Retirement accounts and physician SCorps and Tax Reform

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Atgard
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Re: Retirement accounts and physician SCorps and Tax Reform

Post by Atgard » Thu Aug 09, 2018 8:40 pm

beagler1 wrote:
Thu Aug 09, 2018 12:31 pm
summary of new 199a irs guidance from Nitti who wrote some good articles before:

https://www.forbes.com/sites/anthonynit ... 6498142ff8

Anyone have tips or experience converting from s-corp to sole prop?
Thanks for the article. It's quite long, but the germane part to the QBI discussion for S-Corps starts under the heading "Treatment of S Corporation Reasonable Compensation." Here is the conclusion:
3. What do the Regulations say? Nothing. W-2 wages continue to include amounts paid to an S corporation shareholder, and QBI continues to not include wages received by a shareholder. As a result, these inequities continue.

4. Takeaway: Similarly situated taxpayers should generally enjoy similar federal income tax consequences. But by virtue of two pieces of Section 199A – the inclusion of wages paid to an owner in the W-2 limitation and the exclusion from qualified business income of reasonable compensation and guaranteed payments paid to an owner – inequities arise at all income levels. If I'm a sole proprietor with income above the taxable income threshold, I'm taking a hard look at converting to an S corporation, paying a small salary, and maximizing the Section 199A deduction.

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Lieutenant.Columbo
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Re: Retirement accounts and physician SCorps and Tax Reform

Post by Lieutenant.Columbo » Sun Aug 12, 2018 2:23 pm

gilgamesh wrote:
Wed Jan 10, 2018 11:26 am
What's frustrating about how different entities are treated to me is how it could be changed a few years later, yet once an S-corp election is revoked one has to wait five years to wait to re-elect S- corp taxation. So, one could figure it all out now and then find themselves in an disadvantageous situation a year later.
beagler1 wrote:
Thu Aug 09, 2018 12:31 pm
Anyone have tips or experience converting from s-corp to sole prop?
Can anyone who's been looking into this lately please refresh our minds by explaining the reason/s wife & husband might be better off revoking the S-Corp status of their LLC (where each is 50% owner and both are the only employees)?
Thank you.
Lt. Columbo: Well, what do you know. Here I am talking with some of the smartest people in the world, and I didn't even notice!

gilgamesh
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Re: Retirement accounts and physician SCorps and Tax Reform

Post by gilgamesh » Sun Aug 12, 2018 7:33 pm

Lieutenant.Columbo wrote:
Sun Aug 12, 2018 2:23 pm
gilgamesh wrote:
Wed Jan 10, 2018 11:26 am
What's frustrating about how different entities are treated to me is how it could be changed a few years later, yet once an S-corp election is revoked one has to wait five years to wait to re-elect S- corp taxation. So, one could figure it all out now and then find themselves in an disadvantageous situation a year later.
beagler1 wrote:
Thu Aug 09, 2018 12:31 pm
Anyone have tips or experience converting from s-corp to sole prop?
Can anyone who's been looking into this lately please refresh our minds by explaining the reason/s wife & husband might be better off revoking the S-Corp status of their LLC (where each is 50% owner and both are the only employees)?
Thank you.
It can get messy, so I’ll only respond as it pertains to the exempted service industry. QBI deduction phasing off at $415k MFJ, with the full 20% deduction upto $315k taxable income. In those instances, yes sole proprietorship enjoys a higher QBI deduction than S-Corp. This is because W2 wages is not included in the QBI deduction. However, there’s more to why one chooses S-Corp over sole proprietorship, therefore one has to look at the overall picture.

P.S: I think there will be further clarifications, as it’s a bigger problem if W2 wage test is included as the situation reverses and sole proprietorship may have zero deductions with no emplyees. However, the $315k threshold is the same for “service industry” and W2 wage test, therefore us in the service industry can ignore that. But, definitely needs further clarifications.

Spirit Rider
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Re: Retirement accounts and physician SCorps and Tax Reform

Post by Spirit Rider » Sun Aug 12, 2018 7:45 pm

It is a complex question based on the difference in FICA taxes on the S-Corp shareholder-employee's reasonable salaries vs. SE taxes as self-employed.

This is complicated by the new 199A 20% QBI deduction. The IRS has issued a notice of proposed rule making including regulations. As expected S-Corp shareholder-employee's W-2 wages are not included in Qualified Business Income (QBI).

This strongly tilts the equation away from S-Corps towards self-employment. Note: This only applies as @gilgamesh pointed out to those whose taxable income/service business status makes them eligible for the QBI deduction.

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gasdoc
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Re: Retirement accounts and physician SCorps and Tax Reform

Post by gasdoc » Mon Aug 13, 2018 1:42 pm

This is the OP- I am glad to see this thread re-emerging. Since my last post, I have met with my CPA, and basically was told that although my large retirement plan contribution (for my defined benefit plan) puts my total taxable income below $315K, my W2 salary plus my retirement plan contribution makes my QBI essentially zero, so no pass-through deduction. I haven't seen it mentioned that the retirement contribution is subtracted from the gross salary to get QBI, but it kind of makes sense to my layman's mind.
1) Am I understanding this correctly?
2) Is there a work-around other than limiting my retirement plan contributions, which I really don't want to do?

I appreciate all the help- I find this all somewhat confusion.

gasdoc

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by Spirit Rider » Mon Aug 13, 2018 2:58 pm

Any employer retirement plan contribution in an S-Corp is deducted on Form 1120S Line 17. Therefore, it reduces the ordinary business income and distributions that will be the basis for any Qualified Business Income (QBI) deduction.

If you are paying little to no distributions due to W-2 wages and employer retirement plan contributions. There is very little if any FICA tax savings over the SE taxes you would pay as a self-employed individual. Why did you elect an S-Corp in the first place?

The only work around I can see if your MFJ taxable income < $315K is to dissolve the S-Corp and file taxes as a sole proprietor on Schedule C/SE. This will allow a 20% QBI deduction on your net taxable income.

I would not do this until the end of the year when all the QBI tax issues are fully known. Once you disolve an S-Corp, you can not create one again for five (5) years. I think you will have to accept the reality of little to no QBI deduction for this tax year.

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gasdoc
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Re: Retirement accounts and physician SCorps and Tax Reform

Post by gasdoc » Mon Aug 13, 2018 3:08 pm

Spirit Rider wrote:
Mon Aug 13, 2018 2:58 pm
Any employer retirement plan contribution in an S-Corp is deducted on Form 1120S Line 17. Therefore, it reduces the ordinary business income and distributions that will be the basis for any QBI deduction.

If you are paying little to no distributions due to W-2 wages and employer retirement plan contributions. There is very little if any FICA tax savings over the SE taxes you would pay as a self-employed individual. Why did you elect an S-Corp in the first place?

The only work around I can see if your MFJ taxable income < $315K is to dissolve the S-Corp and file taxes as a sole proprietor on Schedule C/SE.
Thanks, Spirit Rider. I originally set up the S-Corp many years ago, before I started the defined benefit plan. I am planning 4.5 years until I retire, and expect the same salary and salary deferment during those years. Should I consider dissolving my S-Corp? Would I still be able to keep my defined benefit plan, which I believe is employer based?

gasdoc

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by Spirit Rider » Mon Aug 13, 2018 3:37 pm

See the edit to my last post adding the last paragraph after you started your reply.

A sole proprietor can just as easily contribute to a defined benefit plan. It may be necessary to amend the plan to change the plan sponsor from the S-Corp to a sole proprietorship.

Note: You should engage a professional for a change of this magnatude. Depending on your exact circumstances and jurisdiction it may or may not be beneficial to create a default single member LLC taxed as a sole proprietorship. If the entity is already an LLC that elected subchapter S status. The dissolution of that election may be all that is necessary.

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Lieutenant.Columbo
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Re: Retirement accounts and physician SCorps and Tax Reform

Post by Lieutenant.Columbo » Mon Aug 13, 2018 3:40 pm

gilgamesh wrote:
Sun Aug 12, 2018 7:33 pm
Lieutenant.Columbo wrote:
Sun Aug 12, 2018 2:23 pm
gilgamesh wrote:
Wed Jan 10, 2018 11:26 am
What's frustrating about how different entities are treated to me is how it could be changed a few years later, yet once an S-corp election is revoked one has to wait five years to wait to re-elect S- corp taxation. So, one could figure it all out now and then find themselves in an disadvantageous situation a year later.
beagler1 wrote:
Thu Aug 09, 2018 12:31 pm
Anyone have tips or experience converting from s-corp to sole prop?
Can anyone who's been looking into this lately please refresh our minds by explaining the reason/s wife & husband might be better off revoking the S-Corp status of their LLC (where each is 50% owner and both are the only employees)?
Thank you.
It can get messy, so I’ll only respond as it pertains to the exempted service industry. QBI deduction phasing off at $415k MFJ, with the full 20% deduction upto $315k taxable income. In those instances, yes sole proprietorship enjoys a higher QBI deduction than S-Corp. This is because W2 wages is not included in the QBI deduction. However, there’s more to why one chooses S-Corp over sole proprietorship, therefore one has to look at the overall picture.

P.S: I think there will be further clarifications, as it’s a bigger problem if W2 wage test is included as the situation reverses and sole proprietorship may have zero deductions with no emplyees. However, the $315k threshold is the same for “service industry” and W2 wage test, therefore us in the service industry can ignore that. But, definitely needs further clarifications.
Spirit Rider wrote:
Sun Aug 12, 2018 7:45 pm
It is a complex question based on the difference in FICA taxes on the S-Corp shareholder-employee's reasonable salaries vs. SE taxes as self-employed.

This is complicated by the new 199A 20% QBI deduction. The IRS has issued a notice of proposed rule making including regulations. As expected S-Corp shareholder-employee's W-2 wages are not included in Qualified Business Income (QBI).

This strongly tilts the equation away from S-Corps towards self-employment. Note: This only applies as @gilgamesh pointed out to those whose taxable income/service business status makes them eligible for the QBI deduction.
Thank you gilgamesh and Spirit Rider for your replies above.
Spirit Rider wrote:
Mon Aug 13, 2018 2:58 pm
Any employer retirement plan contribution in an S-Corp is deducted on Form 1120S Line 17. Therefore, it reduces the ordinary business income and distributions that will be the basis for any Qualified Business Income (QBI) deduction.

If you are paying little to no distributions due to W-2 wages and employer retirement plan contributions. There is very little if any FICA tax savings over the SE taxes you would pay as a self-employed individual. Why did you elect an S-Corp in the first place?

The only work around I can see if your MFJ taxable income < $315K is to dissolve the S-Corp and file taxes as a sole proprietor on Schedule C/SE. This will allow a 20% QBI deduction on your net taxable income.

I would not do this until the end of the year when all the QBI tax issues are fully known. Once you disolve an S-Corp, you can not create one again for five (5) years. I think you will have to accept the reality of little to no QBI deduction for this tax year.
Philosophically speaking, does it make sense for Section 199A to provide so that, with the same business net results, one business entity would benefit more than another? Was that an intended or unintended consequence?
What was the legislators' real intention? :?
Lt. Columbo: Well, what do you know. Here I am talking with some of the smartest people in the world, and I didn't even notice!

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gasdoc
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Re: Retirement accounts and physician SCorps and Tax Reform

Post by gasdoc » Mon Aug 13, 2018 4:11 pm

Spirit Rider wrote:
Mon Aug 13, 2018 3:37 pm
See the edit to my last post adding the last paragraph after you started your reply.

A sole proprietor can just as easily contribute to a defined benefit plan. It may be necessary to amend the plan to change the plan sponsor from the S-Corp to a sole proprietorship.

Note: You should engage a professional for a change of this magnatude. Depending on your exact circumstances and jurisdiction it may or may not be beneficial to create a default single member LLC taxed as a sole proprietorship. If the entity is already an LLC that elected subchapter S status. The dissolution of that election may be all that is necessary.
Thanks, again, Sprit Rider. I have read your edited last sentences and your latest post. I'll have to meet again with my CPA, given your advice.

gasdoc

BusterMcTaco
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Re: Retirement accounts and physician SCorps and Tax Reform

Post by BusterMcTaco » Mon Aug 13, 2018 10:31 pm

Lieutenant.Columbo wrote:
Mon Aug 13, 2018 3:40 pm
Philosophically speaking, does it make sense for Section 199A to provide so that, with the same business net results, one business entity would benefit more than another? Was that an intended or unintended consequence?
What was the legislators' real intention? :?
I can't speak to their intention, but I think there was already a disparity between benefits. Previously, an S-Corp could save considerable taxes over a disregarded entity due to the saved FICA taxes.

My guess is that they wrote this as they did to ensure that those business with W-2 employees would see the greatest benefit, and as it happens, that means that an S-corp employing a shareholder can see a benefit above the phase-out (if not a specified service as is the focus of this thread), but happens to suffer below.

Imagine if this was a S-corp with non-shareholder employees. If you make $1,000,000 and pay $900,000 in W-2 wages, why should your QBI be counted as $1,000,000? 90% of it was expense! In the case we're discussing here, you just happen to be your own expense (which was set up in the first place, often, to avoid FICA taxes).

gilgamesh
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Re: Retirement accounts and physician SCorps and Tax Reform

Post by gilgamesh » Tue Aug 14, 2018 7:48 am

gasdoc wrote:
Mon Aug 13, 2018 1:42 pm
... I haven't seen it mentioned that the retirement contribution is subtracted from the gross salary to get QBI, but it kind of makes sense to my layman's mind.

gasdoc
That's because it is not. The 199A deduction is lesser of 20% of QBI or 20% of taxable income. It's your taxable income that's essentially zero due to your defined benefit plan, not QBI.

That's why I think this small business deduction should be called the 199A deduction and not QBI deduction.

P.S: When you setup your defined benefit plan, your then "current" tax bracket would have been higher than the new tax brackets. Now, including the 199A deduction, every dollar your DB plan reduces your taxable income below $315k is only saving your taxes by maximum 19.2% (80% of the 24% tax bracket... MFJ) and as tax brackets get lower, even less than 19.2% (it would be 80% of each tax bracket). (Edit: for a sole prop., Scorp be slightly more complex, but concept applies). You may want to run the "benefits" of you DB plan with this new number...is it worth doing given new data? If it is, then consider yourself lucky, as you are doing better without needing the 199A deduction.

gilgamesh
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Re: Retirement accounts and physician SCorps and Tax Reform

Post by gilgamesh » Tue Aug 14, 2018 12:03 pm

If it’s based off of QBI income alone the s-Corp to Sole proprietorship disadvantage will be more. But it is not. In a simple situation , most likely S-Corp will deduct QBI and sole proprietorship taxable income.

Take a simple case of a service industry small bisiness owner having a net business income of $400k. If he was a sole proprietor his QBI is $400.

Say, he takes standard deduction of $24k, HSA 7k, health insurance premium $12k and safe harbor 401k between him and his wife ~$43k. Taxable income is $314k. This couple is eligible for the full 20% deduction. As the 199A threshold is based on taxable income. Edit: Wife’s income is ignored, but could be $1k after full 401k deduction, for a taxable income of $315k

20% deduction for the sole proprietorship is taken from the $314k.

If it was an S-Corp and reasonable W2 wages was $180k, then the 199A deduction will be from $400k - $180k = $220k, which is the QBI for the s-Corp.

P.S: I think my understanding is correct. Oversimplifation, But concepts should be correct ???

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gasdoc
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Re: Retirement accounts and physician SCorps and Tax Reform

Post by gasdoc » Tue Aug 14, 2018 7:59 pm

gilgamesh wrote:
Tue Aug 14, 2018 7:48 am
gasdoc wrote:
Mon Aug 13, 2018 1:42 pm
... I haven't seen it mentioned that the retirement contribution is subtracted from the gross salary to get QBI, but it kind of makes sense to my layman's mind.

gasdoc
That's because it is not. The 199A deduction is lesser of 20% of QBI or 20% of taxable income. It's your taxable income that's essentially zero due to your defined benefit plan, not QBI.

That's why I think this small business deduction should be called the 199A deduction and not QBI deduction.

P.S: When you setup your defined benefit plan, your then "current" tax bracket would have been higher than the new tax brackets. Now, including the 199A deduction, every dollar your DB plan reduces your taxable income below $315k is only saving your taxes by maximum 19.2% (80% of the 24% tax bracket... MFJ) and as tax brackets get lower, even less than 19.2% (it would be 80% of each tax bracket). (Edit: for a sole prop., Scorp be slightly more complex, but concept applies). You may want to run the "benefits" of you DB plan with this new number...is it worth doing given new data? If it is, then consider yourself lucky, as you are doing better without needing the 199A deduction.
gilgamesh, I appreciate the help. But my understanding is different from that. Using your example of $400K with a W2 wage of $180K, but throw in a retirement contribution of $200K, my understanding was that you now have a QBI of 400-180-200 = $20K. And your total income is 400-200 = $200K. At least that is how my CPA seemed to understand things. I really can't terminate the DBP because I haven't had it long enough to keep it qualified (recommend at least 5 years). My CPA estimates that I come out ahead about $5500 per year plus less administrative expense if I dissolve the S-Corp and continue as a Sole Proprietor. Spirit Rider? Anyway, I am not an expert, and I don't want to say more at the risk of confusing others.

gasdoc

gilgamesh
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Re: Retirement accounts and physician SCorps and Tax Reform

Post by gilgamesh » Wed Aug 15, 2018 6:13 am

gasdoc wrote:
Tue Aug 14, 2018 7:59 pm
gilgamesh wrote:
Tue Aug 14, 2018 7:48 am
gasdoc wrote:
Mon Aug 13, 2018 1:42 pm
... I haven't seen it mentioned that the retirement contribution is subtracted from the gross salary to get QBI, but it kind of makes sense to my layman's mind.

gasdoc
That's because it is not. The 199A deduction is lesser of 20% of QBI or 20% of taxable income. It's your taxable income that's essentially zero due to your defined benefit plan, not QBI.

That's why I think this small business deduction should be called the 199A deduction and not QBI deduction.

P.S: When you setup your defined benefit plan, your then "current" tax bracket would have been higher than the new tax brackets. Now, including the 199A deduction, every dollar your DB plan reduces your taxable income below $315k is only saving your taxes by maximum 19.2% (80% of the 24% tax bracket... MFJ) and as tax brackets get lower, even less than 19.2% (it would be 80% of each tax bracket). (Edit: for a sole prop., Scorp be slightly more complex, but concept applies). You may want to run the "benefits" of you DB plan with this new number...is it worth doing given new data? If it is, then consider yourself lucky, as you are doing better without needing the 199A deduction.
gilgamesh, I appreciate the help. But my understanding is different from that. Using your example of $400K with a W2 wage of $180K, but throw in a retirement contribution of $200K, my understanding was that you now have a QBI of 400-180-200 = $20K. And your total income is 400-200 = $200K. At least that is how my CPA seemed to understand things. I really can't terminate the DBP because I haven't had it long enough to keep it qualified (recommend at least 5 years). My CPA estimates that I come out ahead about $5500 per year plus less administrative expense if I dissolve the S-Corp and continue as a Sole Proprietor. Spirit Rider? Anyway, I am not an expert, and I don't want to say more at the risk of confusing others.

gasdoc
It looks like it might end up being like how your accountant explained.

“Missing Guidance For Schedule C
There are some things we are unsure about. One example is 401k or defined benefits contribution. This is typically an adjustment on Form 1040 separate from Schedule C. Will these amounts get filtered back into the Section 199A calculation when basing it on Schedule C net business income? Probably… since this would be a double dip. Same with self-employment taxes and health insurance We’ll have to wait and see on handling the C.‘

https://www.watsoncpagroup.com/section-199a-deduction/

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by Spirit Rider » Wed Aug 15, 2018 8:12 am

Currently there is a worksheet in the 2017 Form 1040 Instructions that limits the Line 29 (Self-employed health insurance deduction) to Line 12 (bussiness profit) - Line 27 (1/2 SE tax) - Line 28 (deductible self-employed retirement plan contributions).

I think it is quite likely in the 2018 Form 1040 Instructions. There will be a worksheet that limits the Line 9 (Qualified business income deduction + Form 1040 Schedule 1 Lines 27-29 to <= Line 12. However, that is only likely to affect someone with well < $100K in business profit.

gilgamesh
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Re: Retirement accounts and physician SCorps and Tax Reform

Post by gilgamesh » Wed Aug 15, 2018 3:17 pm

Spirit Rider wrote:
Wed Aug 15, 2018 8:12 am
Currently there is a worksheet in the 2017 Form 1040 Instructions that limits the Line 29 (Self-employed health insurance deduction) to Line 12 (bussiness profit) - Line 27 (1/2 SE tax) - Line 28 (deductible self-employed retirement plan contributions).

I think it is quite likely in the 2018 Form 1040 Instructions. There will be a worksheet that limits the Line 9 (Qualified business income deduction + Form 1040 Schedule 1 Lines 27-29 to <= Line 12. However, that is only likely to affect someone with well < $100K in business profit.
Thank you for this reply

It was kind of hard to decipher what's been said here. But looking at my tax returns when I was a sole proprietor matches what you are saying. But in that instance I don't see how line 12 can ever be lower than the sum of QBI and lines 27-29?

With my s-Corp tax returns, 1040 line 12 is blank and line 17 has the net income (minus W2 wages).

Anyhow, if you say it will only affect those with business profit less than $100k, I'll just take your word for it.

But if this $100k threshold is line 12 of 1040 for sole proprietor and line 17 for s-Corp, again it looks like an s-Corp line 17 can hit the lower number well before line 12 of a sole proprietor.

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by Spirit Rider » Wed Aug 15, 2018 4:18 pm

I am referring to the actual 20% QBI deduction and not the QBI. The $100K was not a theshold but rather just a more than sufficient number, because the self-employed health insurance deduction is variable.

For purposes of an example, assume there is such a limitation with business profit = $50K. Line 9 = $50K * 20% = $10K. There are no W-2 wages, Line 27 1/2 SE tax = $3,532. Line 28 = $18,500 employee elective deferral + $9,294 employer contribution = $27,794. Line 29 = $15K (arbitrary). $10K + $3,532 + $27,794 + $15K = $56,326 > $50K.

Something has to give. My guess is in the calculation that QBI goes first, then Line 29 and there are already rules limiting the values on Line 28. Although it would be better if you proactively made a portion of line 28 designated Roth contributions.

This all speculation, but it is consistent with IRS current pattern and practice not to allow deductions attributable to business profits to exceed those business profits. This is also consistent with the Watson CPA Group's concern.

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by gilgamesh » Wed Aug 15, 2018 4:56 pm

I used the word “threshold” loosely. I know what you meant...

I did confuse QBI to the actual 20% deduction...now it makes sense.

I was thinking of Roth too...max federal tax bracket below $315k is 19.2% (given max 199A deduction, possible with sole proprietor), with no state taxes might as well contribute to Roth 401k, If 401k is going to affect QBI deduction....fine line.

2018 was a wasted year, couldn’t optimize anything. Hoping 2019 will be different - for that, all of this has to be known prior to March (deadline for s-Corp revocation). Edit: Actually I have to decide sometimes in September so I can decide to go from simple IRA to 401k of one form or another

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gasdoc
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Re: Retirement accounts and physician SCorps and Tax Reform

Post by gasdoc » Thu Aug 16, 2018 6:50 pm

I appreciate all of the help here. So, my CPA and I don’t see any reason to put off dissolving my S-Corp, despite the fact that some of the considerations are still up in the air. THis is largely because, with my large DBP contributions, as Spirit Rider has pointed out, I am no longer getting much benefit from the S-Corp anyway. I am thinking that the most convenient thing would be to make all of my remaining contributions from my S-Corp to my S-Corp’s DBP this fall, and then start switching everything over to a sole proprietorship account (probably not stating this correctly) prior to the start of 2019 so that the 2018 S-Corp tax filing will be the last one. Thanks, everyone!

Gasdoc

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by beagler1 » Wed Aug 29, 2018 2:48 pm

Spirit Rider wrote:
Mon Aug 13, 2018 3:37 pm
See the edit to my last post adding the last paragraph after you started your reply.

A sole proprietor can just as easily contribute to a defined benefit plan. It may be necessary to amend the plan to change the plan sponsor from the S-Corp to a sole proprietorship.

Note: You should engage a professional for a change of this magnatude. Depending on your exact circumstances and jurisdiction it may or may not be beneficial to create a default single member LLC taxed as a sole proprietorship. If the entity is already an LLC that elected subchapter S status. The dissolution of that election may be all that is necessary.
Need some help.

I'm having a hard time finding a CPA with knowledge/experience. I have a single member LLC with s-corp election. Total income < 315K married. Salary over FICA limits due to comparable physician salary. Lowish business profit due to salary + maxed out 401k matching. So converting to sole prop, I should come out well ahead due to fully utilizing 199a deduction.

Can I revoke the s-corp election via letter and file a 8332 to elect sole prop -- without a new LLC or closing bank accounts and new TIN? S-corp revocation would still require taxable distribution of assets, I think. Could one pick the date of revocation to value everything? I'm can't find a CPA that understands why I would do this and how to do it. I'd need help on 1)can it be done this way and 2) final 1120s with taxable distribution after revocation of s-corp. Any ideas?

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by Spirit Rider » Wed Aug 29, 2018 3:54 pm

I am not a professional and do not have the requisite knowledge to answer. I really think this requires a professional with the specific experience necessary to make sure it is done correctly.

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gasdoc
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Re: Retirement accounts and physician SCorps and Tax Reform

Post by gasdoc » Wed Aug 29, 2018 4:19 pm

beagler1 wrote:
Wed Aug 29, 2018 2:48 pm
Spirit Rider wrote:
Mon Aug 13, 2018 3:37 pm
See the edit to my last post adding the last paragraph after you started your reply.

A sole proprietor can just as easily contribute to a defined benefit plan. It may be necessary to amend the plan to change the plan sponsor from the S-Corp to a sole proprietorship.

Note: You should engage a professional for a change of this magnatude. Depending on your exact circumstances and jurisdiction it may or may not be beneficial to create a default single member LLC taxed as a sole proprietorship. If the entity is already an LLC that elected subchapter S status. The dissolution of that election may be all that is necessary.
Need some help.

I'm having a hard time finding a CPA with knowledge/experience. I have a single member LLC with s-corp election. Total income < 315K married. Salary over FICA limits due to comparable physician salary. Lowish business profit due to salary + maxed out 401k matching. So converting to sole prop, I should come out well ahead due to fully utilizing 199a deduction.

Can I revoke the s-corp election via letter and file a 8332 to elect sole prop -- without a new LLC or closing bank accounts and new TIN? S-corp revocation would still require taxable distribution of assets, I think. Could one pick the date of revocation to value everything? I'm can't find a CPA that understands why I would do this and how to do it. I'd need help on 1)can it be done this way and 2) final 1120s with taxable distribution after revocation of s-corp. Any ideas?

It is relatively easy to fully dissolve an S-Corp (like mine) and just revert to a basic sole proprietorship (my case, not yours). It shouldn’t be that much more difficult to change your election from an S-Corp to a Sole Proprietorship without dissolving your LLC, but I am no expert. Perhaps the attorney that you used to set up your LLC could help without spending too many billable hours?

Gasdoc

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Lieutenant.Columbo
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Re: Retirement accounts and physician SCorps and Tax Reform

Post by Lieutenant.Columbo » Wed Aug 29, 2018 6:44 pm

beagler1 wrote:
Wed Aug 29, 2018 2:48 pm
I have a single member LLC with s-corp election. Total income < 315K married. Salary over FICA limits due to comparable physician salary. Lowish business profit due to salary + maxed out 401k matching. So converting to sole prop, I should come out well ahead due to fully utilizing 199a deduction.

Can I revoke the s-corp election via letter and file a 8332 to elect sole prop -- without a new LLC or closing bank accounts and new TIN? S-corp revocation would still require taxable distribution of assets, I think. Could one pick the date of revocation to value everything? I'm can't find a CPA that understands why I would do this and how to do it. I'd need help on 1)can it be done this way and 2) final 1120s with taxable distribution after revocation of s-corp. Any ideas?
gasdoc wrote:
Wed Aug 29, 2018 4:19 pm
It is relatively easy to fully dissolve an S-Corp (like mine) and just revert to a basic sole proprietorship (my case, not yours). It shouldn’t be that much more difficult to change your election from an S-Corp to a Sole Proprietorship without dissolving your LLC, but I am no expert. Perhaps the attorney that you used to set up your LLC could help without spending too many billable hours?
1. are you guys revoking the S Corp status for tax year 2018 and after or for tax year 2019 and on?
2. as a sole proprietor or as a disregarded LLC, your business stops creating W-2 paychecks, correct?
3. is there any business/professional expense that one could deduct under the S Corp election that you cannot deduct as sole proprietor or disregarded LLC?
Thank you.
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Re: Retirement accounts and physician SCorps and Tax Reform

Post by gasdoc » Thu Aug 30, 2018 8:46 am

LC,
!. I am planning to officially end my S-Corp 12/31/18, and start my sole proprietorship 1/1/2019. I wanted to keep it "clean," and I need until the end of the year to save enough money to fund my defined benefits plan.
2. Yes, my business will stop creating W-2 paychecks as a sole proprietor.
3. I am not aware of any business/professional expenses that I will no longer be able to deduct as a sole proprietor.

gasdoc

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by Lieutenant.Columbo » Sat Sep 08, 2018 11:43 pm

gasdoc wrote:
Thu Aug 30, 2018 8:46 am
LC,
!. I am planning to officially end my S-Corp 12/31/18, and start my sole proprietorship 1/1/2019. I wanted to keep it "clean," and I need until the end of the year to save enough money to fund my defined benefits plan.
2. Yes, my business will stop creating W-2 paychecks as a sole proprietor.
3. I am not aware of any business/professional expenses that I will no longer be able to deduct as a sole proprietor.

gasdoc
gasdoc, thank you for your replies.

This step-by-step
How an LLC Can Revoke its S-Corporation Election with the IRS article may be helpful to some of us here.

By the way, does anyone know if an LLC is allowed to continue doing business under the EIN it used under its S Corp election? It'd really be a time saver not needing to update those the LLC does business with about a new EIN. Thank you.
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Re: Retirement accounts and physician SCorps

Post by Lieutenant.Columbo » Mon Oct 01, 2018 11:32 pm

gilgamesh wrote:
Thu Dec 28, 2017 6:37 am
There is no S corp corporate rate...there is a small business 199A deduction which S-corp physician's MFJ, could enjoy if their taxable income is less than $315k-$415k...this deduction is 20% when your taxable income is less than $315k, linearly phased out over the next $100k.


It's not total income of $315k-$415k, it is taxable income from all sources.

If your taxable income is less than $315k, then the 20% deduction is either 20% of taxable income or 20% of total business income (Qualified Business Income), whichever is less...for an S-corp, as "reasonable compensation" is not included in QBI, the 20% will be that of the lesser Schedule K1, line 1 profit...not line 43.
(Assuming you are paying a reasonable physician wages which then won't be counted as QBI for the 199A deduction)

P.S: For an LLC it could be line 43...assuming the physician doesn't have much non-business taxable income, which could push taxable income more than total business income.
gilgamesh,
Since an S Corp shareholder looks at Schedule K-1 Line 1 (unlike the member of a disregarded LLC, who looks at Form 1040 Line 43), does this mean that the business owner's spouse's income does not count towards the QBI deduction if the business is taxed as S Corp, even is MFJ?? :?
Thank you very much!
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Re: Retirement accounts and physician SCorps and Tax Reform

Post by gasdoc » Tue Oct 02, 2018 7:25 am

Lieutenant.Columbo wrote:
Sat Sep 08, 2018 11:43 pm
gasdoc wrote:
Thu Aug 30, 2018 8:46 am
LC,
!. I am planning to officially end my S-Corp 12/31/18, and start my sole proprietorship 1/1/2019. I wanted to keep it "clean," and I need until the end of the year to save enough money to fund my defined benefits plan.
2. Yes, my business will stop creating W-2 paychecks as a sole proprietor.
3. I am not aware of any business/professional expenses that I will no longer be able to deduct as a sole proprietor.

gasdoc
gasdoc, thank you for your replies.

This step-by-step
How an LLC Can Revoke its S-Corporation Election with the IRS article may be helpful to some of us here.

By the way, does anyone know if an LLC is allowed to continue doing business under the EIN it used under its S Corp election? It'd really be a time saver not needing to update those the LLC does business with about a new EIN. Thank you.
My CPA suggested that I get a new EIN, but my case may be different in that I never was an LLC- just an SCorp. So, I am completely changing my entity.

gasdoc

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by Hayden » Tue Oct 02, 2018 10:56 am

I've been running tax plans for 2018 using a few different calculators, and none of them included the self-employed health insurance deduction as a reduction to AGI.

I have an S Corp. I believe that the health insurance (that is included as wages on my W2) is still deductible in 2018. Guessing that the software just hasn't been updated to reflect that. Can someone confirm this is true?

This is important for me because i plan to do Roth conversions up to $200,000 AGI. I'm trying to dial in my AGI to keep it just under $200,000.

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by Spirit Rider » Tue Oct 02, 2018 4:07 pm

Nothing changed in the tax reform with regard to the ability or steps necessary for an S-Corp shareholder-employee to take the self-employed health insurance deduction.

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by Hayden » Tue Oct 02, 2018 4:50 pm

Spirit Rider wrote:
Tue Oct 02, 2018 4:07 pm
Nothing changed in the tax reform with regard to the ability or steps necessary for an S-Corp shareholder-employee to take the self-employed health insurance deduction.
Thanks! i guess folks just haven't gotten around to putting this in the 2018 tax calculators.

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Re: Retirement accounts and physician SCorps

Post by gilgamesh » Tue Oct 02, 2018 7:07 pm

Lieutenant.Columbo wrote:
Mon Oct 01, 2018 11:32 pm
gilgamesh wrote:
Thu Dec 28, 2017 6:37 am
There is no S corp corporate rate...there is a small business 199A deduction which S-corp physician's MFJ, could enjoy if their taxable income is less than $315k-$415k...this deduction is 20% when your taxable income is less than $315k, linearly phased out over the next $100k.


It's not total income of $315k-$415k, it is taxable income from all sources.

If your taxable income is less than $315k, then the 20% deduction is either 20% of taxable income or 20% of total business income (Qualified Business Income), whichever is less...for an S-corp, as "reasonable compensation" is not included in QBI, the 20% will be that of the lesser Schedule K1, line 1 profit...not line 43.
(Assuming you are paying a reasonable physician wages which then won't be counted as QBI for the 199A deduction)

P.S: For an LLC it could be line 43...assuming the physician doesn't have much non-business taxable income, which could push taxable income more than total business income.
gilgamesh,
Since an S Corp shareholder looks at Schedule K-1 Line 1 (unlike the member of a disregarded LLC, who looks at Form 1040 Line 43), does this mean that the business owner's spouse's income does not count towards the QBI deduction if the business is taxed as S Corp, even is MFJ?? :?
Thank you very much!
You are combining two totally unrelated aspects of this deduction. One is determining eligibility for deduction and the other is calculating the actual deduction. Totally different things...

For those of us in the “ service industry”, eligibility is based on taxable income - it doesn’t matter what entity your business, taxation (whatever accounting term) is, everyone looks at their taxable income to figure out whether they are eligible or not...sorry! Spouse income will be considered for this as MFJ.

Once you are eligible for the deduction, it is 20% of QBI or 20% of taxable income - whichever is less. Therefore, the actual amount of deduction may or may not have spouses income.

P.S: I’m a health care provider...not an accountant.

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Re: Retirement accounts and physician SCorps

Post by Lieutenant.Columbo » Tue Oct 02, 2018 9:54 pm

gilgamesh wrote:
Tue Oct 02, 2018 7:07 pm
Lieutenant.Columbo wrote:
Mon Oct 01, 2018 11:32 pm
gilgamesh,
Since an S Corp shareholder looks at Schedule K-1 Line 1 (unlike the member of a disregarded LLC, who looks at Form 1040 Line 43), does this mean that the business owner's spouse's income does not count towards the QBI deduction if the business is taxed as S Corp, even is MFJ?? :?
Thank you very much!
You are combining two totally unrelated aspects of this deduction. One is determining eligibility for deduction and the other is calculating the actual deduction. Totally different things...

For those of us in the “ service industry”, eligibility is based on taxable income - it doesn’t matter what entity your business, taxation (whatever accounting term) is, everyone looks at their taxable income to figure out whether they are eligible or not...sorry! Spouse income will be considered for this as MFJ.

Once you are eligible for the deduction, it is 20% of QBI or 20% of taxable income - whichever is less. Therefore, the actual amount of deduction may or may not have spouses income.

P.S: I’m a health care provider...not an accountant.
eureka! now I understand; thank you for taking the time to explain
Lt. Columbo: Well, what do you know. Here I am talking with some of the smartest people in the world, and I didn't even notice!

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