Author Topic: Sole proprietors should take another look at S corporation given Senate Tax Bill  (Read 776 times)

SeattleCPA

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Just a pre-year-end tax planning idea for folks...

People who have looked at the S corporation option before and decided not to go to the work may want to reconsider.

If the Senate version of the tax cut becomes the actual law in the end, the 23% deduction gets limited to 50% of the pass-through entity's wages. If you have a one person sole proprietorship with no employees, therefore, you don't get the tax break.

You can however set as an S corporation which will mean you pay some wages to yourself as the owner-employee.

Probably right way to do this is to form an LLC before year-end (maybe after the tax bill passes both House and Senate) and then make 2553 election as of 1/1/2018
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radram

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Posting to follow.  Love learning something new. Please update as bills change.

andysandp

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Just a pre-year-end tax planning idea for folks...

People who have looked at the S corporation option before and decided not to go to the work may want to reconsider.

If the Senate version of the tax cut becomes the actual law in the end, the 23% deduction gets limited to 50% of the pass-through entity's wages. If you have a one person sole proprietorship with no employees, therefore, you don't get the tax break.

You can however set as an S corporation which will mean you pay some wages to yourself as the owner-employee.

Probably right way to do this is to form an LLC before year-end (maybe after the tax bill passes both House and Senate) and then make 2553 election as of 1/1/2018

Can you clarify?

For Example

S-Corp where I'm the owner and only Employee.

My Wage as Employee- $35,000-  How is this taxed in the new way?
S-Corp Profits- $100,000-     How is this taxed in the new way?


I also read on CNN

"Prevent abuse of pass-through tax break: If the owner or partner in a pass-through also draws a salary from the business, that money would be subject to ordinary income tax rates.
But to prevent people from recharacterizing their wage income as business profits to get the benefit of the pass-through deduction, the Senate bill would automatically limit the deduction to half of the W-2 wages of the pass-through entity or its share to the individual taxpayer. The W-2 rule would not apply, however, if the filer's taxable income is under $500,000 if married, $250,000 if single."
« Last Edit: December 02, 2017, 12:33:36 PM by andysandp »

SeattleCPA

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This answers your question...

https://evergreensmallbusiness.com/sec-199a-qualified-business-income-deduction/

But basically while you potentially qualify for a roughly $23K deduction... your $35K of wages limit you to $17,500 deduction.
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tralfamadorian

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Thank you for the great blog post!

SeattleCPA

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The W-2 rule would not apply, however, if the filer's taxable income is under $500,000 if married, $250,000 if single."

That's correct. I actually missed that in my first nine readings of the Sec 199A stuff today. Sorry. BTW not joking about the nine readings...

This thread's subject matter now becomes much less urgent... it's urgent only for people with really high incomes (over $250K single and over $500K married).
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CoffeeRoyal

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Just a pre-year-end tax planning idea for folks...

Probably right way to do this is to form an LLC before year-end (maybe after the tax bill passes both House and Senate) and then make 2553 election as of 1/1/2018
I have already have an LLC. Never considered an S corp, but now you make we wonder (thanks!!!!). If I convert to a S corp do I need to do so before 1/1/2018 to benefit next tax year? I need to research this. PTF.

bacchi

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The W-2 rule would not apply, however, if the filer's taxable income is under $500,000 if married, $250,000 if single."

That's correct. I actually missed that in my first nine readings of the Sec 199A stuff today. Sorry. BTW not joking about the nine readings...

This thread's subject matter now becomes much less urgent... it's urgent only for people with really high incomes (over $250K single and over $500K married).

To clarify, it's now your understanding that any sole proprietor would qualify, even without an S-Corp? And the "specified business trade" exemption is below $250k for a single filer?

If so, this is a huge giveaway. There will be a lot of tax games to fit in under the $250k/500k limit.

SeattleCPA

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The W-2 rule would not apply, however, if the filer's taxable income is under $500,000 if married, $250,000 if single."

That's correct. I actually missed that in my first nine readings of the Sec 199A stuff today. Sorry. BTW not joking about the nine readings...

This thread's subject matter now becomes much less urgent... it's urgent only for people with really high incomes (over $250K single and over $500K married).

To clarify, it's now your understanding that any sole proprietor would qualify, even without an S-Corp? And the "specified business trade" exemption is below $250k for a single filer?

If so, this is a huge giveaway. There will be a lot of tax games to fit in under the $250k/500k limit.

Yes, that's how I read the bill. Keep in mind, though, that taxable income plugs into the deduction calculation a handful of places...

FIRST, the deduction percentage gets applied to lesser of your qualified business income (so the pass through income) or your taxable income adjusted for your net capital gains...

SECOND, if your taxable income exceeds those $250K/$500K limits, you lose some or even all of your deduction if you're in a "specified service trade or business"... basically that means that white collar profession service businesses and then performing artists and athletes may miss out.

THIRD, if your taxable income exceeds those $250K/$500K limits, your deduction can't be more than 50% of your W-2 wages... meaning a taxpayer with a sole proprietorship or an employee-less partnership may miss out too if the proprietors or partner's taxable income is high.

I provided examples at the aforementioned blog post...
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jpdx

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Assuming you are below the $250/500k limitation, I don't see how the new 23% deduction is more valuable to an S-Corp compared to a Partnership. Can you explain?

Also thank you for that blog post!

SeattleCPA

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Assuming you are below the $250/500k limitation, I don't see how the new 23% deduction is more valuable to an S-Corp compared to a Partnership. Can you explain?

Also thank you for that blog post!

I agree with you. I misspoke the first time I posted. Because I missed a paragraph in the statute.

To be clear, if you are under the $250K/$500K threshold, you don't need to worry about the W2 wages limit or the specified service business disqualification.
My blog Evergreen Small Business
My free downloadable ebook: Thirteen Word Retirement Plan