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S corp QBI question

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  • Avatar cellingson 
    Participant
    Status: Physician
    Posts: 5
    Joined: 03/11/2019
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    Quick question and first time poster.

     

    I am about 2 years out of residency and work as an independent contractor. I set up as a single owner/employee S -corp at the recommendations of my CPA. My company earned about $380k last year. When I set up the S-corp the idea was to save the 2. 9% social security tax on earnings over 130k. While this could have been achieved being an LLC and taxed like an S-corp the thought process at the time was, why not just have the real thing. Now this year with the QBI my accountant noted a significant tax savings and is concerned. He thinks that I should become an LLC because I am now at a higher risk of being audited and he isn’t quite sure that my business would qualify as an S-corp since I am the only employee.

     

    If I switch to an LLC and elect to be taxed as an s-corp, will I lose some of the QBI as my taxable income will be over $315k and I expect it to continue to rise into the $450k range in a few years?

     

    Thoughts?

    #197472 Reply
    Avatar Peds 
    Participant
    Status: Physician
    Posts: 3010
    Joined: 01/08/2016
    on earnings over 130k.

    Click to expand…

    are you a pediatrician, cause otherwise thats a low salary anyways which might raise flags….

    #197530 Reply
    Liked by spiritrider
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 6912
    Joined: 01/09/2016

    HUH?!?!? I had to read your post 3 times to make sure I wasn’t seeing things.

    If it were possible for you to switch to LLC to be taxed as an s-corp, the results would be no different than they are now. However, if you move to an LLC, you will have to wait 5 years to elect S-status again. You elected S-status the first time, it was just your corporation electing instead of an LLC.

    When I set up the S-corp the idea was to save the 2. 9% social security tax on earnings over 130k.

    Click to expand…

    You are saving only half of that.

    Now this year with the QBI my accountant noted a significant tax savings and is concerned.

    Click to expand…

    Are you sure you understood him correctly? Most CPAs would rejoice with you. You’re saying he wants you to pay MORE taxes?

    He thinks that I should become an LLC because I am now at a higher risk of being audited and he isn’t quite sure that my business would qualify as an S-corp since I am the only employee.

    Are you sure you understood him correctly? Prob most of our s-corp clients have only 1 employee. With all due respect, how much experience does this guy have?

    If I switch to an LLC and elect to be taxed as an s-corp, will I lose some of the QBI as my taxable income will be over $315k and I expect it to continue to rise into the $450k range in a few years?

    Click to expand…

    Your taxable income will be the same under either form (if it were even possible to make the change without waiting 5 yrs).

    Welcome to the forum! I think you’re in the right place.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #197533 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1510
    Joined: 02/01/2016

    I agree with Johanna. Either you misunderstood this CPA or they are not qualified to provide small business tax services. A significant percentage of S-Corps consist of only a single shareholder-employee. An LLC is a state chartered business entity and has nothing to do with your federal tax status. As pointed out by @peds, what will present an S-Corp audit risk is paying yourself an unreasonably low compensation.

    As pointed out an S-Corp shareholder-employee’s taxable income includes both their W-2 wages and distributions. You would have virtually the same taxable income regardless whether you are an S-Corp or a sole proprietor. The QBI taxable income phase out would impact both entity types equally.

    An S-Corp will likely have a substantially smaller QBI deduction. Their QBI is limited to the S-Corp’s distributions – deductible employer retirement plan contributions. While a sole proprietor’s QBI is their earned income (business profit – 1/2 SE tax) – deductible employee and employer retirement plan contributions and any SE health insurance deduction.

    For some people it may be advantageous to dissolve the S-Corp if the larger self-employed QBI deduction offsets the increased SE taxes over the current FICA. However, if your income phases you out of the QBI deduction. As pointed out, you can not create a new S-Corp for 5-years after dissolving one.

    Are you married? If not you are way over the taxable income range to receive a QBI deduction. If you are, the taxable income is based on your MFJ taxable income.

    #197564 Reply
    Avatar cellingson 
    Participant
    Status: Physician
    Posts: 5
    Joined: 03/11/2019

    Thanks everyone

    I am the first 1099 doctor my CPA has done taxes for and he has admitted he has minimal experience. But he is a trustworthy guy and so far I like him.  I think he was worried that an audit would be a higher risk as an S-corp then an LLC. But it sounds like that functioning as an s-corp itself is not the risk.

    Yes I am a pediatrician. When I set up the S corp I wasn’t sure what my take would be and we estimated too low. I saw significant volume of distributions last year and plan to adjust my salary this year accordingly.

    I thought QBI was based on W2 earnings. I didn’t realize it was based on taxable income.

    Spiraltrider. If I understand you correctly. An LLC will phase out of a QBI easier then an S-corp since the QBI of an LLC is calculated on taxable income while the QBI of an S-corp is calculated on distributions?

     

     

     

    #197637 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1510
    Joined: 02/01/2016

    You are still misunderstanding. Go back and re-read my post again. Then for emphasis.

    A sole proprietor and S-Corp are both pass-thru businesses and all taxable income passes thru to the taxpayer. The QBI phaseout is based on the taxable income of the taxpayer and not the business. I repeat again they will both be phased out equally.

    A sole proprietor’s base QBI before reductions is their net profit. While an S-Corp shareholder-employee’s QBI before reductions is limited to their distributions.

    Stop bringing the issue of an LLC into the discussion, it is irrelevant.

    #197646 Reply
    Faithful Steward Faithful Steward 
    Participant
    Status: Financial Advisor, Small Business Owner
    Posts: 260
    Joined: 06/12/2017
    I am the first 1099 doctor my CPA has done taxes for and he has admitted he has minimal experience. But he is a trustworthy guy and so far I like him.

    Click to expand…

    Trustworthiness without competence is not particularly beneficial. I think you might need to find a new CPA that has experience with 1099 physicians.

    Michael Peterson, CFP® | Faithful Steward Wealth Advisors
    http://www.fswealthadvisors.com | (717) 496-0900

    #197758 Reply

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