Retirement accounts and physician SCorps and Tax Reform

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gasdoc
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Retirement accounts and physician SCorps and Tax Reform

Post by gasdoc » Sun Dec 24, 2017 4:59 pm

I am reading that tax treatment of SCorps for physicians is phasing out the more favorable corporate rates at total incomes of $315-$415K. For these purposes, what counts as “total income? Do retirement plan contributions affect total income? Are these phase out levels before or after deduction of business expenses?

Thanks,
Gasdoc
Last edited by gasdoc on Tue Dec 26, 2017 12:26 pm, edited 1 time in total.

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Re: Retirement accounts and physician SCorps

Post by Artsdoctor » Sun Dec 24, 2017 5:01 pm

My understanding is that physicians will not be eligible for the favored pass-through rates (physicians, lawyers, accountants, financial advisors, etc.). There's a list which you can search for.

From Forbes:

"Separately, the income deduction is not available to what the law calls a 'specified service trade or business.' These are defined as investment services, as well those 'in the fields of health, law, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.' In the final negotiation, architects and engineers managed to get themselves taken off the list of excluded industries. As a lobbyist once told me, it is always the exceptions to the exceptions that make a law interesting."

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Re: Retirement accounts and physician SCorps

Post by gasdoc » Sun Dec 24, 2017 7:42 pm

Artsdoctor wrote:
Sun Dec 24, 2017 5:01 pm
My understanding is that physicians will not be eligible for the favored pass-through rates (physicians, lawyers, accountants, financial advisors, etc.). There's a list which you can search for.

From Forbes:

"Separately, the income deduction is not available to what the law calls a 'specified service trade or business.' These are defined as investment services, as well those 'in the fields of health, law, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.' In the final negotiation, architects and engineers managed to get themselves taken off the list of excluded industries. As a lobbyist once told me, it is always the exceptions to the exceptions that make a law interesting."
I have read, however, in an article quoted elsewhere, that those classes do have a tax reduction that phases out at certain income levels. I am looking for clarification on that.

Gasdoc


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Re: Retirement accounts and physician SCorps

Post by BusterMcTaco » Sun Dec 24, 2017 8:32 pm

The law uses the term "taxable income" which is your AGI minus deductions (excluding the new 199A deduction itself). So I understand it to mean that the phase out is reduced by the contributions. But that also reduces potentially the 199A deduction itself which is limited to 20% of taxable income. I am not a CPA but I did read the relevant parts of the bill.

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Re: Retirement accounts and physician SCorps

Post by gasdoc » Sun Dec 24, 2017 10:03 pm

So, I think a normal retirement contribution is deductible for the phaseout. If one has a large retirement contribution, for example with a defined benefit plan, would the entire contribution still be deductible?

Gasdoc

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Re: Retirement accounts and physician SCorps

Post by goodenyou » Mon Dec 25, 2017 12:10 pm

If your practice and partnership has been an S-Corporation already, does it mean your practice is now ineligible as an S-Corporation? I can't understand why a medical business that employs 100 people and spends hundreds of thousands of dollars on equipment and supplies would not be eligible. I can understand why individuals with few or no additional employees would be ineligible, but large practices are no different than widget makers that spend on equipment and employ. My understanding is the pass-through S-distributions have to be limited in order to not reduce reasonable W-2 wages of a physician. For example, if a physician has $500,000 of compensation, you cannot classify that compensation as $100,000 of W-2 and $400,000 of S-distributions. Plus, if you are in a (equal) partnership with large discrepancies in income, the S-distributions has to equal and, therefore, limited to the lowest earner's reasonable W-2 wage. Plus, W-2 wages determine the amount of pre-tax deferral of retirement savings. I think it's a minimum of $275,000 to reach $53,500 for 2018 (+$6,000 catch-up).

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Re: Retirement accounts and physician SCorps

Post by PhysicianOnFIRE » Mon Dec 25, 2017 11:56 pm

Artsdoctor wrote:
Sun Dec 24, 2017 5:01 pm
My understanding is that physicians will not be eligible for the favored pass-through rates (physicians, lawyers, accountants, financial advisors, etc.). There's a list which you can search for.

From Forbes:

"Separately, the income deduction is not available to what the law calls a 'specified service trade or business.' These are defined as investment services, as well those 'in the fields of health, law, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.' In the final negotiation, architects and engineers managed to get themselves taken off the list of excluded industries. As a lobbyist once told me, it is always the exceptions to the exceptions that make a law interesting."
Those of us in the service industry are eligible, but the deduction phases out from a taxable income of $315,000 to $415,000 for married filed jointly (and half those numbers for individual filers).

Dr. Elseroad wrote a guest post on the topic of the pass-through deduction -- there's a lot of good information in the comments, too.

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Re: Retirement accounts and physician SCorps

Post by White Coat Investor » Tue Dec 26, 2017 12:59 am

gasdoc wrote:
Sun Dec 24, 2017 4:59 pm
I am reading that tax treatment of SCorps for physicians is phasing out the more favorable corporate rates at total incomes of $315-$415K. For these purposes, what counts as “total income? Do retirement plan contributions affect total income? Are these phase out levels before or after deduction of business expenses?

Thanks,
Gasdoc
It's taxable income. So, line 43 on the 1040...after business expenses, after above the line deductions, and after itemized deductions.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Re: Retirement accounts and physician SCorps

Post by gasdoc » Tue Dec 26, 2017 12:25 pm

Thanks for linking these, Concernedkid. I think we all owe PhysicianOnFire and WhiteCoatInvestor a shoutout for the work they are doing in their blogs. Even where the work is not original, they are providing lots of good info in one place (well, two places). (I hate to admit to having spent a good deal of time on Christmas Eve and Christmas Day reading these blogs!)

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by gilgamesh » Wed Dec 27, 2017 6:10 pm

What I find most interesting about all of this is the LLC loophole which is rarely talked about. S-corp thus far had the advantage of corporate income not being subject to SE tax. However as reasonable compensation is always higher than SS limit, the tax break was only in not paying Medicare taxes for the nonW2 parts of income.

Now for those filing MFJ, but below $315k (phased out to $415K), if you are an s-corp you get 20% deduction only on corporate income and not w2 wages. Where as if you are an LLC you get it for the whole income...in fact it's lesser of 20% of business income or taxable income...in case of S-corp the 20% of non-w2 wages will be much less than 20% of LLC taxable income...therefore S-corp is at a disadvantage... the final tally depends on what your are paying as reasonable wages, but if it's reasonable and you overall income less than $315k, the way I see it, LLC has an unfair advantage over S-corp.

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by Lieutenant.Columbo » Wed Dec 27, 2017 11:03 pm

gilgamesh wrote:
Wed Dec 27, 2017 6:10 pm
What I find most interesting about all of this is the LLC loophole which is rarely talked about. S-corp thus far had the advantage of corporate income not being subject to SE tax. However as reasonable compensation is always higher than SS limit, the tax break was only in not paying Medicare taxes for the nonW2 parts of income.

Now for those filing MFJ, but below $315k (phased out to $415K), if you are an s-corp you get 20% deduction only on corporate income and not w2 wages. Where as if you are an LLC you get it for the whole income...in fact it's lesser of 20% of business income or taxable income...in case of S-corp the 20% of non-w2 wages will be much less than 20% of LLC taxable income...therefore S-corp is at a disadvantage... the final tally depends on what your are paying as reasonable wages, but if it's reasonable and you overall income less than $315k, the way I see it, LLC has an unfair advantage over S-corp.
gilgamesh, making sure I understand your post:
You talk about LLCs and about S-Corps. In which of the two categories does an LLC taxed by IRS as an S-Corp fall? Thank you.
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Re: Retirement accounts and physician SCorps and Tax Reform

Post by gilgamesh » Thu Dec 28, 2017 6:26 am

Lieutenant.Columbo wrote:
Wed Dec 27, 2017 11:03 pm
gilgamesh wrote:
Wed Dec 27, 2017 6:10 pm
What I find most interesting about all of this is the LLC loophole which is rarely talked about. S-corp thus far had the advantage of corporate income not being subject to SE tax. However as reasonable compensation is always higher than SS limit, the tax break was only in not paying Medicare taxes for the nonW2 parts of income.

Now for those filing MFJ, but below $315k (phased out to $415K), if you are an s-corp you get 20% deduction only on corporate income and not w2 wages. Where as if you are an LLC you get it for the whole income...in fact it's lesser of 20% of business income or taxable income...in case of S-corp the 20% of non-w2 wages will be much less than 20% of LLC taxable income...therefore S-corp is at a disadvantage... the final tally depends on what your are paying as reasonable wages, but if it's reasonable and you overall income less than $315k, the way I see it, LLC has an unfair advantage over S-corp.
gilgamesh, making sure I understand your post:
You talk about LLCs and about S-Corps. In which of the two categories does an LLC taxed by IRS as an S-Corp fall? Thank you.
An LLC taxed as an S-corp is the only S-corp entity I'm aware of...I'm fairly certain there is no stand alone S-corp,...so, an LLC taxed as an S-corp will only get a deductible of the lesser of the total taxable income or corporate income (The non-W2 part, schedule K line1).

Here is Forbes article finally mentioning it

"...And as you may have noticed, way up above, we said that QBI does NOT include "reasonable compensation" paid to the shareholder. This means that even if an accountant DID set up an S corporation to take $300,000 of what were once wages and pass them through as QBI, even though according to Section 199A this would fly, the IRS could come in and say that some or all of the $300,000 is reasonable compensation, which is NOT treated as QBI. So, for example, if the IRS reclassified $120,000 of the S corporation's income as reasonable compensation, only $180,000 of the S corporation's income would be eligible for the QBI treatment.
The same risk, however, does not exist with partnerships, because: 1. partnerships cannot pay wages to partners, only guaranteed payments, and 2. There is generally no "reasonable compensation" standard for partnerships, because partnership income is usually subject to self-employment tax. Therefore, a partner has nothing to gain by foregoing guaranteed payments in exchange for an increased share of flow-through income, because there would be no payroll tax savings.

Thus, it follows, an accountant or attorney COULD set up an LLC, rather than an S corporation, and convert up to $315,000 of wages into QBI. Of course, over time, the IRS could seek to establish the same type of reasonable compensation standard for partnerships that currently exists for S corporations, minimizing or closing this potential loophole." - FORBES

Source: https://www.forbes.com/sites/anthonynit ... 6f1dab44fd

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Re: Retirement accounts and physician SCorps

Post by gilgamesh » Thu Dec 28, 2017 6:37 am

White Coat Investor wrote:
Tue Dec 26, 2017 12:59 am
gasdoc wrote:
Sun Dec 24, 2017 4:59 pm
I am reading that tax treatment of SCorps for physicians is phasing out the more favorable corporate rates at total incomes of $315-$415K. For these purposes, what counts as “total income? Do retirement plan contributions affect total income? Are these phase out levels before or after deduction of business expenses?

Thanks,
Gasdoc
It's taxable income. So, line 43 on the 1040...after business expenses, after above the line deductions, and after itemized deductions.
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.

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by gasdoc » Thu Dec 28, 2017 8:32 am

This is the OP. I appreciate all of the clarifying comments. My situation is interesting. I am an SCorp. My "reasonable salary" was $265K in 2016. Due to a rich retirement plan and various deductions, my "taxable income" was $215K. I wonder where this leaves me with the new pass thru tax laws.

gasdoc

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by randomguy » Thu Dec 28, 2017 8:52 am

gilgamesh wrote:
Thu Dec 28, 2017 6:26 am


An LLC taxed as an S-corp is the only S-corp entity I'm aware of...I'm fairly certain there is no stand alone S-corp,...so, an LLC taxed as an S-corp will only get a deductible of the lesser of the total taxable income or corporate income (The non-W2 part, schedule K line1).

There are stand alone s-corps.:) From a tax purpose, I don't think there is any federal level differences between a corporation making the s-corp election and a LLC making a s-corp election.

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by gilgamesh » Thu Dec 28, 2017 9:03 am

gasdoc wrote:
Thu Dec 28, 2017 8:32 am
This is the OP. I appreciate all of the clarifying comments. My situation is interesting. I am an SCorp. My "reasonable salary" was $265K in 2016. Due to a rich retirement plan and various deductions, my "taxable income" was $215K. I wonder where this leaves me with the new pass thru tax laws.

gasdoc
See this is an interesting situation. Your taxable income from all sources (if MFJ, your spouses taxable income, and all other sources) is $215k. Now, there is no ifs and buts, you qualify for the full 20% deduction.

Next question is 20% of what? Is it 20% of $215k? Not necessarily.

You said you are paying yourself $265k but the question is what's the remaining portion (which I call the corporate income which is not subject to SE tax), if that's less than $215k then you will get 20% of that. Say your total business income was $465k, and you paid a reasonable compensation of $265k, the remaining corporate income not subject to SE tax is $200k. So, your 20% deduction is 20% of $200k and not $215k.

But it gets even more interesting, if your retirement plan is a tax deferred plan. In 2017 when you calculated the tax savings, your $314th dollar had a marginal federal tax rate of 33%, which means that 314th dollar saved 33% of federal taxes when you opted to defer taxes. Now, even without the 20% deduction the tax brackets is lowered to 24%, and with the 20% deduction you are eligible the rate will be less than 24%...it is actually 19.2% if you were deducting 20% of taxable income (I know I'm confusing many here)...so, you chose to defer taxes on the 314th dollar because you were saving 33% of federal taxes, now it could be as low as 19.2%...gets even more interesting - what you deferring to? If the tax cut elapses, you could be deferring taxes at a current 19.2% and deferring to a 'high tax environment' if tax cuts elapse....so, tax deferred plans have to be re-evaluated.

Not a CPA, just a healthcare provider...

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by gilgamesh » Thu Dec 28, 2017 9:05 am

randomguy wrote:
Thu Dec 28, 2017 8:52 am
gilgamesh wrote:
Thu Dec 28, 2017 6:26 am


An LLC taxed as an S-corp is the only S-corp entity I'm aware of...I'm fairly certain there is no stand alone S-corp,...so, an LLC taxed as an S-corp will only get a deductible of the lesser of the total taxable income or corporate income (The non-W2 part, schedule K line1).

There are stand alone s-corps.:) From a tax purpose, I don't think there is any federal level differences between a corporation making the s-corp election and a LLC making a s-corp election.
What is a stand alone S-corp from a tax purpose? Can you explain?

P.S: I looked it up...as per this CPA site there is no such thing
https://www.watsoncpagroup.com/s-corp-election/

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Re: Retirement accounts and physician SCorps

Post by CppCoder » Thu Dec 28, 2017 9:24 am

goodenyou wrote:
Mon Dec 25, 2017 12:10 pm
If your practice and partnership has been an S-Corporation already, does it mean your practice is now ineligible as an S-Corporation? I can't understand why a medical business that employs 100 people and spends hundreds of thousands of dollars on equipment and supplies would not be eligible. I can understand why individuals with few or no additional employees would be ineligible, but large practices are no different than widget makers that spend on equipment and employ. My understanding is the pass-through S-distributions have to be limited in order to not reduce reasonable W-2 wages of a physician. For example, if a physician has $500,000 of compensation, you cannot classify that compensation as $100,000 of W-2 and $400,000 of S-distributions. Plus, if you are in a (equal) partnership with large discrepancies in income, the S-distributions has to equal and, therefore, limited to the lowest earner's reasonable W-2 wage. Plus, W-2 wages determine the amount of pre-tax deferral of retirement savings. I think it's a minimum of $275,000 to reach $53,500 for 2018 (+$6,000 catch-up).

Merry Christmas!
I wonder if many large S-corps will need to reevaluate whether or not it is better to be a C-corp. With the new rates, is pass through still better than double taxation? I've never looked in depth at the two options. I've never needed to as I've always been a W-2 wage slave :).

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by gasdoc » Thu Dec 28, 2017 10:46 am

gilgamesh wrote:
Thu Dec 28, 2017 9:03 am
gasdoc wrote:
Thu Dec 28, 2017 8:32 am
This is the OP. I appreciate all of the clarifying comments. My situation is interesting. I am an SCorp. My "reasonable salary" was $265K in 2016. Due to a rich retirement plan and various deductions, my "taxable income" was $215K. I wonder where this leaves me with the new pass thru tax laws.

gasdoc
See this is an interesting situation. Your taxable income from all sources (if MFJ, your spouses taxable income, and all other sources) is $215k. Now, there is no ifs and buts, you qualify for the full 20% deduction.

Next question is 20% of what? Is it 20% of $215k? Not necessarily.

You said you are paying yourself $265k but the question is what's the remaining portion (which I call the corporate income which is not subject to SE tax), if that's less than $215k then you will get 20% of that. Say your total business income was $465k, and you paid a reasonable compensation of $265k, the remaining corporate income not subject to SE tax is $200k. So, your 20% deduction is 20% of $200k and not $215k.

But it gets even more interesting, if your retirement plan is a tax deferred plan. In 2017 when you calculated the tax savings, your $314th dollar had a marginal federal tax rate of 33%, which means that 314th dollar saved 33% of federal taxes when you opted to defer taxes. Now, even without the 20% deduction the tax brackets is lowered to 24%, and with the 20% deduction you are eligible the rate will be less than 24%...it is actually 19.2% if you were deducting 20% of taxable income (I know I'm confusing many here)...so, you chose to defer taxes on the 314th dollar because you were saving 33% of federal taxes, now it could be as low as 19.2%...gets even more interesting - what you deferring to? If the tax cut elapses, you could be deferring taxes at a current 19.2% and deferring to a 'high tax environment' if tax cuts elapse....so, tax deferred plans have to be re-evaluated.

Not a CPA, just a healthcare provider...
Wow, Gilgamesh, you may have chosen the wrong profession. Thanks for the analysis on my personal situation. Your assumptions are not far off. I will add that I have a lot of my retirement savings in a Roth IRA, so I shouldn't have much income in retirement, regardless of the brackets at that time. It is only in the last couple of years, that I have actually been putting money into a deferred account, albeit a large contribution each year. I really appreciate the work you have done. I am sure the CPA's are really struggling with this when they have to do this analysis on hundreds of clients.

gasdoc

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Re: Retirement accounts and physician SCorps

Post by goodenyou » Thu Dec 28, 2017 2:41 pm

CppCoder wrote:
Thu Dec 28, 2017 9:24 am
goodenyou wrote:
Mon Dec 25, 2017 12:10 pm
If your practice and partnership has been an S-Corporation already, does it mean your practice is now ineligible as an S-Corporation? I can't understand why a medical business that employs 100 people and spends hundreds of thousands of dollars on equipment and supplies would not be eligible. I can understand why individuals with few or no additional employees would be ineligible, but large practices are no different than widget makers that spend on equipment and employ. My understanding is the pass-through S-distributions have to be limited in order to not reduce reasonable W-2 wages of a physician. For example, if a physician has $500,000 of compensation, you cannot classify that compensation as $100,000 of W-2 and $400,000 of S-distributions. Plus, if you are in a (equal) partnership with large discrepancies in income, the S-distributions has to equal and, therefore, limited to the lowest earner's reasonable W-2 wage. Plus, W-2 wages determine the amount of pre-tax deferral of retirement savings. I think it's a minimum of $275,000 to reach $53,500 for 2018 (+$6,000 catch-up).

Merry Christmas!
I wonder if many large S-corps will need to reevaluate whether or not it is better to be a C-corp. With the new rates, is pass through still better than double taxation? I've never looked in depth at the two options. I've never needed to as I've always been a W-2 wage slave :).
We will be looking into this. I spoke to our CPA about the strategy. I think it is a PIA to change back and forth though.
"Ignorance more frequently begets confidence than does knowledge" | "The best years you have left are the ones you have right now"

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by gilgamesh » Fri Dec 29, 2017 9:34 am

My practice is not large enough to consider C-Corp, but I might benefit from the LLC loophole...there will be quite a few who could benefit from revoking their S-Corp filing status.

This is because S-Corp 'reasonable wages' is not included in the 199A deduction calculation, where as LLC doesn't have such restrictions. However, one still has to consider SE-tax savings before making my decision...I'm considering that...however, it's way too premature as everyone is waiting for IRS clarification on all of this...

But these deadlines are certain...S-corp revocation has to be done before March 15th to be effective for 2018. However, I am taking myself off of payroll effective the beginning of the year, so the option is open.

Second, if I decide to revoke S-corp filing, then I have to wait five years before I could switch back to being an S-corp. If IRS closes this loophole, then I will miss out on SE tax savings...

Decisions...but at least think about this, and if relevant get yourself out of payroll.
Last edited by gilgamesh on Fri Dec 29, 2017 9:50 pm, edited 1 time in total.

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by Spirit Rider » Fri Dec 29, 2017 11:44 am

gilgamesh wrote:
Thu Dec 28, 2017 9:05 am
randomguy wrote:
Thu Dec 28, 2017 8:52 am
gilgamesh wrote:
Thu Dec 28, 2017 6:26 am
An LLC taxed as an S-corp is the only S-corp entity I'm aware of...I'm fairly certain there is no stand alone S-corp,...so, an LLC taxed as an S-corp will only get a deductible of the lesser of the total taxable income or corporate income (The non-W2 part, schedule K line1).
There are stand alone s-corps.:) From a tax purpose, I don't think there is any federal level differences between a corporation making the s-corp election and a LLC making a s-corp election.
What is a stand alone S-corp from a tax purpose? Can you explain?

P.S: I looked it up...as per this CPA site there is no such thing
https://www.watsoncpagroup.com/s-corp-election/
random guy is correct. You have misinterpreted what that CPA is saying.

Sub chapter S was enacted decades before LLCs were available. Sub chapter S pass-thru treatment can be elected on either a corporation or an LLC. What you are referring to an "LLC Loophole" is no such thing. It is based on on of the business entities electing sub chapter S treatment.

An S-Corp is not a business entity, it is a state chartered business entity (corporation) with a federal sub chapter S tax election. An LLC is not a tax status, is a state chartered business entity. By default an LLC is a disregarded entity for federal tax purposes.

A single member LLC is treated as a sole proprietor filing Form 1040 Schedule C and SE. A multiple member LLC is treated as a partnership filing Form 1065 and Form K-1s. An S-Corp is a corporation filing Form 1120s and K-1(s). An LLC/S is an LLC filing Form 1120s and K-1(s).

You would never just use the term corporation when referring to federal tax status. Do not just use the term LLC when referring to federal tax status.

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by gilgamesh » Fri Dec 29, 2017 11:57 am

Spirit Rider wrote:
Fri Dec 29, 2017 11:44 am
gilgamesh wrote:
Thu Dec 28, 2017 9:05 am
randomguy wrote:
Thu Dec 28, 2017 8:52 am
gilgamesh wrote:
Thu Dec 28, 2017 6:26 am
An LLC taxed as an S-corp is the only S-corp entity I'm aware of...I'm fairly certain there is no stand alone S-corp,...so, an LLC taxed as an S-corp will only get a deductible of the lesser of the total taxable income or corporate income (The non-W2 part, schedule K line1).
There are stand alone s-corps.:) From a tax purpose, I don't think there is any federal level differences between a corporation making the s-corp election and a LLC making a s-corp election.
What is a stand alone S-corp from a tax purpose? Can you explain?

P.S: I looked it up...as per this CPA site there is no such thing
https://www.watsoncpagroup.com/s-corp-election/
random guy is correct. You have misinterpreted what that CPA is saying.

Sub chapter S was enacted decades before LLCs were available. Sub chapter S pass-thru treatment can be elected on either a corporation or an LLC. What you are referring to an "LLC Loophole" is no such thing. It is based on on of the business entities electing sub chapter S treatment.

An S-Corp is not a business entity, it is a state chartered business entity (corporation) with a federal sub chapter S tax election. An LLC is not a tax status, is a state chartered business entity. By default an LLC is a disregarded entity for federal tax purposes.

A single member LLC is treated as a sole proprietor filing Form 1040 Schedule C and SE. A multiple member LLC is treated as a partnership filing Form 1065 and Form K-1s. An S-Corp is a corporation filing Form 1120s and K-1(s). An LLC/S is an LLC filing Form 1120s and K-1(s).

You would never just use the term corporation when referring to federal tax status. Do not just use the term LLC when referring to federal tax status.
Forbes magazine used the word 'loophole'....could you please comment on this?...it's in regard the new 199A deduction...this is what they said...Thanks!

""...And as you may have noticed, way up above, we said that QBI does NOT include "reasonable compensation" paid to the shareholder. This means that even if an accountant DID set up an S corporation to take $300,000 of what were once wages and pass them through as QBI, even though according to Section 199A this would fly, the IRS could come in and say that some or all of the $300,000 is reasonable compensation, which is NOT treated as QBI. So, for example, if the IRS reclassified $120,000 of the S corporation's income as reasonable compensation, only $180,000 of the S corporation's income would be eligible for the QBI treatment.
The same risk, however, does not exist with partnerships, because: 1. partnerships cannot pay wages to partners, only guaranteed payments, and 2. There is generally no "reasonable compensation" standard for partnerships, because partnership income is usually subject to self-employment tax. Therefore, a partner has nothing to gain by foregoing guaranteed payments in exchange for an increased share of flow-through income, because there would be no payroll tax savings.

Thus, it follows, an accountant or attorney COULD set up an LLC, rather than an S corporation, and convert up to $315,000 of wages into QBI. Of course, over time, the IRS could seek to establish the same type of reasonable compensation standard for partnerships that currently exists for S corporations, minimizing or closing this potential loophole."

SOURCE: https://www.forbes.com/sites/anthonynit ... 52d3af44fd

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by Spirit Rider » Fri Dec 29, 2017 12:18 pm

gilgamesh wrote:
Fri Dec 29, 2017 11:57 am
Forbes magazine used the word 'loophole'....could you please comment on this?...it's in regard the new 199A deduction...this is what they said...Thanks!
You missed the point. It is not an "LLC Loophole". I'll repeat, an LLC is not a tax status. The fact that it is a default single member LLC or a sole proprietor is irrelevant.

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by gilgamesh » Fri Dec 29, 2017 12:44 pm

Spirit Rider wrote:
Fri Dec 29, 2017 12:18 pm
gilgamesh wrote:
Fri Dec 29, 2017 11:57 am
Forbes magazine used the word 'loophole'....could you please comment on this?...it's in regard the new 199A deduction...this is what they said...Thanks!
You missed the point. It is not an "LLC Loophole". I'll repeat, an LLC is not a tax status. The fact that it is a default single member LLC or a sole proprietor is irrelevant.
Lol!...ok! do you see any loophole as per Forbes article, if so what is it?...thanks!

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by Spirit Rider » Fri Dec 29, 2017 12:57 pm

gilgamesh wrote:
Fri Dec 29, 2017 12:44 pm
Lol!...ok! do you see any loophole as per Forbes article, if so what is it?...thanks!
Well, I don't know if it is really a loophole when the tax writers intentionally put it in there.

What Forbes is referring to is, that the self-employed are likely to get a much larger deduction than an S-Corp for the same net business profit. This should generally more than offset any payroll tax savings of the S-Corp.

The bottom line is that this is all very complicated with a lot a moving parts. This tax reform is going to be a boon for tax professionals to sort it all out.

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by Salmon » Fri Dec 29, 2017 1:07 pm

.....
Last edited by Salmon on Sat Jun 09, 2018 9:12 am, edited 1 time in total.

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by gilgamesh » Fri Dec 29, 2017 1:12 pm

Spirit Rider wrote:
Fri Dec 29, 2017 12:57 pm
gilgamesh wrote:
Fri Dec 29, 2017 12:44 pm
Lol!...ok! do you see any loophole as per Forbes article, if so what is it?...thanks!
Well, I don't know if it is really a loophole when the tax writers intentionally put it in there.

What Forbes is referring to is, that the self-employed are likely to get a much larger deduction than an S-Corp for the same net business profit. This should generally more than offset any payroll tax savings of the S-Corp.

The bottom line is that this is all very complicated with a lot a moving parts. This tax reform is going to be a boon for tax professionals to sort it all out.
Ok!Thanks...you said self employed are likely to get a much larger deduction (I assume, especially if S-corp W2 wages is above SS limit and only saves Medicare taxes), what's a 'self employed' who elected S-corp status called?...Is there such a thing?

lets say a family practitioner with staff and his own practice ? Can that 'self-employed elect S-corp status? If so can that be revoked if this deduction seems more beneficial?

I might be using wrong terms here...

P.S: My point is, if it as at all possible that revocation of S-corp status could help, can it still be done if the practitioner continues to receive W2 wages?...and pausing W2 wages does not harm S-corp status, as it can be increased after the March 15th deadline ...so would it ever be prudent for those who may benefit to pause their wages for Jan, Feb, march till IRS clarifies this?

So, even if I have used the wrong terms, will there be ever a situation a single practitioner may benefit from stopping his W2 wages for the first few months?
Last edited by gilgamesh on Fri Dec 29, 2017 1:33 pm, edited 1 time in total.

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by Spirit Rider » Fri Dec 29, 2017 1:31 pm

Self-employed refers to a sole-proprietor or partner paying SE tax. An S-Corp shareholder-employee paying FICA is not self-employed.

I would definitely consult with a professional before taking such a significant act such as dissolving an S-Corp. There really hasn't been much time to fully understand the consequences of the pass-thru deduction. Just because they (collectively, tax professionals, Forbes, etc...) think they know all the answers, doesn't mean they haven't missed something.

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by gilgamesh » Fri Dec 29, 2017 1:36 pm

Spirit Rider wrote:
Fri Dec 29, 2017 1:31 pm
Self-employed refers to a sole-proprietor or partner paying SE tax. An S-Corp shareholder-employee paying FICA is not self-employed.

I would definitely consult with a professional before taking such a significant act such as dissolving an S-Corp. There really hasn't been much time to fully understand the consequences of the pass-thru deduction. Just because they (collectively, tax professionals, Forbes, etc...) think they know all the answers, doesn't mean they haven't missed something.
Sry! added some stuff later...yes! not dissolving, that's very premature...

Just pausing W2 wages for the first few months if in case it needs to be dissolved? wouldn't it be more difficult if W2 wages were paid and dissolving is found to be better later, and no harm if we are not dissolving and just resume W2 wages once that decision is being made?

Isn't it prudent for those who think it may benefit to just pause W2 wages? this needs to be done before we get all the clarifications.

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by Lieutenant.Columbo » Fri Dec 29, 2017 1:51 pm

Spirit Rider wrote:
Fri Dec 29, 2017 1:31 pm
Self-employed refers to a sole-proprietor or partner paying SE tax. An S-Corp shareholder-employee paying FICA is not self-employed.

I would definitely consult with a professional before taking such a significant act such as dissolving an S-Corp. There really hasn't been much time to fully understand the consequences of the pass-thru deduction. Just because they (collectively, tax professionals, Forbes, etc...) think they know all the answers, doesn't mean they haven't missed something.
gilgamesh wrote:
Fri Dec 29, 2017 1:36 pm
Sry! added some stuff later...yes! not dissolving, that's very premature...

Just pausing W2 wages for the first few months if in case it needs to be dissolved? wouldn't it be more difficult if W2 wages were paid and dissolving is found to be better later, and no harm if we are not dissolving and just resume W2 wages once that decision is being made?

Isn't it prudent for those who think it may benefit to just pause W2 wages? this needs to be done before we get all the clarifications.
Not that I like nor want to give the IRS more than required, but what is the dollar range ballpark difference between terminating or maintaining S-Corp status? I ask because if the difference wouldn't be that large, then it might make practical sense to run one's operation in 2018 just like in 2017 while at the same time continue to learn about the implications of the recent Law changs, so that by the end of 2018 one could have a solid basis to decide if to stay S-Corp or not.

TL;DR: is it a big deal if one doesn't make changes quite yet and, if found appropriate, later one makes changes effective Jan 1 2019? :?:
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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Re: Retirement accounts and physician SCorps and Tax Reform

Post by gilgamesh » Fri Dec 29, 2017 5:16 pm

Lieutenant.Columbo wrote:
Fri Dec 29, 2017 1:51 pm
Spirit Rider wrote:
Fri Dec 29, 2017 1:31 pm
Self-employed refers to a sole-proprietor or partner paying SE tax. An S-Corp shareholder-employee paying FICA is not self-employed.

I would definitely consult with a professional before taking such a significant act such as dissolving an S-Corp. There really hasn't been much time to fully understand the consequences of the pass-thru deduction. Just because they (collectively, tax professionals, Forbes, etc...) think they know all the answers, doesn't mean they haven't missed something.
gilgamesh wrote:
Fri Dec 29, 2017 1:36 pm
Sry! added some stuff later...yes! not dissolving, that's very premature...

Just pausing W2 wages for the first few months if in case it needs to be dissolved? wouldn't it be more difficult if W2 wages were paid and dissolving is found to be better later, and no harm if we are not dissolving and just resume W2 wages once that decision is being made?

Isn't it prudent for those who think it may benefit to just pause W2 wages? this needs to be done before we get all the clarifications.
Not that I like nor want to give the IRS more than required, but what is the dollar range ballpark difference between terminating or maintaining S-Corp status? I ask because if the difference wouldn't be that large, then it might make practical sense to run one's operation in 2018 just like in 2017 while at the same time continue to learn about the implications of the recent Law changs, so that by the end of 2018 one could have a solid basis to decide if to stay S-Corp or not.

TL;DR: is it a big deal if one doesn't make changes quite yet and, if found appropriate, later one makes changes effective Jan 1 2019? :?:
Sure! That's always possible...just ignore 2018 and decide for tax year 2019...I was just hoping spiritrider who seems to know the technicalities of tax laws may shed some light on those who may not want to wait - especially if taking actions now can only possibly help and not harm...it's clear not everyone is for that but would rather wait....fair enough. Let's wait and see.

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by gilgamesh » Fri Dec 29, 2017 6:10 pm

Delete

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by gilgamesh » Fri Dec 29, 2017 8:53 pm

Spirit Rider wrote:
Fri Dec 29, 2017 11:44 am
gilgamesh wrote:
Thu Dec 28, 2017 9:05 am
randomguy wrote:
Thu Dec 28, 2017 8:52 am
gilgamesh wrote:
Thu Dec 28, 2017 6:26 am
An LLC taxed as an S-corp is the only S-corp entity I'm aware of...I'm fairly certain there is no stand alone S-corp,...so, an LLC taxed as an S-corp will only get a deductible of the lesser of the total taxable income or corporate income (The non-W2 part, schedule K line1).
There are stand alone s-corps.:) From a tax purpose, I don't think there is any federal level differences between a corporation making the s-corp election and a LLC making a s-corp election.
What is a stand alone S-corp from a tax purpose? Can you explain?

P.S: I looked it up...as per this CPA site there is no such thing
https://www.watsoncpagroup.com/s-corp-election/
random guy is correct. You have misinterpreted what that CPA is saying.

Sub chapter S was enacted decades before LLCs were available. Sub chapter S pass-thru treatment can be elected on either a corporation or an LLC. What you are referring to an "LLC Loophole" is no such thing. It is based on on of the business entities electing sub chapter S treatment.

An S-Corp is not a business entity, it is a state chartered business entity (corporation) with a federal sub chapter S tax election. An LLC is not a tax status, is a state chartered business entity. By default an LLC is a disregarded entity for federal tax purposes.

A single member LLC is treated as a sole proprietor filing Form 1040 Schedule C and SE. A multiple member LLC is treated as a partnership filing Form 1065 and Form K-1s. An S-Corp is a corporation filing Form 1120s and K-1(s). An LLC/S is an LLC filing Form 1120s and K-1(s).

You would never just use the term corporation when referring to federal tax status. Do not just use the term LLC when referring to federal tax status.
Now that it looks like you are done with the substance of the argument, which to me was more important and not technicalities...I was only interested in actions that may or may not help, ...but, now let me get back to this terminology argument.

You said I misunderstood the CPA, let me cut and past what my link said...

"There is a misconception floating around out there that an S-Corp is a standalone entity. Not true. There are three basic business entities with variations within. The three basic are-

Limited Liability Company (LLC)
Limited Liability Partnership (LLP) or General Partnership (GP)
C Corporation including Professional Corporation (some states require doctors, for example, to be a Professional Corporation)"

All I said was there may not be a stand alone S-corp entity...EXACTLY what the link said...tell me how I misinterpreted what the CPA guy was saying?

Random guy said there is a stand alone S-corp entity...how could random guy be right and at the same time I am misunderstanding the CPA whom I cited which says the right opposite - could you explain your position on this.

Not that these things matter, but curious how you could say I misinterpreted the link I provided, where it says exactly what I said...

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by Spirit Rider » Fri Dec 29, 2017 11:00 pm

I surrender.

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by gilgamesh » Sat Dec 30, 2017 12:09 am

Spirit Rider wrote:
Fri Dec 29, 2017 11:00 pm
I surrender.
Lol!...I don't know anything about LLC , S-corp, ABC, CNN, FOX...it's all Greek to me...

However if random guy says "There are stand alone s-corps." and my CPA quote said " There is a misconception floating around out there that an S-Corp is a standalone entity. Not true"....one or the other has to be wrong...it's simple logic...

But you said "random guy is correct. You have misinterpreted what that CPA is saying"...how could that possibly be correct?...I don't know anything about accounting, but that's simple logic...random guy is saying the right opposite of what that CPA is saying, therefore either the CPA is wrong or random guy is wrong...very basic logic, no?

Anyhow...do you know whether there is any harm in not paying W2 wages for the first few month as an S-corp? If I don't and continue to get a W2 wage will it be more difficult to revoke s_corp election, is there any harm as an S-corp to not get W2 wage for the first 3 months?

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by Hayden » Sat Dec 30, 2017 1:35 pm

gilgamesh wrote:
Sat Dec 30, 2017 12:09 am
Spirit Rider wrote:
Fri Dec 29, 2017 11:00 pm
I surrender.
Lol!...I don't know anything about LLC , S-corp, ABC, CNN, FOX...it's all Greek to me...

However if random guy says "There are stand alone s-corps." and my CPA quote said " There is a misconception floating around out there that an S-Corp is a standalone entity. Not true"....one or the other has to be wrong...it's simple logic...

But you said "random guy is correct. You have misinterpreted what that CPA is saying"...how could that possibly be correct?...I don't know anything about accounting, but that's simple logic...random guy is saying the right opposite of what that CPA is saying, therefore either the CPA is wrong or random guy is wrong...very basic logic, no?

Anyhow...do you know whether there is any harm in not paying W2 wages for the first few month as an S-corp? If I don't and continue to get a W2 wage will it be more difficult to revoke s_corp election, is there any harm as an S-corp to not get W2 wage for the first 3 months?
I don't think there is any harm in not paying wages for the first couple of months. I've read posts where other bogleheads say they pay annually.

BUT, you still will have to run payroll in the sense of filing Form 941 and any filings your state may require.

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by gilgamesh » Sat Dec 30, 2017 2:33 pm

Hayden wrote:
Sat Dec 30, 2017 1:35 pm
gilgamesh wrote:
Sat Dec 30, 2017 12:09 am
Spirit Rider wrote:
Fri Dec 29, 2017 11:00 pm
I surrender.
Lol!...I don't know anything about LLC , S-corp, ABC, CNN, FOX...it's all Greek to me...

However if random guy says "There are stand alone s-corps." and my CPA quote said " There is a misconception floating around out there that an S-Corp is a standalone entity. Not true"....one or the other has to be wrong...it's simple logic...

But you said "random guy is correct. You have misinterpreted what that CPA is saying"...how could that possibly be correct?...I don't know anything about accounting, but that's simple logic...random guy is saying the right opposite of what that CPA is saying, therefore either the CPA is wrong or random guy is wrong...very basic logic, no?

Anyhow...do you know whether there is any harm in not paying W2 wages for the first few month as an S-corp? If I don't and continue to get a W2 wage will it be more difficult to revoke s_corp election, is there any harm as an S-corp to not get W2 wage for the first 3 months?
I don't think there is any harm in not paying wages for the first couple of months. I've read posts where other bogleheads say they pay annually.

BUT, you still will have to run payroll in the sense of filing Form 941 and any filings your state may require.
Thanks! I don't think it will be an issue either, as 2017 was the first year of S-corp status, and I started W2 wages for me starting March.

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Re: Retirement accounts and physician SCorps

Post by Lieutenant.Columbo » Mon Jan 01, 2018 4:11 pm

goodenyou wrote:
Mon Dec 25, 2017 12:10 pm
...My understanding is the pass-through S-distributions have to be limited in order to not reduce reasonable W-2 wages of a physician. For example, if a physician has $500,000 of compensation, you cannot classify that compensation as $100,000 of W-2 and $400,000 of S-distributions...
goodenyou,
Assuming a one-member LLC taxed as SCorp, with the physician member as its only employee, couldn't the physician in your example set a W-2 "reasonable salary" equal to the Mean Annual Wage according to the latest BLS data, with the rest of the income (after business expenses) being distribution? Can the BLS data not be used to determine reasonable to compensation even if one's income is higher than BLS' data? Thank you.
Spirit Rider wrote:
Fri Dec 29, 2017 12:57 pm
...What Forbes is referring to is, that the self-employed are likely to get a much larger deduction than an S-Corp for the same net business profit. This should generally more than offset any payroll tax savings of the S-Corp.
gilgamesh wrote:
Fri Dec 29, 2017 1:12 pm
Ok!Thanks...you said self employed are likely to get a much larger deduction (I assume, especially if S-corp W2 wages is above SS limit and only saves Medicare taxes), what's a 'self employed' who elected S-corp status called?...Is there such a thing?

lets say a family practitioner with staff and his own practice ? Can that 'self-employed elect S-corp status? If so can that be revoked if this deduction seems more beneficial?

I might be using wrong terms here...

P.S: My point is, if it as at all possible that revocation of S-corp status could help, can it still be done if the practitioner continues to receive W2 wages?...and pausing W2 wages does not harm S-corp status, as it can be increased after the March 15th deadline ...so would it ever be prudent for those who may benefit to pause their wages for Jan, Feb, march till IRS clarifies this?

So, even if I have used the wrong terms, will there be ever a situation a single practitioner may benefit from stopping his W2 wages for the first few months?
gilgamesh,
My take home message from what Spirit Rider says is that the "technically self employed" is likely to get a much larger deduction than an the S-Corp owner for the same net business profit.

Now, what is considered Self employed? It's a business that pays SE tax, that is: either a sole proprietor or an LLC that did not elect S-Corp status.
The owner of an LLC that the IRS taxes as an S-Corp is not considered self employed.

Now, to the best of my understanding, sole proprietor and LLC not taxed as SCorp and LLC taxed as SCorp, all three must meet the "independent contractor" IRS tests.
Meaning changing the business entity type from one of the three to any of the other does not require "more no less proof" of being an independent contractor than the current business entity does.
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Re: Retirement accounts and physician SCorps and Tax Reform

Post by solobuildingblogs » Tue Jan 02, 2018 1:49 am

Here is my take on it. Take home messages:

1. During the phaseout of the 20% deduction you are in a extremely high marginal rate, like 47% or higher- because you’re “paying back” the 20% discount on your tax rate. If you’re right under the phaseout, accelerate income and defer income to get to the phaseout. If you’re in the phaseout, accelerate expenses and defer income.

2. It usually doesn’t make sense to be taxed as a C Corp for a small or solo medical practice. With double taxation you pay more than individual rates and can’t take distributions to avoid Medicare tax like you can for S corps.

3. Forming a separate LLC to own and rent equipment back to your practice won’t result in a huge tax break. Because of cost segregation analysis, LLCs that hold your practice real estate usually take a loss first 5-7 years to offset practice income but they would be eligible for 20% deduction. I’m not sure if forming a billing company LLC to do the billing for my company would be a specified service business (consulting is a specified service business) so I’m not gonna rush into this until the IRS clarifies.

Details in my post below:

https://solobuildingblogs.com/2017/12/3 ... e-doctors/

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Re: Retirement accounts and physician SCorps

Post by goodenyou » Wed Jan 03, 2018 10:00 am

Lieutenant.Columbo wrote:
Mon Jan 01, 2018 4:11 pm
goodenyou wrote:
Mon Dec 25, 2017 12:10 pm
...My understanding is the pass-through S-distributions have to be limited in order to not reduce reasonable W-2 wages of a physician. For example, if a physician has $500,000 of compensation, you cannot classify that compensation as $100,000 of W-2 and $400,000 of S-distributions...
goodenyou,
Assuming a one-member LLC taxed as SCorp, with the physician member as its only employee, couldn't the physician in your example set a W-2 "reasonable salary" equal to the Mean Annual Wage according to the latest BLS data, with the rest of the income (after business expenses) being distribution? Can the BLS data not be used to determine reasonable to compensation even if one's income is higher than BLS' data? Thank you.
Spirit Rider wrote:
Fri Dec 29, 2017 12:57 pm
...What Forbes is referring to is, that the self-employed are likely to get a much larger deduction than an S-Corp for the same net business profit. This should generally more than offset any payroll tax savings of the S-Corp.
gilgamesh wrote:
Fri Dec 29, 2017 1:12 pm
Ok!Thanks...you said self employed are likely to get a much larger deduction (I assume, especially if S-corp W2 wages is above SS limit and only saves Medicare taxes), what's a 'self employed' who elected S-corp status called?...Is there such a thing?

lets say a family practitioner with staff and his own practice ? Can that 'self-employed elect S-corp status? If so can that be revoked if this deduction seems more beneficial?

I might be using wrong terms here...

P.S: My point is, if it as at all possible that revocation of S-corp status could help, can it still be done if the practitioner continues to receive W2 wages?...and pausing W2 wages does not harm S-corp status, as it can be increased after the March 15th deadline ...so would it ever be prudent for those who may benefit to pause their wages for Jan, Feb, march till IRS clarifies this?

So, even if I have used the wrong terms, will there be ever a situation a single practitioner may benefit from stopping his W2 wages for the first few months?
gilgamesh,
My take home message from what Spirit Rider says is that the "technically self employed" is likely to get a much larger deduction than an the S-Corp owner for the same net business profit.

Now, what is considered Self employed? It's a business that pays SE tax, that is: either a sole proprietor or an LLC that did not elect S-Corp status.
The owner of an LLC that the IRS taxes as an S-Corp is not considered self employed.

Now, to the best of my understanding, sole proprietor and LLC not taxed as SCorp and LLC taxed as SCorp, all three must meet the "independent contractor" IRS tests.
Meaning changing the business entity type from one of the three to any of the other does not require "more no less proof" of being an independent contractor than the current business entity does.
If you assume that a reasonable salary for a physician is $275,000 for the purposes of maximizing tax-privileged retirement savings ($53,500/$59,500), then you would classify each dollar after that as an S-distribution for the purposes of a more favorable tax rate. So, for very high income earners, this would work. It would not work well for physicians making less than $300,000/year or in partnerships where the least compensated partner makes less than $300,000/year, since all partners are required to make an equal S-distribution . There are huge differences in compensation for physicians, from several millions (spine surgeons) to a few hundred thousand (pediatricians). I guess you could use MGMA salary averages as well. "Reasonable" is the question. I would assume that, if it is within a standard deviation or so of MGMA averages, it would pass the test of "reasonable". That has been my understanding of the accounting for S-Corp status in a partnership. I am not an accountant, but only a physician with a lot of miles on him after 22 years of practice. I am sure there are very competent accountants here on BH that could weigh-in on this.
Last edited by goodenyou on Wed Jan 03, 2018 10:11 am, edited 1 time in total.
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Re: Retirement accounts and physician SCorps

Post by gasdoc » Wed Jan 03, 2018 10:11 am

goodenyou wrote:
Wed Jan 03, 2018 10:00 am
Lieutenant.Columbo wrote:
Mon Jan 01, 2018 4:11 pm
goodenyou wrote:
Mon Dec 25, 2017 12:10 pm
...My understanding is the pass-through S-distributions have to be limited in order to not reduce reasonable W-2 wages of a physician. For example, if a physician has $500,000 of compensation, you cannot classify that compensation as $100,000 of W-2 and $400,000 of S-distributions...
goodenyou,
Assuming a one-member LLC taxed as SCorp, with the physician member as its only employee, couldn't the physician in your example set a W-2 "reasonable salary" equal to the Mean Annual Wage according to the latest BLS data, with the rest of the income (after business expenses) being distribution? Can the BLS data not be used to determine reasonable to compensation even if one's income is higher than BLS' data? Thank you.
Spirit Rider wrote:
Fri Dec 29, 2017 12:57 pm
...What Forbes is referring to is, that the self-employed are likely to get a much larger deduction than an S-Corp for the same net business profit. This should generally more than offset any payroll tax savings of the S-Corp.
gilgamesh wrote:
Fri Dec 29, 2017 1:12 pm
Ok!Thanks...you said self employed are likely to get a much larger deduction (I assume, especially if S-corp W2 wages is above SS limit and only saves Medicare taxes), what's a 'self employed' who elected S-corp status called?...Is there such a thing?

lets say a family practitioner with staff and his own practice ? Can that 'self-employed elect S-corp status? If so can that be revoked if this deduction seems more beneficial?

I might be using wrong terms here...

P.S: My point is, if it as at all possible that revocation of S-corp status could help, can it still be done if the practitioner continues to receive W2 wages?...and pausing W2 wages does not harm S-corp status, as it can be increased after the March 15th deadline ...so would it ever be prudent for those who may benefit to pause their wages for Jan, Feb, march till IRS clarifies this?

So, even if I have used the wrong terms, will there be ever a situation a single practitioner may benefit from stopping his W2 wages for the first few months?
gilgamesh,
My take home message from what Spirit Rider says is that the "technically self employed" is likely to get a much larger deduction than an the S-Corp owner for the same net business profit.

Now, what is considered Self employed? It's a business that pays SE tax, that is: either a sole proprietor or an LLC that did not elect S-Corp status.
The owner of an LLC that the IRS taxes as an S-Corp is not considered self employed.

Now, to the best of my understanding, sole proprietor and LLC not taxed as SCorp and LLC taxed as SCorp, all three must meet the "independent contractor" IRS tests.
Meaning changing the business entity type from one of the three to any of the other does not require "more no less proof" of being an independent contractor than the current business entity does.
If you assume that a reasonable salary for a physician is $275,000 for the purposes of maximizing tax-privileged retirement savings ($53,500/$59,500), then you would classify each dollar after that as an S-distribution for the purposes of a more favorable tax rate. So, for very high income earners, this would work. It would not work well for physicians making less than $300,000/year or in partnerships where the least compensated partner makes less than $300,000/year, since all partners are required to make an equal S-distribution . I guess you could use MGMA salary averages as well. "Reasonable" is the question. I would assume that, if it is within a standard deviation or so of MGMA averages, it would pass the test of "reasonable". That has been my understanding of the accounting for S-Corp status in a partnership. I am not an accountant, but only a physician with a lot of miles on him after 22 years of practice. I am sure there are very competent accountants here on BH that could weigh-in on this.
goodenyou, I will just say that my "reasonable salary" for 2018 will be $275,000, just as you guessed. My CPA usually recommends maximizing tax-privileged retirement savings, as you mentioned.

gasdoc

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goodenyou
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Re: Retirement accounts and physician SCorps

Post by goodenyou » Wed Jan 03, 2018 10:34 am

gasdoc wrote:
Wed Jan 03, 2018 10:11 am
goodenyou wrote:
Wed Jan 03, 2018 10:00 am
Lieutenant.Columbo wrote:
Mon Jan 01, 2018 4:11 pm
goodenyou wrote:
Mon Dec 25, 2017 12:10 pm
...My understanding is the pass-through S-distributions have to be limited in order to not reduce reasonable W-2 wages of a physician. For example, if a physician has $500,000 of compensation, you cannot classify that compensation as $100,000 of W-2 and $400,000 of S-distributions...
goodenyou,
Assuming a one-member LLC taxed as SCorp, with the physician member as its only employee, couldn't the physician in your example set a W-2 "reasonable salary" equal to the Mean Annual Wage according to the latest BLS data, with the rest of the income (after business expenses) being distribution? Can the BLS data not be used to determine reasonable to compensation even if one's income is higher than BLS' data? Thank you.
Spirit Rider wrote:
Fri Dec 29, 2017 12:57 pm
...What Forbes is referring to is, that the self-employed are likely to get a much larger deduction than an S-Corp for the same net business profit. This should generally more than offset any payroll tax savings of the S-Corp.
gilgamesh wrote:
Fri Dec 29, 2017 1:12 pm
Ok!Thanks...you said self employed are likely to get a much larger deduction (I assume, especially if S-corp W2 wages is above SS limit and only saves Medicare taxes), what's a 'self employed' who elected S-corp status called?...Is there such a thing?

lets say a family practitioner with staff and his own practice ? Can that 'self-employed elect S-corp status? If so can that be revoked if this deduction seems more beneficial?

I might be using wrong terms here...

P.S: My point is, if it as at all possible that revocation of S-corp status could help, can it still be done if the practitioner continues to receive W2 wages?...and pausing W2 wages does not harm S-corp status, as it can be increased after the March 15th deadline ...so would it ever be prudent for those who may benefit to pause their wages for Jan, Feb, march till IRS clarifies this?

So, even if I have used the wrong terms, will there be ever a situation a single practitioner may benefit from stopping his W2 wages for the first few months?
gilgamesh,
My take home message from what Spirit Rider says is that the "technically self employed" is likely to get a much larger deduction than an the S-Corp owner for the same net business profit.

Now, what is considered Self employed? It's a business that pays SE tax, that is: either a sole proprietor or an LLC that did not elect S-Corp status.
The owner of an LLC that the IRS taxes as an S-Corp is not considered self employed.

Now, to the best of my understanding, sole proprietor and LLC not taxed as SCorp and LLC taxed as SCorp, all three must meet the "independent contractor" IRS tests.
Meaning changing the business entity type from one of the three to any of the other does not require "more no less proof" of being an independent contractor than the current business entity does.
If you assume that a reasonable salary for a physician is $275,000 for the purposes of maximizing tax-privileged retirement savings ($53,500/$59,500), then you would classify each dollar after that as an S-distribution for the purposes of a more favorable tax rate. So, for very high income earners, this would work. It would not work well for physicians making less than $300,000/year or in partnerships where the least compensated partner makes less than $300,000/year, since all partners are required to make an equal S-distribution . I guess you could use MGMA salary averages as well. "Reasonable" is the question. I would assume that, if it is within a standard deviation or so of MGMA averages, it would pass the test of "reasonable". That has been my understanding of the accounting for S-Corp status in a partnership. I am not an accountant, but only a physician with a lot of miles on him after 22 years of practice. I am sure there are very competent accountants here on BH that could weigh-in on this.
goodenyou, I will just say that my "reasonable salary" for 2018 will be $275,000, just as you guessed. My CPA usually recommends maximizing tax-privileged retirement savings, as you mentioned.

gasdoc
That seems to be what a lot of physicians’ salaries are going to be. I wonder why? :wink:
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Re: Retirement accounts and physician SCorps and Tax Reform

Post by Atgard » Wed Jan 03, 2018 11:49 am

Sorry if this is a dumb question, but why would the salary be $275,000 to max out retirement savings? Is it just a physician thing?

For an S-Corp Solo 401K, which can use 25% of W-2 salary, it requires $146,000 of W-2 compensation (salary + benefits) to max out $18,500 in employee deferral + $36,500 in employer contribution to hit the $55,000 Solo 401K cap. Or am I missing something?

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by goodenyou » Wed Jan 03, 2018 2:42 pm

Atgard wrote:
Wed Jan 03, 2018 11:49 am
Sorry if this is a dumb question, but why would the salary be $275,000 to max out retirement savings? Is it just a physician thing?

For an S-Corp Solo 401K, which can use 25% of W-2 salary, it requires $146,000 of W-2 compensation (salary + benefits) to max out $18,500 in employee deferral + $36,500 in employer contribution to hit the $55,000 Solo 401K cap. Or am I missing something?
I was referring to a partnership with employees and profit-sharing plan, not a sole proprietorship or single owner corporation. It's not a physician thing other than it was referenced by the OP who is a physician.
"Ignorance more frequently begets confidence than does knowledge" | "The best years you have left are the ones you have right now"

beagler1
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Re: Retirement accounts and physician SCorps and Tax Reform

Post by beagler1 » Mon Jan 08, 2018 11:00 pm

Forbes article on pass though deduction. Maybe Congress screwed up describing what they meant with w2 and QBI. Otherwise we may switching my single member llc status from s corp to disregarded sole prop.

The New 'Qualified Business Income Deduction' Varies Based On Your Business Type - Or Does It?

http://www.forbes.com/sites/anthonynitt ... be6ef12076

gilgamesh
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Re: Retirement accounts and physician SCorps and Tax Reform

Post by gilgamesh » Wed Jan 10, 2018 8:27 am

beagler1 wrote:
Mon Jan 08, 2018 11:00 pm
Forbes article on pass though deduction. Maybe Congress screwed up describing what they meant with w2 and QBI. Otherwise we may switching my single member llc status from s corp to disregarded sole prop.

The New 'Qualified Business Income Deduction' Varies Based On Your Business Type - Or Does It?

http://www.forbes.com/sites/anthonynitt ... be6ef12076
This clearly articulates the 'LLC loophole'....which appears to be rather a 'type of entity loophole'...does anyone still believe this was left in their by design so it's not a loophole? Really!!

Substantive arguments like this is more helpful than arguments on semantics...

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by gilgamesh » 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.

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Re: Retirement accounts and physician SCorps and Tax Reform

Post by beagler1 » 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?

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