news/article/ ... with_limit

mikep
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Re: Pass Through Entities Questions Thread

Post by mikep » Wed Dec 20, 2017 7:38 pm

My wife is a sole proprietor photographer.,, no LLC/Scorp etc. Does she qualify for this..her net income is around $5K which I usually zero out with a SE 401k deduction. Would we be able to take a $5K - self employment tax SE401k deduction then another below the line 20% deduction of the ($5K-SE tax) amount?

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Re: Pass Through Entities Questions Thread

Post by LadyGeek » Wed Dec 20, 2017 8:43 pm

JamesSFO wrote:
Wed Dec 20, 2017 2:32 pm
Curious as an attorney as well how the 20% rate works for LLPs/LLCs since the bill is now law it should be discussable
Not until the bill has been signed by the President. Until that happens, discussion is normally not permitted.

The site owner is now permitting a single discussion thread for all tax reform questions. The discussion may continue in: Tax Bill Omnibus Thread

Please do not start a new thread until the bill is signed into law.

(Thread locked to end discussion.)
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cadreamer2015
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Question about pass through income in new tax law

Post by cadreamer2015 » Fri Dec 22, 2017 12:04 pm

Since the new tax bill has been signed into law, I will try this question to see if anyone has any resources to answer my question.

I am self employed with all my self employment income coming in from 1099s. We file MFJ. Income well below the ~$400k figure I've seen as an important cut off/phase out. My question is - will I be able to deduct 20% of my self employment income as a business expense, or something like that? Does anyone understand the pass through income treatment in the new law well enough to help me understand it?
Last edited by cadreamer2015 on Fri Dec 22, 2017 2:51 pm, edited 1 time in total.
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HueyLD
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Re: Queston about pass through income in new tax law

Post by HueyLD » Fri Dec 22, 2017 12:25 pm

CADreamer,

The best source is directly from the bill writers.

It is so complicated that I suggest that you read pdf pages 545 - 565 of the bill. That section is written in plain language (non-lawyer language).

Good luck.

http://docs.house.gov/billsthisweek/201 ... %20466.pdf

ConcernedKid
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Re: Queston about pass through income in new tax law

Post by ConcernedKid » Fri Dec 22, 2017 12:43 pm

I've been trying to find anything I can to figure out what qualifies and what doesn't. I've found this blog post to be informative.

https://evergreensmallbusiness.com/pass ... ust-know/

harikaried
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Re: Queston about pass through income in new tax law

Post by harikaried » Fri Dec 22, 2017 12:53 pm

If you want some more context of the previous law, House vs Senate versions, and Conference agreement:

http://docs.house.gov/billsthisweek/201 ... tement.pdf

B. Treatment of Business Income of Individuals, Trusts, and Estates
1. Deduction for qualified business income (sec. 1004 of the House bill, sec. 11011 of the Senate amendment, and sec. 199A of the Code)

Page 20 Present Law
Page 23 House Bill
Page 28 Senate Amendment
Page 37 Conference Agreement

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Re: Queston about pass through income in new tax law

Post by cadreamer2015 » Fri Dec 22, 2017 12:54 pm

Thanks to both previous posters. I did try to read the law and it made my head hurt. I guess I will trust that TurboTax will have figured it out 12 months from now :)
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theplayer11
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Re: Queston about pass through income in new tax law

Post by theplayer11 » Fri Dec 22, 2017 1:04 pm

I found this extremely helpful
https://www.watsoncpagroup.com/SubS.pdf

Scooter57
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Re: Queston about pass through income in new tax law

Post by Scooter57 » Fri Dec 22, 2017 1:21 pm

An important question would be, would tax exempt income be included in the total income that defines whether a pass-thru business owner has gone over that $157,500/$315,000 limit?

And what about capital gains from sale of taxable stock and or funds?

That could make it important to sell taxable investments with capital gains this year, rather than next, if you were planning to sell them, so as not to boost the total income used to calculate whether you get the deduction or not. It also might make tax exempt money market and bond funds much more appealing for business owners whose tax bracket is rising rather than falling.

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PaddyMac
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Re: Question about pass through income in new tax law

Post by PaddyMac » Fri Dec 22, 2017 3:35 pm

I've been researching this and found a few helpful articles. However, it seems to be deducted on page 2 of the 1040 so it will NOT reduce your AGI (a bummer if you are like us and trying to fit into the ACA subsidy cliff).

simpler overview
https://www.kitces.com/blog/final-gop-t ... trategies/

DEEP dive by KPMG - open bookmarks in PDF and search for "Passthrough entities and sole proprietorships"
= page 67 of paper (68 of PDF - I deleted the cover page so they match)
https://home.kpmg.com/content/dam/kpmg/ ... 8-2017.pdf

exerpt:
With certain exceptions described below, an individual’s qualified business income for the
tax year would be the net amount of domestic qualified items of income, gain, deduction,
and loss (determined by taking into account only items included in the determination of
taxable income) with respect to the taxpayer’s “qualified business.” If the amount of
qualified business income for a tax year were less than zero (i.e., a loss), the loss would
be treated as a loss from qualified businesses in the next tax year.

A qualified business generally would be any trade or business other than a “specified
service trade or business.” A specified service trade or business is any trade or business
activity involving the performance of services in the fields of health, law, accounting,
actuarial science, performing arts, consulting, athletics, financial services, brokerage
services, any trade or business the principal asset of which is the reputation or skill of one
or more of its owners or employees (excluding engineering and architecture), or any
business that involves the performance of services that consist investment and
investment managing trading or dealing in securities, partnership interest, or
commodities. However, the deduction may apply to income from a specified service trade
or business if the taxpayer’s taxable income does not exceed $315,000 (for married
individuals filing jointly or $157,500 for other individuals).
Under the conference
agreement, this benefit would be phased out over the next $100,000 of taxable income
for married individuals filing jointly ($50,000 for other individuals).

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LadyGeek
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Re: Pass Through Entities Questions Thread

Post by LadyGeek » Fri Dec 22, 2017 3:43 pm

After receiving a PM, this thread is reopened to continue the discussion.

(Members wishing to have tax reform discussions unlocked can report the post with a request. Or, PM a moderator.)
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PaddyMac
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Re: Pass Through Entities Questions Thread

Post by PaddyMac » Fri Dec 22, 2017 3:58 pm

Thanks LadyGeek.

I see another pass-through thread was opened in the meantime.

The best link I've found is a PDF prepared by KPMG - see Pass-through header, on page 67 of paper (68 of PDF)
https://home.kpmg.com/content/dam/kpmg/ ... 8-2017.pdf

ConcernedKid
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Re: Pass Through Entities Questions Thread

Post by ConcernedKid » Fri Dec 22, 2017 4:02 pm

I am posting articles that helped shed some light on how Section 199A will work (in no particular order). Please feel free to add additional ones.


https://evergreensmallbusiness.com/pass ... ust-know/

https://www.kitces.com/blog/final-gop-t ... trategies/

https://www.physicianonfire.com/tax-reform-physicians/

https://www.forbes.com/sites/peterjreil ... 4551a10c2

Based on my reading of the articles, if you in a special service business (lawyer, doctor, consultant, etc. BUT NOT an engineer or architect) you are completely phased out no matter what if you are a high income earner 157k/315k with complete phaseout after $207k/$415k (but this is taxable income AFTER HSA accounts, retirement contributions and business expenses).

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JamesSFO
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Re: Pass Through Entities Questions Thread

Post by JamesSFO » Fri Dec 22, 2017 4:04 pm

Thanks for re-opening LadyGeek and thanks for the additional links.

betablocker
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Re: Pass Through Entities Questions Thread

Post by betablocker » Fri Dec 22, 2017 4:07 pm

Noobvestor wrote:
Wed Dec 20, 2017 4:47 pm
This is simplified, but not hypothetical: what's the general impact for someone with combined employee, investment and pass-through income?

* $80,000/year in ordinary wages
* $20,000/year in LLC pass-through business income
* $20,000/year in taxable dividends

Are there any calculators live yet for this kind of thing? They mostly seem to be wage-based. Mainly curious how the LLC income will be taxed.
Assuming your single, you get a lower tax rate: 24%, you should get the pass through deduction but check if you need to itemize for that. So then it depends if you have $4k or more of other deductions for mortgage, property tax, or state and local tax, and your dividends would be taxed at 15% with the aca 3.8% added on top of that. Double check on Amt though.

betablocker
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Re: Pass Through Entities Questions Thread

Post by betablocker » Fri Dec 22, 2017 4:09 pm

ConcernedKid wrote:
Fri Dec 22, 2017 4:02 pm
I am posting articles that helped shed some light on how Section 199A will work (in no particular order). Please feel free to add additional ones.


https://evergreensmallbusiness.com/pass ... ust-know/

https://www.kitces.com/blog/final-gop-t ... trategies/

https://www.physicianonfire.com/tax-reform-physicians/

https://www.forbes.com/sites/peterjreil ... 4551a10c2

Based on my reading of the articles, if you in a special service business (lawyer, doctor, consultant, etc. BUT NOT an engineer or architect) you are completely phased out no matter what if you are a high income earner 157k/315k with complete phaseout after $207k/$415k (but this is taxable income AFTER HSA accounts, retirement contributions and business expenses).
Architects and engineers still might be subject. They took them off the list but still included language about service companies generally. IRS will decide in about 4 years.

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Re: Pass Through Entities Questions Thread

Post by LadyGeek » Fri Dec 22, 2017 4:10 pm

PaddyMac wrote:
Fri Dec 22, 2017 3:58 pm
Thanks LadyGeek.

I see another pass-through thread was opened in the meantime.

The best link I've found is a PDF prepared by KPMG - see Pass-through header, on page 67 of paper (68 of PDF)
https://home.kpmg.com/content/dam/kpmg/ ... 8-2017.pdf
Thanks! I have merged the two threads.

FYI - If anyone sees duplicate discussions, please report the post using the "!" in the top-right corner of the post. It will take a while to get things organized, but we'll get there.
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betablocker
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Re: Queston about pass through income in new tax law

Post by betablocker » Fri Dec 22, 2017 4:17 pm

Scooter57 wrote:
Fri Dec 22, 2017 1:21 pm
An important question would be, would tax exempt income be included in the total income that defines whether a pass-thru business owner has gone over that $157,500/$315,000 limit?

And what about capital gains from sale of taxable stock and or funds?

That could make it important to sell taxable investments with capital gains this year, rather than next, if you were planning to sell them, so as not to boost the total income used to calculate whether you get the deduction or not. It also might make tax exempt money market and bond funds much more appealing for business owners whose tax bracket is rising rather than falling.
I’d assume it’s AGI so you are right but if you keep growing all you have to do is convert to a C-Corp and then grow your income inside that structure. And you could deduct SALT and avoid the AMT as a c as well. You could still pay yourself $300k (deductible to the C-Corp) and still only pay 24% taxes. You lose the pass thru deduction but you could make up some with the other c Corp breaks. You can keep and grow the rest inside the C.

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Re: Pass Through Entities Questions Thread

Post by Leesbro63 » Fri Dec 22, 2017 5:30 pm

mikep wrote:
Wed Dec 20, 2017 7:38 pm
My wife is a sole proprietor photographer.,, no LLC/Scorp etc. Does she qualify for this..her net income is around $5K which I usually zero out with a SE 401k deduction. Would we be able to take a $5K - self employment tax SE401k deduction then another below the line 20% deduction of the ($5K-SE tax) amount?
Same question: Must you be an S Corp to get the pass-thru deduction, or will Schedule C businesses also be able to take it?

jst
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Re: Pass Through Entities Questions Thread

Post by jst » Fri Dec 22, 2017 6:05 pm

ConcernedKid wrote:
Fri Dec 22, 2017 4:02 pm
I am posting articles that helped shed some light on how Section 199A will work (in no particular order). Please feel free to add additional ones.


https://evergreensmallbusiness.com/pass ... ust-know/

https://www.kitces.com/blog/final-gop-t ... trategies/

https://www.physicianonfire.com/tax-reform-physicians/

https://www.forbes.com/sites/peterjreil ... 4551a10c2

Based on my reading of the articles, if you in a special service business (lawyer, doctor, consultant, etc. BUT NOT an engineer or architect) you are completely phased out no matter what if you are a high income earner 157k/315k with complete phaseout after $207k/$415k (but this is taxable income AFTER HSA accounts, retirement contributions and business expenses).
That first link has a lot of good info and examples in the comments.

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Re: Pass Through Entities Questions Thread

Post by jst » Fri Dec 22, 2017 6:06 pm

Leesbro63 wrote:
Fri Dec 22, 2017 5:30 pm
mikep wrote:
Wed Dec 20, 2017 7:38 pm
My wife is a sole proprietor photographer.,, no LLC/Scorp etc. Does she qualify for this..her net income is around $5K which I usually zero out with a SE 401k deduction. Would we be able to take a $5K - self employment tax SE401k deduction then another below the line 20% deduction of the ($5K-SE tax) amount?
Same question: Must you be an S Corp to get the pass-thru deduction, or will Schedule C businesses also be able to take it?
As far as I've read, this specifically does NOT apply to C Corps. You don't have to be an S though. You can be a sole-proprietor or an LLC also.

Edit: Sorry! I misread "schedule C" as "C corp". The poster below me is correct!
Last edited by jst on Fri Dec 22, 2017 6:20 pm, edited 1 time in total.

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PaddyMac
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Re: Pass Through Entities Questions Thread

Post by PaddyMac » Fri Dec 22, 2017 6:08 pm

Leesbro63 wrote:
Fri Dec 22, 2017 5:30 pm
mikep wrote:
Wed Dec 20, 2017 7:38 pm
My wife is a sole proprietor photographer.,, no LLC/Scorp etc. Does she qualify for this..her net income is around $5K which I usually zero out with a SE 401k deduction. Would we be able to take a $5K - self employment tax SE401k deduction then another below the line 20% deduction of the ($5K-SE tax) amount?
Same question: Must you be an S Corp to get the pass-thru deduction, or will Schedule C businesses also be able to take it?
It's very clear that YES, Schedule C/sole proprietor businesses can use it!

But that is a good question whether or not you can "double-dip" - use her earnings to fund 401k then also use the same amount (net profits) to calculate the 20% deduction.

BusterMcTaco
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Re: Question about pass through income in new tax law

Post by BusterMcTaco » Fri Dec 22, 2017 6:12 pm

To take it you must have "Qualified Business Income" which is defined as "for any taxable year, the net amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer." See page 30 of the proposal, SEC. 199A(c)(1)

You do not need an S corp.

However, an S corp may be beneficial if you have taxable income above the threshold ($315,000 MFJ) and are not one of the excluded service businesses (lawyers, accountants, etc.), since you will start become subject to 50% of W-2 wages, as well. Mathematically, it seems to me that one must pay oneself 2/7 of the business income as W-2 wages to maximize the deduction (assuming the W-2 wages to self reduce the QBI, which I'm not 100% sure it does, but I think it does) [edit: confirmed that W-2 wages to self reduce QBI, see a few posts down]. That way you get 1/7 of your business income as a deduction (20% of your QBI which is 5/7 of your business income, or 50% of W-2 which is 2/7 of your business income, which equal 1/7).

The only thing I'm still not clear on, and no one seems to be, is whether this deduction will be disallowed by AMT. If not, I will not hit meaningful AMT until ~$2M in AGI ever [edit: I earlier was miscalculating]. If disallowed, then I will be subject to AMT until somewhere around $750k AGI :annoyed. Big difference!

Regarding the 401k calculation, since that is above-the-line and affects AGI, I think the 401k deduction would reduce ones QBI, and the remainder would get the 20% deduction. But this is a WAG, since it doesn't seem to be clarified.
Last edited by BusterMcTaco on Fri Dec 22, 2017 6:59 pm, edited 3 times in total.

TIAX
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Re: Question about pass through income in new tax law

Post by TIAX » Fri Dec 22, 2017 6:26 pm

PaddyMac wrote:
Fri Dec 22, 2017 3:35 pm
However, the deduction may apply to income from a specified service trade
or business if the taxpayer’s taxable income does not exceed $315,000 (for married
individuals filing jointly or $157,500 for other individuals).[/b] Under the conference
agreement, this benefit would be phased out over the next $100,000 of taxable income
for married individuals filing jointly ($50,000 for other individuals).
If you're over the phase-out does that mean you can't claim the 20% deduction at all or is it only applicable to the income under the phase-out? Is the 315k based only on the business income or all income of the couple (including W2)?
Last edited by TIAX on Fri Dec 22, 2017 6:31 pm, edited 1 time in total.

jst
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Re: Question about pass through income in new tax law

Post by jst » Fri Dec 22, 2017 6:31 pm

I'm definitely have a bit of a hard time wrapping my head around this, but for those of us with businesses where we can basically determine what portion of profits should be W-2 wages and what portion should be distributions, am I right that this becomes pretty complicated? I want to maximize my 20% deduction, stay under phase-out limits, and also maximize my profit sharing plan (which maxes out at 25% of W-2 wages for the whole company, I believe).

I feel like I'll be in a bit of a circle here.

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PaddyMac
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Re: Question about pass through income in new tax law

Post by PaddyMac » Fri Dec 22, 2017 6:38 pm

TIAX wrote:
Fri Dec 22, 2017 6:26 pm
PaddyMac wrote:
Fri Dec 22, 2017 3:35 pm
However, the deduction may apply to income from a specified service trade
or business if the taxpayer’s taxable income does not exceed $315,000 (for married
individuals filing jointly or $157,500 for other individuals).[/b] Under the conference
agreement, this benefit would be phased out over the next $100,000 of taxable income
for married individuals filing jointly ($50,000 for other individuals).
If you're over the phase-out does that mean you can't claim the 20% deduction at all or is it only applicable to the income under the phase-out? Is the 315k based only on the business income or all income of the couple (including W2)?
Reread the entire exerpt above, and maybe the PDF as well. From my reading (and I'm not an accountant...), if you are qualified business (you make widgets and have a few helpers etc), you can deduct 20% of ALL your net profit. However, there is a separate calculation for "service industries" (or what I call "gurus" or consultants - see list), that over a certain amount of taxable income, the deduction phases out.

So I take it that every small business can claim the deduction, but if you make a good income in a service industry, you will have to see if your services fall into the "guru" trap.

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Re: Question about pass through income in new tax law

Post by BusterMcTaco » Fri Dec 22, 2017 6:40 pm

TIAX wrote:
Fri Dec 22, 2017 6:26 pm
If you're over the phase-out does that mean you can't claim the 20% deduction at all or is it only applicable to the income under the phase-out? Is the 315k based only on the business income or all income of the couple (including W2)?
You lose it in the phase-out. So once you hit $415k (MFJ), you have 0% deduction on all the income. Kind of like the AMT exemption phase-out in that sense. There was a WSJ journal article about how, with the old numbers in the senate bill, this made it such that there was a particular range of income where one was paying an effective tax rate of over 100%. Note these are the old numbers in the article, not the final ones.
jst wrote:
Fri Dec 22, 2017 6:31 pm
I'm definitely have a bit of a hard time wrapping my head around this, but for those of us with businesses where we can basically determine what portion of profits should be W-2 wages and what portion should be distributions, am I right that this becomes pretty complicated? I want to maximize my 20% deduction, stay under phase-out limits, and also maximize my profit sharing plan (which maxes out at 25% of W-2 wages for the whole company, I believe).

I feel like I'll be in a bit of a circle here.
Yup. I've already gone around in circles about this. See above, where I basically concluded the 20% deduction can be maximized by paying 2/7 of gross profits as W-2 wages to self. I didn't really factor in how this affected solo 401(k) contributions, and truly I never even considered how those come into play with W-2 wages. Presumably one has to start properly withholding and remitting the employee deferral? *shudder*

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MP123
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Re: Question about pass through income in new tax law

Post by MP123 » Fri Dec 22, 2017 6:41 pm

TIAX wrote:
Fri Dec 22, 2017 6:26 pm
PaddyMac wrote:
Fri Dec 22, 2017 3:35 pm
However, the deduction may apply to income from a specified service trade
or business if the taxpayer’s taxable income does not exceed $315,000 (for married
individuals filing jointly or $157,500 for other individuals).[/b] Under the conference
agreement, this benefit would be phased out over the next $100,000 of taxable income
for married individuals filing jointly ($50,000 for other individuals).
If you're over the phase-out does that mean you can't claim the 20% deduction at all or is it only applicable to the income under the phase-out? Is the 315k based only on the business income or all income of the couple (including W2)?
My understanding is that it phases out completely over $415k. Similar to the personal exemption phase out currently. In other words you don't get any part of it if you're over $415k.

Edit: to add that is for specified service businesses.

BusterMcTaco
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Re: Question about pass through income in new tax law

Post by BusterMcTaco » Fri Dec 22, 2017 6:59 pm

BusterMcTaco wrote:
Fri Dec 22, 2017 6:12 pm
(assuming the W-2 wages to self reduce the QBI, which I'm not 100% sure it does, but I think it does).
Found it. It does, per the explanation on page 30 of the "Joint Explanatory Statement of the Committee of Conference"
Qualified business income does not include any amount paid by an S corporation that is treated as reasonable compensation of the taxpayer. Similarly, qualified business income does not include any guaranteed payment for services rendered with respect to the trade or business, and to the extent provided in regulations, does not include any amount paid or incurred by a partnership to a partner who is acting other than in his or her capacity as a partner for services.

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Re: Question about pass through income in new tax law

Post by ConcernedKid » Fri Dec 22, 2017 7:04 pm

I think this provision is in need of a good flow chart made by someone much smarter than me. I'm going to see if I can find one. It seems like if you are under 157k/315k, you can be in a pass through business in any form and get the full deduction. Over $207k/$415k and you get NO deduction whatsoever if you are in one of the specified trades or business. If you are over $157k/$315k but NOT in one of the specified trades or businesses, your deduction is either 50% of W-2 wages or 25% of wages plus 2.5% of property subject to depreciation. This latter provision can come in handy for people with rental real estate who show a net income on paper (as opposed to a phantom loss due to depreciation).

It looks like C-corps get the 21% rate regardless of the industry.

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Re: Question about pass through income in new tax law

Post by jst » Fri Dec 22, 2017 7:06 pm

BusterMcTaco wrote:
Fri Dec 22, 2017 6:40 pm
Yup. I've already gone around in circles about this. See above, where I basically concluded the 20% deduction can be maximized by paying 2/7 of gross profits as W-2 wages to self. I didn't really factor in how this affected solo 401(k) contributions, and truly I never even considered how those come into play with W-2 wages. Presumably one has to start properly withholding and remitting the employee deferral? *shudder*
Thanks. I'll have to balance the ability to max out my profit sharing against this deduction. Tricky! Having tax deferred savings is great, but it's hard to really value and compare to this deduction.

Just to be clear, the 50% of wages limit includes wages I pay my employees right? I have a 50% partner, so we'd each get the 20% on our distributions up to 25% of the total wages of the company, if I understand correctly. Does that sound right?

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Re: Question about pass through income in new tax law

Post by BusterMcTaco » Fri Dec 22, 2017 7:08 pm

MP123 wrote:
Fri Dec 22, 2017 6:41 pm
My understanding is that it phases out completely over $415k. Similar to the personal exemption phase out currently. In other words you don't get any part of it if you're over $415k.

Edit: to add that is for specified service businesses.
If you aren't a specified service business then it phases out similarly, but is now the difference between 20% of QBI and the maximum of 50% of W-2 wages or 25% of W-2 wages + 2.5% of qualified property. So if you are a sole proprietor without W-2 payments, it's the same effect.

If you're an S-corp, then I think you'd optimize by paying yourself 2/7 of profits as W-2. I haven't really thought through how that would affect solo 401(k) contribution eligibility though.

Of course you'd also have to deal with payroll taxes, but you'd have to pay yourself that anyway unless you have separate W-2 employment. And I suppose once you hit $315,000 in taxable income, assuming much of it is from self-employment, you can probably save a pretty penny on medicare taxes by switching to an S-corp. But this is all idle thought and I haven't really worked through it.

BusterMcTaco
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Re: Question about pass through income in new tax law

Post by BusterMcTaco » Fri Dec 22, 2017 7:09 pm

jst wrote:
Fri Dec 22, 2017 7:06 pm
Just to be clear, the 50% of wages limit includes wages I pay my employees right? I have a 50% partner, so we'd each get the 20% on our distributions up to 25% of the total wages of the company, if I understand correctly. Does that sound right?
I believe so, if you're each above $415,000 in taxable income and MFJ. If you're under $315,000 taxable income it's just 20% of your half of distributions.

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vitaflo
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Re: Pass Through Entities Questions Thread

Post by vitaflo » Fri Dec 22, 2017 8:19 pm

PaddyMac wrote:
Fri Dec 22, 2017 6:08 pm
Leesbro63 wrote:
Fri Dec 22, 2017 5:30 pm
mikep wrote:
Wed Dec 20, 2017 7:38 pm
My wife is a sole proprietor photographer.,, no LLC/Scorp etc. Does she qualify for this..her net income is around $5K which I usually zero out with a SE 401k deduction. Would we be able to take a $5K - self employment tax SE401k deduction then another below the line 20% deduction of the ($5K-SE tax) amount?
Same question: Must you be an S Corp to get the pass-thru deduction, or will Schedule C businesses also be able to take it?
It's very clear that YES, Schedule C/sole proprietor businesses can use it!

But that is a good question whether or not you can "double-dip" - use her earnings to fund 401k then also use the same amount (net profits) to calculate the 20% deduction.
I've read that QBI is reduced by SE retirement plan and health insurance deductions to get around this double dip scenario. An example is listed here:

https://www.watsoncpagroup.com/SubS.pdf

"Wilma makes $100,000 in net business income but also deducts $5,000 for self-employed health insurance
and $10,000 for a SEP IRA. Her deduction is $100,000 less $15,000 or 20% of $85,000."

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Re: Question about pass through income in new tax law

Post by grp2c » Fri Dec 22, 2017 8:51 pm

https://www.watsoncpagroup.com/SubS.pdf

I'm confused by this example:

"If Mr. Slate instead operates as a sole proprietor and earns $500,000 but does not pay any W-2 wages, his
deduction is the lessor of 50% of the W-2 wages (or $0 in this example) or 20% of the $500,000. If he paid
out $200,000 in wages and had $300,000 in net business income, his Section 199A deduction would be the
lessor of 50% of $200,000 or 20% of $300,000.
In other words, he would deduct $60,000 ($60,000 is less than $100,000, even in Canada). He would want
to create an LLC, tax it as an S corporation and pay out W-2 wages to maximize his Section 199A
deduction."

A self-employed sole proprietor with no employees has no w-2 wages, therefore they are saying the deduction is $0. I would expect a sole proprietor's deduction to be 20% x (business profit - deductions), otherwise why would the legislation include sole proprietors at all.

BusterMcTaco
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Re: Pass Through Entities Questions Thread

Post by BusterMcTaco » Fri Dec 22, 2017 10:11 pm

vitaflo wrote:
Fri Dec 22, 2017 8:19 pm
I've read that QBI is reduced by SE retirement plan and health insurance deductions to get around this double dip scenario. An example is listed here:

https://www.watsoncpagroup.com/SubS.pdf

"Wilma makes $100,000 in net business income but also deducts $5,000 for self-employed health insurance
and $10,000 for a SEP IRA. Her deduction is $100,000 less $15,000 or 20% of $85,000."
Well, drat. I was going to post this spreadsheet which was helpful for me in determining whether to opt for a QJV or an S-corp, but one of the assumptions I made is that it would not reduce QBI. I wanted to share it here with the disclaimers that 1) read the assumptions (at least one of which is wrong per your example) and 2) it could and probably does have errors:

https://docs.google.com/spreadsheets/d/ ... edit#gid=0
grp2c wrote:
Fri Dec 22, 2017 8:51 pm
A self-employed sole proprietor with no employees has no w-2 wages, therefore they are saying the deduction is $0. I would expect a sole proprietor's deduction to be 20% x (business profit - deductions), otherwise why would the legislation include sole proprietors at all.
The example is correct, and a self-employed sole proprietor with no employees would indeed get no deduction after $415,000 taxable income (MFJ). They included sole proprietors because they can still have employees. In fact, this is the anti-abuse bit in action. If you are just a guy (or gal) working for himself (herself) making income, you're not the kind of small business they are trying to give a break to (although up to the threshold you will get it anyway). The break seems intended for those who employ others. Well, that, and real estate tycoons (but that borders on politics!)

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Re: Question about pass through income in new tax law

Post by technovelist » Fri Dec 22, 2017 10:59 pm

Isn't tax simplification great?
In theory, theory and practice are identical. In practice, they often differ.

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Noobvestor
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Re: Pass Through Entities Questions Thread

Post by Noobvestor » Fri Dec 22, 2017 11:41 pm

betablocker wrote:
Fri Dec 22, 2017 4:07 pm
Noobvestor wrote:
Wed Dec 20, 2017 4:47 pm
This is simplified, but not hypothetical: what's the general impact for someone with combined employee, investment and pass-through income?

* $80,000/year in ordinary wages
* $20,000/year in LLC pass-through business income
* $20,000/year in taxable dividends

Are there any calculators live yet for this kind of thing? They mostly seem to be wage-based. Mainly curious how the LLC income will be taxed.
Assuming your single, you get a lower tax rate: 24%, you should get the pass through deduction but check if you need to itemize for that. So then it depends if you have $4k or more of other deductions for mortgage, property tax, or state and local tax, and your dividends would be taxed at 15% with the aca 3.8% added on top of that. Double check on Amt though.
I feel dense asking but: if I don't itemize then there's no benefit to that 20k being through an LLC vs wage income. Correct?
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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