Menu

Pass Thru Deduction Explained

Home Tax Reduction Pass Thru Deduction Explained

  • Avatar Re3iRtH 
    Participant
    Status: Physician
    Posts: 145
    Joined: 09/23/2017

    I am aware of every word you said. I know that LLCs are pass-through entities.

    The way it was stated initially, I thought for this specific new tax law, you would have to set up an LLC in order to qualify for this NEW 20% exemption. Could someone confirm if its the case?

    #96083 Reply
    Avatar docnews 
    Participant
    Status: Physician
    Posts: 410
    Joined: 01/09/2016

    I am aware of every word you said. I know that LLCs are pass-through entities.

    The way it was stated initially, I thought for this specific new tax law, you would have to set up an LLC in order to qualify for this NEW 20% exemption. Could someone confirm if its the case?

    Click to expand…

    A sole proprietorship will suffice and you don’t need it in a LLC. This tax law ignores LLCs just like they have in the past.

    #96086 Reply
    Avatar Re3iRtH 
    Participant
    Status: Physician
    Posts: 145
    Joined: 09/23/2017

    Thanks! Saves me a lot of money and paperwork 🙂

    #96087 Reply
    Liked by docnews
    Avatar beagler 
    Participant
    Status: Physician
    Posts: 265
    Joined: 07/08/2017

    I think the Forbes article is wishful thinking. Yes, it makes more sense for different types of pass thru entities to be treated identically, but that’s not what the text of the law says. It’s a screwup, but one we’ll live with and plan around until the bill sunsets or is amended or repealed.

    Click to expand…

    For those that haven’t read the linked article, it’s worthy. Maybe someone smarter than I can summarize.

    I hope the IRS can favorably interpret this mess.

    But, it’ll take 60 senate votes to amend so unlikely to be fixed? This deserves more publicity and complaining- squeaky wheel and all. Maybe it can be fixed?

    Those of us that are s-Corp single member llc under the limits have about 2 months to decide if we want to go for full pass through deduction: revoke s-Corp status and go back to disregarded sole proprietor.

    Feds, Please don’t make me do it;) Typical, one good idea and they manage to screw it up somehow. Same goes for the Feds and healthcare…

    Solo Internist, Midwest

    #96098 Reply
    Avatar docnews 
    Participant
    Status: Physician
    Posts: 410
    Joined: 01/09/2016

    I think the Forbes article is wishful thinking. Yes, it makes more sense for different types of pass thru entities to be treated identically, but that’s not what the text of the law says. It’s a screwup, but one we’ll live with and plan around until the bill sunsets or is amended or repealed.

    Click to expand…

    For those that haven’t read the linked article, it’s worthy. Maybe someone smarter than I can summarize.

    I hope the IRS can favorably interpret this mess.

    But, it’ll take 60 senate votes to amend so unlikely to be fixed? This deserves more publicity and complaining- squeaky wheel and all. Maybe it can be fixed?

    Those of us that are s-Corp single member llc under the limits have about 2 months to decide if we want to go for full pass through deduction: revoke s-Corp status and go back to disregarded sole proprietor.

    Feds, Please don’t make me do it;) Typical, one good idea and they manage to screw it up somehow. Same goes for the Feds and healthcare…

    Click to expand…

    Basically the article assumes the limitation of the W2 wages and guarenteed payments was not for the personal business income but for wages and payments you had to give to others. Therefore you add back in your personal scorp w2 and partnership guarenteed payments.

    This interpretation makes logical sense, making all business types equal under the law.

     

    Look at it from a sole proprietorship perspective: do you really think my reasonable compensation should be zero? Under current law I don’t have to declare any. Do you really think the government is going to make all sole proprietorships declare their reasonable compensation so that it can be excluded from this deduction? If they do, shouldn’t my FICA taxes be reduced then as well?

    #96118 Reply
    Avatar pulmdoc 
    Participant
    Status: Physician
    Posts: 434
    Joined: 09/19/2016

    Don’t get me wrong, I think the author’s a
    idea makes sense as a rational tax law. I just don’t think it’s adequately supported by the evidence, i.e. the text of the bill. Therefore, sole proprietors need to make a calculation whether it is worth more to have a higher QBI deduction (and stay sole propietors) or less FICA and lower QBI deduction by becoming S corp.

    Regarding admendment, since this bill was passed through reconciliation, amending the bill could also be passed through reconciliation and require only a simple majority in both houses. I don’t foresee that; a unified Democratic government is more likely to repeal the bill than tweak it, and I don’t think the Republicans have any appetite to announce they made mistakes. However, I included it in the list of possible ways things change because it is technically possible.

    #96237 Reply
    Avatar Rajesh57 
    Participant
    Status: Physician
    Posts: 1
    Joined: 02/23/2018

    I have 2 urstions where can I post it ?

    raj

    #105436 Reply
    Avatar radonc23 
    Moderator
    Status: Physician
    Posts: 26
    Joined: 03/07/2018

    Can higher earning physicians classify themselves as “cooperatives” to take advantage of pass through changes?

    https://www.bloomberg.com/news/articles/2018-03-06/rich-professionals-can-exploit-tax-break-for-farms-small-firms

    #108067 Reply
    Avatar CaliBoneDoc 
    Participant
    Status: Physician
    Posts: 6
    Joined: 12/14/2017

    interesting. have any of the CPA’s or other knowledgeable tax folks  on the forum heard anything about this?

    #108625 Reply
    Avatar hrain1099 
    Participant
    Status: Resident
    Posts: 15
    Joined: 03/06/2016
    Splash Refinancing Bonus

    Hi guys, can anyone look through this to see if my calculations are approximately correct? Assumptions: two-income emergency medicine couple, paid as 1099s, making (approximately) equivalent incomes, looking to go more part-time in the years ahead rather than full-time and trying to find the “sweet spot” for a dual-1099 sole proprietor couple for gross income. I tried to explain where I get each number — hope it makes sense.

     

    Estimated “Sweet Spot” (ie to get the lowest fed taxes if not just wanting to push income higher) for Joint Income if both 1099 contractors:

    ~$474,000 gross income (after business deductions (ie flights, hotels, licenses, etc) but before self-employment tax deduction (deduction ~$23,000 as below) and standard deductions (24,000), retirement account contributions (112,000), etc):

    474,000 – 112,000 (solo 401k x 2) – 24,000 (standard deduction x 2) – 23,000 (1/2 self-employment tax deduction for both persons combined) = 315,000.

     

    Therefore, for Federal Taxes when gross income $474,00 but QBI = 315,000:

    $28,179 (fed taxes up to 165,000 for MFJ 2018) + [(315,000 x 0.8 i.e. 315,000-63,000=252,0000 -165,000 (bottom of tax bracket)=$87,000 * 24% (tax bracket that encompasses the full deduction)] = $28,179 + $20,880= $49,059

     

    $28,179 + $20,880= $49,059 = FEDERAL INCOME TAX

     

    This is a $15,120 tax savings from 64,179 (ie the basic federal taxes on 315,000 per regular 2018 tax brackets).

     

    Does this all look correct? Is there any major glaring things I’m missing or messing up with this calculation?

     

    ———————————-

     

    Used the following for calculations, from the PoF article and for SE tax:

    For married filers, $315k of taxable income * 20% deduction = $63k deduction * 24% tax bracket that encompasses it all = $15,120 in tax savings.

    Deduction Calculation for One-Half of SE Tax

    Each year, when calculating your income tax, you are allowed an “above the line” deduction equal to 50% of the amount you pay as self-employment tax. That is, after using Schedule SE to calculate your self-employment tax, you’ll enter an amount equal to one-half of your self-employment tax on line 27 of your Form 1040 as a deduction to arrive at adjusted gross income.

    Estimated FICA: SS: ~8,000×4 (self-employed x 2) =32,000;  $16,000 self-employment deduction

    Medicare: 1.45% x total pay x 4 (Self-employed x 2) = 13800; $6900 self-employment deduction

    #166776 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1910
    Joined: 02/01/2016

    Your end result is close, but I don’t get the math. With $474K business profit combined it matters to some degree what the distribution of the business profit is for determining the SE tax. Making the following assumption for 2019:

    If both have >= $132,900 / 92.35% = $143,909 in business profit then they will each have $132,900 * 12.4% ~= $16,480 in the Social Security component of SE tax. They will then have a combined $474,000  * 92.35% = $437,739 * 2.9% ~= $12,694 in the Medicare component of SE tax. For a total SE tax of ($16,480 * 2 = $32,960) + $12,694 = $45,924 and 1/2 SE tax of $22,962

    Note: There will be a 0.9% additional Medicare tax if one of them has a business profit > $250,000 / 92.35% ~= $270,709. This is just an additional tax and does not change SE tax, 1/2 SE tax and no amount can be deducted.

    Any amount of income and adjustments to income will change your MFJ AGI and thus taxable income. For example, the Self-employed health insurance deduction, HSA deduction, etc… Also, the taxable income used for determining the thresholds are from the 2018 Qualified Business Income Deduction—Simplified Worksheet in the 2018 draft Form 1040 Instructions. It adds capital gains and qualified dividends to your AGI – Standard or Itemized Deductions.

    #166805 Reply
    MPMD MPMD 
    Participant
    Status: Physician
    Posts: 2509
    Joined: 05/01/2017

    Have read through this and I’m still confused about these income limits so I’m just going to post some #s and see if anyone has figured this out.

    If we make >$500k MFJ but also have passive income from a service biz of ~$100k/year do we get reported on a K1.

     

    a) nothing b/c of our AGI

    b) something other than nothing that I need my tax preparer to sort out.

     

    It’s “A” right?

    #167211 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2382
    Joined: 03/01/2018

    Confused by the question. A K-1 you receive from an S Corp or Partnership to report your share of income, distribution, interest etc with respect to the corp or partnership.

    Do you have ownership in an S Corp or Partnership?

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #167219 Reply
    MPMD MPMD 
    Participant
    Status: Physician
    Posts: 2509
    Joined: 05/01/2017

    Confused by the question. A K-1 you receive from an S Corp or Partnership to report your share of income, distribution, interest etc with respect to the corp or partnership.

    Do you have ownership in an S Corp or Partnership?

    Click to expand…

    partnership, 30% ownership

     

    #167241 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2382
    Joined: 03/01/2018

    Well your K-1 from the partnership should not change in overall structure from last year, unless your practice changed things, rewrote an operating agreement to take advantage of the tax reform. I assume you’re getting at what’s QBI in your case. QBI from the partnership is going to be your allocable share of the profit that isn’t guaranteed payments (box 4) or investment income.

    How was your K-1 income structured last year?

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #167243 Reply

Reply To: Pass Thru Deduction Explained

In case of a glitch or error, please save your text elsewhere, clear browser cache, close browser, open browser and refresh the page.

Notifications Mark all as read  |  Clear