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Pass Thru Deduction Explained

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  • Avatar Complete_newbie 
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    Status: Physician, Small Business Owner
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    Joined: 01/03/2017

    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 ?

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    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.

    Click to expand…

    Is this true?? Because that’ll be great! Otherwise I am eating that phase out already. Lame.

    Ecommerce (selling products!) + Real estate business (equity + lending) doesn’t look like service business to me – 20% deductions??? Would be nice. Will ask some CPA friends but any thoughts welcome. Thanks.

    #90777 Reply
    Avatar docnews 
    Participant
    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.

    Click to expand…

    Is this true?? Because that’ll be great! Otherwise I am eating that phase out already. Lame.

    Ecommerce (selling products!) + Real estate business (equity + lending) doesn’t look like service business to me – 20% deductions??? Would be nice. Will ask some CPA friends but any thoughts welcome. Thanks.

    Click to expand…

    Yes but your limitation will be AMT that still exists but with higher deductions.

    #90878 Reply
    Liked by Dr. Mom
    Avatar docnews 
    Participant
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    Joined: 01/09/2016

    See POF write-up of this discussion: https://www.physicianonfire.com/tax-reform-physicians

    #90881 Reply
    Avatar Physiciancouple.com 
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    Status: Physician
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    Have been contemplating opening a self storage business for a long time. It seems like side businesses like these not subject to the service industry 315k limit are going to be a considerably more attractive option for high income earning households like mine who will never benefit from the new tax rules because of too much income coming from medicine.

    #90912 Reply
    Avatar spencerhawkins 
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    Status: Resident
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    Joined: 12/23/2017
    I am wondering if our imaging center business, in which we are investors with other parties in a separate corporation, which passes through income through an LLC, to the tune of about $50k/investor per year, would be eligible for this deduction. Currently, we pay ordinary income tax on these distributions. (Our salaries are otherwise above the $315k number, but I do not know if I am mixing apples and oranges) 

    Click to expand…

    I have the same question as it applies to my Surgery Center income.

    Click to expand…

    Based on my reading of the Kitces re-explanation of the tax law, yes and nok.

    Yes, if your income from the surgery center and all other sources is less than $315k, phasing out in $50k chunks at $415k (MFJ). So if your total income is greater than $415k (including professional and surgery center income), there will be no benefit. (Lower thresholds apply for single filers.)

    So for me, it won’t apply.

    Click to expand…

    V- Do you have a way to turn any of your active service income into passive income which would qualify for the 20% deduction without the income cap?  For us, we have an LLC that owns all of my husband’s ophthalmic equipment/toys.  We pay rent to it from his S-corp to use the equipment.  Another practice in town rents one of his lasers from us also.  My understanding, which is improving daily, is that the income that we can pay in rent would get the deduction without being subject to the 315K – 415K MFJ taxable income phaseout.  On the other hand, if it stayed in the S-corp and was taken as a dividend, it would be subject to it.

    Click to expand…

    Can someone else confirm this? For a dual physician household with no hope of being under $415k taxable income after deductions, if I was the sole owner of a separate non service based LLC would I still qualify for the pass through deduction on the non service based income? In this case I would have an LLC for practice real estate and an LLC for lasers/other practice equipment to which I would pay rent. These new pass through LLCs would then qualify for the 20% pass through deduction even if my personal taxable income is above 415k?

    Thank you for the clarification,

    #91808 Reply
    PhysicianOnFIRE PhysicianOnFIRE 
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    Status: Physician
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    Can someone else confirm this? For a dual physician household with no hope of being under $415k taxable income after deductions, if I was the sole owner of a separate non service based LLC would I still qualify for the pass through deduction on the non service based income?

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    I believe you would. Jim plans to do this with WCI income.

    Of course, you’ll want to verify with your CPA and possibly a tax attorney, since a lot of money is at stake.

    40-something anesthesiologist and personal finance blogger @ https://physicianonfire.com [Part of the WCI Network] Find me on Twitter: @physicianonfire

    FIRE. Financial Independence. Retire Early.

    #91829 Reply
    Avatar docnews 
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    Status: Physician
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    Earnest refinancing bonus
    I am wondering if our imaging center business, in which we are investors with other parties in a separate corporation, which passes through income through an LLC, to the tune of about $50k/investor per year, would be eligible for this deduction. Currently, we pay ordinary income tax on these distributions. (Our salaries are otherwise above the $315k number, but I do not know if I am mixing apples and oranges) 

    Click to expand…

    I have the same question as it applies to my Surgery Center income.

    Click to expand…

    Based on my reading of the Kitces re-explanation of the tax law, yes and nok.

    Yes, if your income from the surgery center and all other sources is less than $315k, phasing out in $50k chunks at $415k (MFJ). So if your total income is greater than $415k (including professional and surgery center income), there will be no benefit. (Lower thresholds apply for single filers.)

    So for me, it won’t apply.

    Click to expand…

    V- Do you have a way to turn any of your active service income into passive income which would qualify for the 20% deduction without the income cap?  For us, we have an LLC that owns all of my husband’s ophthalmic equipment/toys.  We pay rent to it from his S-corp to use the equipment.  Another practice in town rents one of his lasers from us also.  My understanding, which is improving daily, is that the income that we can pay in rent would get the deduction without being subject to the 315K – 415K MFJ taxable income phaseout.  On the other hand, if it stayed in the S-corp and was taken as a dividend, it would be subject to it.

    Click to expand…

    Can someone else confirm this? For a dual physician household with no hope of being under $415k taxable income after deductions, if I was the sole owner of a separate non service based LLC would I still qualify for the pass through deduction on the non service based income? In this case I would have an LLC for practice real estate and an LLC for lasers/other practice equipment to which I would pay rent. These new pass through LLCs would then qualify for the 20% pass through deduction even if my personal taxable income is above 415k?

    Thank you for the clarification,

    Click to expand…

    I believe this is the case. I call it the “Trump Model”. Have passive / nonservice / often real estate based business and have all your business income deducted 20%, making your new top bracket of 37% feel like 29.6%.

    #91880 Reply
    Avatar docnews 
    Participant
    Status: Physician
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    Joined: 01/09/2016

    Anyone figured out how the AMT will play into this pass through deduction issue?

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    I first thought that the bill’s language meant AMT applied but after reading the conference report (official thought process of the congressional compromise) I believe I was wrong.

    If AMT applied almost all of those with primary pass thru income would hit it even with the standard deduction even with this new less strict AMT.

    Without AMT applying here, my above mentioned “Trump Model” works and AMT is practically dead other than those who have stock options and those AMT add-back-ins that aren’t part of itemizing / Schedule A.

     

     

    #91882 Reply
    Liked by Caligas
    Avatar beagler 
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    Status: Physician
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    Joined: 07/08/2017

    Comment from Kitces in Kitces article:

    “All deductions are available for AMT purposes, unless specifically added back as an AMT adjustment or preference item.

    Congress did not add any provisions to make the QBI deduction an AMT adjustment (which as you note, would have defeated the purpose).

    Thus, the QBI deduction is an above-the-line deduction that applies for regular and AMT purposes.
    – Michael”

    Solo Internist, Midwest

    #91936 Reply
    Liked by beagler, docnews
    Avatar Slav4ikMD 
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    Status: Physician
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    Sorry if this has been asked and answered before, but someone confirm that the 315k limit thing applies to ALL adjusted gross income, not just income from the business? (e.g. I have both W2 and 1099 income and am above the cut off for both combined, but below for self-employed income)  And does it matter if self-employed income is service based (i.e. MD work) or non-service based?  This part is a bit confusing.  Just trying to figure out if there is anything at all I can or should do to take advantage of the 20% deduction.  Thanks!

    #91937 Reply
    Avatar beagler 
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    Status: Physician
    Posts: 272
    Joined: 07/08/2017

    Docnews seems right on s-Corp deduction if w2 wages and dividend. From bill conference section which is a little easier to read than actual bill:

    “The taxpayer’s deduction for qualified business income for the taxable year is equal to the sum of (a) the lesser of the combined qualified business income amount for the taxable year or an amount equal to 20 percent of the excess of taxpayer’s taxable income over any net capital gain69 and qualified cooperative dividends, plus (b) the lesser of 20 percent of qualified cooperative dividends and taxable income (reduced by net capital gain). This sum may not exceed the taxpayer’s taxable income for the taxable year “

    Qualified business income is the dividend minus reasonable salary. Taxable income should be wages or wages plus dividend? Weird wording but it adds up to all s-Corp income (provided you meet the phase in and the other wage limits.) For those of us near but under 315k total taxable income we get the $15000 tax cut, not bad! I’ll still wait for the spelled out IRS interpretation or consensus interpetation though.

    Solo Internist, Midwest

    #91939 Reply
    Liked by docnews
    Avatar docnews 
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    Status: Physician
    Posts: 412
    Joined: 01/09/2016

    Sorry if this has been asked and answered before, but someone confirm that the 315k limit thing applies to ALL adjusted gross income, not just income from the business? (e.g. I have both W2 and 1099 income and am above the cut off for both combined, but below for self-employed income)  And does it matter if self-employed income is service based (i.e. MD work) or non-service based?  This part is a bit confusing.  Just trying to figure out if there is anything at all I can or should do to take advantage of the 20% deduction.  Thanks!

    Click to expand…

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

    It’s not AGI. It’s all taxable income, no matter the source minus all other deductions/adjustments. You could change retirement account contributions to get under this limit (401k/HSA/DBP) or choose to give more charity at a lower cost to you.

     

    The limit is ONLY for service industries. Otherwise the deduction is unlimited.

     

     

     

    #91940 Reply
    Avatar Complete_newbie 
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    Status: Physician, Small Business Owner
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    Ha! Nice. Looks like bonanza for non service based businesses which real estate and ecommerce would qualifiy.

    Rich get richer.

    #91955 Reply
    Liked by docnews
    Dr. Mom Dr. Mom 
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    Status: Physician
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    Joined: 02/27/2017
    Of course, you’ll want to verify with your CPA and possibly a tax attorney, since a lot of money is at stake.

    Click to expand…

    Absolutely agree! When we set up my husband’s practice structure in the late 90’s, we used a tax attorney to advise us on the appropriate structure for our needs.  The attorney was separate from our CPA which decreased the chance of advice being clouded by whatever would cause the most ongoing business to the CPA.  I would highly recommend to those of you considering setting up a non service LLC to do the same.  No need to set up multiple LLC’s if one could serve your purpose.  Ours allows us to do real estate investing if we wanted.  It also allowed us to do regular investing although the advantage of that is gone.  We set it up with myself and the kids as partners although the advantage of that appears to be gone also.  I am not sure that the deduction is unlimited by the AMT which also would effect how many or how complicated you make this idea.  I am waiting for clarification from the IRS as theirs is the only opinion that matters.  This dual pass-through structure was very advantageous to us 18 years ago, but less so recently. Happy Holidays!

    #91994 Reply
    Avatar Traveldoc 
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    Status: Physician
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    Joined: 02/06/2016

    I ran the numbers for 2017 and 2018. We expect our income and other numbers to be about the same:

    First we are hit by a 31k loss in SALT deduction  👿  , calculating on, the pass through deduction looks great, but then we suddenly get hit with a 13k increase in AMT. Not much of a win for us to say the least.

    #92095 Reply

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