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Pass Thru Deduction Explained

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  • Avatar HumbleInvestor 
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    Status: Physician, Small Business Owner
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    Joined: 12/28/2016

    We have a business that provides medical services and retail products. The profits are passed through the same LLC. If the taxable income is more than $315K, do we still get to deduct 20% of the retail income (assuming atleast 50% of the profits come from that part of the business)? Also 50% of wages my wife and I receive as employees of that entity or 50% of all wages paid out (including staff) by that entity? Appreciate the clarification.

    #86130 Reply
    Avatar StarTrekDoc 
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    Status: Physician
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    Joined: 01/15/2017

    WCI: As pointed out by docnews the deduction is limited by your (MFJ in your case) taxable income on Form 1040 Line 43 not counting the deduction. It is not based on any individual businesses that you own.

    Also, it is a 20% deduction not a credit (as I also first thought) on a maximum of $315K for maximum deduction of $63K. At the maximum MFJ taxable income ($315K) this deduction falls entirely within the new 24% tax bracket. The maximum tax savings is as docnews stated is $15,120.

    Click to expand…

    I think this is what makes the most sense.   If one gets the ENTIRE AGI of $315K from LLC sources, the maximum reduction in income reported is 63K.

    So scenario 1:

    LLC 1,2,3 and 4 all report pass through income to MFJ A:  who’s entire income comes from LLCs.   income: $315K  reported taxable income 315-63 = 252k which is taxed at the new scales.

    Scenario 2:

    W2 Salary, work income gets 215K

    LLCs-Scorps pass throughs report 100k ==  income = 315K  20% reduction of 100k – 80k =    295K  taxable income.

     

    I think that’s the easiest, least confusing, but knowing our government probably will be much more convoluted 😉

    #86132 Reply
    Avatar hightower 
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    Status: Physician
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    Joined: 12/07/2016

    I’m confused and too lazy to think.

    If I currently make around 300k or so on a W2, will this new tax law make it more beneficial for me to somehow figure out a way to get paid via a pass through next year?

    #86135 Reply
    Avatar StarTrekDoc 
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    Status: Physician
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    My bet is ‘yes’.   Every reported earned income dollar below 315K that comes via a pass through will get an adjustment.

    My belief is that every dollar via pass through will get a 20% reduction in line calculation and you’d just have to worksheet it to arrive in the line item for the reported and calculated tax for that portion.  That’s how I see it being done….yea…another worksheet.

     

    #86136 Reply
    Avatar spiritrider 
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    Status: Small Business Owner
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    Joined: 02/01/2016

    These are the key points as I think I understand them from reading the bill’s text.

    1. Your eligibility is controlled by your personal Form 1040 return’s taxable income, not counting the deduction itself. It is not based except indirectly on any specific business income.

    2. If and to the degree eligible your deduction subject to phaseout is based on your qualified business income.

    3. *** Qualified business income is based on net self-employment earnings – Form 1040 Lines 28/29 or an S-Corp’s distributions – Lines 25/29 if paid or reimbursed by the S-Corp.

    4. The deduction is further limited for an S-Corp to 50% of W-2 wages.

    5. This indicates that within the eligibility range, an S-Corp is at a distinct disadvantage to self-employment for the deduction. The problem is that on the bubble your income could cost you thousands.

    Johanna mentioned this early in the process, far from simplification, this is going to provide a boon for financial professionals. This is going to be the busiest 1st quarter ever for financial professionals.

    6. The taxable income thresholds, especially for those with dual incomes, is going to leave many physicians ineligible.

    *** Edited based on 199A(c)(3)(ii). See my recent post in House and Senate Reconcillation “Compromise” Reached

    #86139 Reply
    Avatar Dilaudidopenia 
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    Status: Physician
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    Joined: 05/22/2016

    Totally confused. What is the impact of this on a sole proprietor that makes ~375k before solo-401k contribution (53k) and deduction of self employment tax?

    #86144 Reply
    Avatar docnews 
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    Status: Physician
    Posts: 412
    Joined: 01/09/2016

    Very interesting thread

    So dumb questions:
    1. 20% deduction applies to which entities? LLC is oass through so if business is generating 300k I can just slap 20% deduction ?
    2. What are the restrictions/phase outs ?

    Click to expand…

    1) The 20% applies to the lesser of either your taxable income or your pass thru income. For those who only pass thru it will be your taxable income. For those who have only a side gig with a W2, this will be limited to your business income (including S corp dividends) unless you have many deductions.

     

    2) If you are married joint filers and your taxable income is <$315k you can do this. This phases out over the next $100k of income. This limitation is only for high income service industries. The golden goose is for those businesses who can argue they are not service industries and they could have super high incomes with unlimited 20% deductions.

    #86146 Reply
    Avatar docnews 
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    Status: Physician
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    Totally confused. What is the impact of this on a sole proprietor that makes ~375k before solo-401k contribution (53k) and deduction of self employment tax?

    Click to expand…

    You would get most of the deduction since your taxable income would be at most $322k.

    #86147 Reply
    Avatar WCInovice 
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    Status: Physician
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    Joined: 12/17/2017

    Please excuse my ignorance, and thanks to all for the input.  My apologies if I”m completely misunderstanding this.

     

    My physician group LLC (ie 100% of our income is physician services) pays the docs a W2 salary of $360K then with quarterly bonuses on top of that for the partners.  I know I’ll be well over the $315K/year number from all income related to this LLC.

     

    Will I still be able to take the pass through deduction on my first $315K or not at all?

     

     

    #86156 Reply
    Avatar docnews 
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    Status: Physician
    Posts: 412
    Joined: 01/09/2016

    We have a business that provides medical services and retail products. The profits are passed through the same LLC. If the taxable income is more than $315K, do we still get to deduct 20% of the retail income (assuming atleast 50% of the profits come from that part of the business)? Also 50% of wages my wife and I receive as employees of that entity or 50% of all wages paid out (including staff) by that entity? Appreciate the clarification.

    Click to expand…

    You would likely need to separate the nonservice business from the service business to recieve the deduction.

     

    How I read it: Whether you receive the income as an scorp or sole proprietorship doesn’t matter. People commenting earlier are not realizing that the first section has an addition component 1 + 2. Business income + dividends never to exceed your taxable income.

     

    #86160 Reply
    Avatar docnews 
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    Status: Physician
    Posts: 412
    Joined: 01/09/2016

    Please excuse my ignorance, and thanks to all for the input.  My apologies if I”m completely misunderstanding this.

     

    My physician group LLC (ie 100% of our income is physician services) pays the docs a W2 salary of $360K then with quarterly bonuses on top of that for the partners.  I know I’ll be well over the $315K/year number from all income related to this LLC.

     

    Will I still be able to take the pass through deduction on my first $315K or not at all?

     

     

    Click to expand…

    W2 from someone else is a no go. If so, you are not a business and only an employee.

     

    A W2 from yourself  (via an scorp that you own) could be eligible as long as your taxable income is under $315k with some phaseout over the next $100k of income (half these numbers if not married).

     

    So if you own part of this partnership you could possibly receive part of this deduction if you have taxable income (the income after all other deductions) <$415k.

    #86161 Reply
    Avatar spiritrider 
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    Status: Small Business Owner
    Posts: 1961
    Joined: 02/01/2016

    I’ll admit I don’t understand how capital gains, dividends and REITs factor into this deduction.

    #86163 Reply
    Avatar docnews 
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    Status: Physician
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    Splash Refinancing Bonus

    Sorry I ignored scorp applicable stuff because it didn’t apply to me. Here’s my interpretation:

    The deduction is whichever is less

    50% of scorp w2

    OR

    20% of all business income (w2 + dividends)

     

    So the sweet spot is 40% income to 60% dividend IF you can justify such a low income.

     

    Example: $200k in business income (20% = $40k)

    So $80k in income (50% = $40k) and $160k in dividends.

    Sweet spot = both rules equal same $40k deduction

     

    To me this plenty generous and stops scorp abusers.

     

    #86167 Reply
    Avatar WCInovice 
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    Status: Physician
    Posts: 40
    Joined: 12/17/2017

    Yes – it’s a W2 to myself essentially since I am a shareholder/owner in the S corp.

    My taxable income is well over 315 k though.

    #86169 Reply
    Avatar Dilaudidopenia 
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    Status: Physician
    Posts: 214
    Joined: 05/22/2016

    Totally confused. What is the impact of this on a sole proprietor that makes ~375k before solo-401k contribution (53k) and deduction of self employment tax?

    Click to expand…

    You would get most of the deduction since your taxable income would be at most $322k.

    Click to expand…

    Forgot to include my spouse who makes ~60k on a W2.  Does this push us too high? Implications for married filing joint vs separately?

    #86171 Reply

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