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Pass Thru Deduction Explained

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  • Avatar docnews 
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    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.

    Click to expand…

    See conversation above. It appears AMT does not involve adding this pass thru deduction back.

    #92100 Reply
    Avatar No One 
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    is consulting for pharma and insurance companies as a physician considered being part of the “service” industry?

     

    #92512 Reply
    Avatar docnews 
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    is consulting for pharma and insurance companies as a physician considered being part of the “service” industry?

     

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    All consulting is a service industry. The standard definition: does the income rely mainly on a person’s reputation and skill.

    #92518 Reply
    Avatar No One 
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    is consulting for pharma and insurance companies as a physician considered being part of the “service” industry?

     

    Click to expand…

    All consulting is a service industry. The standard definition: does the income rely mainly on a person’s reputation and skill.

    Click to expand…

    I figured but I wanted to clarify. Thanks for that info.

     

    Basic question :  I currently receive a W2 and also get 1099 income, for which I have a LLC setup as a partnership.  Incomes combined are north of $800K.  Last year, let’s assume 1099 was 300K and business deductions were 100K. Am I now not able to continue with this setup and deduct my usual business deductions from 1099?

     

     

    #92541 Reply
    Avatar spencerhawkins 
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    I believe you can still take your standard business deductions, but you won’t be eligible for the new 20% pass through deduction on the LLC unless you strip all service related income into a separate LLC. If your LLC income is mostly consulting/service based, you’re not going to see any benefits from the new pass through deduction.

    #92542 Reply
    Liked by docnews
    Avatar trackjunke 
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    Another question….looking at Section 199A regarding what constitutes a “qualified business income” it apparently does not allow guaranteed payments.  Our group is set up as a partnership and we are paid on a K1 with all income coming from guaranteed payments on that K1.  It would appear this makes us unable to take advantage of the 20% pass thru deduction.  Any suggestions on how to restructure so that we could take advantage of this?

    #92545 Reply
    Avatar Caligas 
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    I’m also trying to figure out the k1 vs w2 issue. We are an S Corp, we pay out 100k as distributions, the rest is w-2 income. Assuming we stay under $315k taxable, do we get the deduction on both the k-1 part and the w2 portion?

    #92547 Reply
    Avatar docnews 
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    I’m also trying to figure out the k1 vs w2 issue. We are an S Corp, we pay out 100k as distributions, the rest is w-2 income. Assuming we stay under $315k taxable, do we get the deduction on both the k-1 part and the w2 portion?

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    End of page 32 to beginning of 33 is pretty clear in excluding guaranteed payments from the qualified business income definition. This same section also excludes reasonable compensation. I’m not sure if these exceptions are excepted by the service industry exception. It would be hard to argue that a sole proprietorship who has no W2 did not have some reasonable salary “mixed in” their business income on the Schedule C but I doubt the IRS is going to piece that out. So it might be reasonable to think under this taxable income there might be more flexibility to the QBI definition. I assume though that you used an accountant to setup the s corp so I’d ask them to officially clarify this issue. I’ll be watching for IRS clarification as well.

    #92573 Reply
    Avatar ablystra 
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    I’ve been reading and re-reading this thread as well as the POF post/Kitces article about the pass thru deduction.

    As I sit currently, I am a partner in a large group, paid via K-1.  I’ve done minimal 1099 work in the past (hospital committees, etc…) but this last year did not have any 1099 income, only K-1.  I’ve been right around 330-340k annually.  We are MFJ, we max out 401k/HSA, after deducting SALT, mortgage interest, health insurance premiums, etc…,we will easily be below the 315k, in fact last yr AGI was 249k.

    As it stands currently, it seems like I would benefit from the pass thru deduction (20%), however, I am not currently self-incorporated.  I have been toying with setting up an S corp for the next year for this reason, to benefit from the deduction.  Our parternship will allow me to self incorporate (S corp), but must be done by January 5th, otherwise will have to wait until 2019.

    By my calculations using last yrs numbers:

    $249,000 x 20% = 49,800

    49,800 x 24% = $11,952 potential tax savings.

    Seems like a no brainer right?  I have to be setup as S corp to get this benefit?

     

    #92863 Reply
    Avatar pulmdoc 
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    I’ve been reading and re-reading this thread as well as the POF post/Kitces article about the pass thru deduction.

    As I sit currently, I am a partner in a large group, paid via K-1.  I’ve done minimal 1099 work in the past (hospital committees, etc…) but this last year did not have any 1099 income, only K-1.  I’ve been right around 330-340k annually.  We are MFJ, we max out 401k/HSA, after deducting SALT, mortgage interest, health insurance premiums, etc…,we will easily be below the 315k, in fact last yr AGI was 249k.

    As it stands currently, it seems like I would benefit from the pass thru deduction (20%), however, I am not currently self-incorporated.  I have been toying with setting up an S corp for the next year for this reason, to benefit from the deduction.  Our parternship will allow me to self incorporate (S corp), but must be done by January 5th, otherwise will have to wait until 2019.

    By my calculations using last yrs numbers:

    $249,000 x 20% = 49,800

    49,800 x 24% = $11,952 potential tax savings.

    Seems like a no brainer right?  I have to be setup as S corp to get this benefit?

     

    Click to expand…

    If you are already paid via K1 and your taxable income is <$315k MFJ, there’s nothing else you need to do to claim the deduction AFAIK.

    #92949 Reply
    Avatar beagler 
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    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.

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    I think I’m wrong again. Article from Forbes:

    http://flip.it/oviq5h

    Basically w2 for s-Corp owner probably not deductible? I’ll wait for IRS to clarify.

     

     

    Solo Internist, Midwest

    #93236 Reply
    Avatar docnews 
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    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.

    Click to expand…

    I think I’m wrong again. Article from Forbes:

    http://flip.it/oviq5h

    Basically w2 for s-Corp owner probably not deductible? I’ll wait for IRS to clarify.

     

     

    Click to expand…

    Very interesting LONG article. I am starting to see consensus on other articles that the 50% w2 limit is limited by the taxable income limit. So therefore if your income is >$415k you use the lesser of 20% of taxable income or 20% of qualified business income.

    Then the topic at hand is the QBI definition: does it exclude s corp w2 wages / reasonable compensation even for those below the taxable income limit? If so what does this mean for a sole proprietorship’s QBI? Do they also need to make up a reasonable compensation? If not, couldn’t all single person s corps dissolve to get this deduction? Please let us know IRS!

     

    #93283 Reply
    Liked by beagler
    Kkhanmd Kkhanmd 
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    One more question, we are a C -corp. Income around 450-480K. If we give ourselves a W2 of 315K and the rest in dividends, will those dividends be charged at 20%, my marginal rate or (21% + 3.8% + 20% = 44.8%) ? Is dividends in C corp a pass through income?

    #93368 Reply
    PhysicianOnFIRE PhysicianOnFIRE 
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    I’m glad we can now file our taxes on a postcard.  🙁

    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.

    #93383 Reply
    Avatar janettebournes 
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    One more question, we are a C -corp. Income around 450-480K. If we give ourselves a W2 of 315K and the rest in dividends, will those dividends be charged at 20%, my marginal rate or (21% + 3.8% + 20% = 44.8%) ? Is dividends in C corp a pass through income?

    Click to expand…

    My limited understanding is that you would be paying 23.8% (20% + 3.8%) on your dividends.

    480k – 100.8k (21%) – 315k (W2) = $64200 in dividends

    I was also under the impression that dividends in a c Corp are NOT pass thru income

    Perhaps someone with a better understanding could clarify for us?

    #93385 Reply

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