By Julia Brufke Wenger CFP & CFC
There are many oxymorons. Some that come to mind are virtual reality, living dead, short wait and now we can add a new one to the list- tax simplification! There is nothing simple about the new tax laws. These seismic tax changes resulting from the 2017 Tax Cuts and Jobs Act are on the mind of every business owner. Don’t be naive, you will be impacted, hopefully for the better, but developing the best strategy possible for 2018 NOW is important and will provide you with the best results.
For those with pass through entities including sole proprietors, LLCs and Subchapter S-Corporations, the overall impact will be a blended result of your personal tax return and pass through income. Let’s highlight the most important concepts affecting your pass through business income.
Married taxpayers with taxable income of $315,000 or below, and single taxpayers at $157500 or below will receive a full deduction of 20% based on what is called “qualified business income” or “QBI”. Basically, in most cases, this means you will reduce your income by 20% of your net income from your business activities. This is a nice new benefit or the legislation for those in that income range.
This deduction is subject to phase outs. Married taxpayers with taxable income of between $315001 and $415000 or single taxpayers with income of $157501 to $207500 will receive a portion of the reduction. In other words, the 20% deduction will be reduced as your income reaches the top amount. Maybe you want to think about ways to reduce income. Should you put a child on the payroll of implement a defined benefit plan? These are a few of the possible actions that could preserve and increase your credit.
If your income exceeds these amounts the deduction may still be available but it is calculated differently. The credit is based on 50% of what you pay in wages or 25% of wages plus 2.5% of unadjusted basis (that is the value of an asset prior to depreciation). If you think about it, this is Congress’s way of encouraging business owners to hire people and invest in assets because your deduction will be a direct result of your payroll and investment in capital. Simple, right?
One more consideration, are you defined as a personal service corporation? If so, there is no deduction after you reach $315000 of taxable income for single individuals and $415000 for married taxpayers. Some examples of a personal service fields include health, law, accounting, performing arts, consulting, financial services to name a few.
If you are a high earning, you may want to look at opening a C Corporation. Top corporate tax rates are 21%- down form 35%. This is not a stand alone decision however because there are taxes including state specific taxes that may make this scenario look better that it really is.
What should you do? Planning tools are now available and skilled tax professionals can model different scenarios to determine the best way to position businesses and individual taxpayers. Because there are so many moving parts it is impossible to generalize on the best way to position all people. My best advice is to reevaluate your corporate structure, look for opportunities and get the ball rolling the first half of this year.
Julia Brufke Wenger is a Certified Financial Planner, Chartered Financial Consultant, has her Masters Degree in Financial Services and is an Enrolled Agent licensed to practice before the IRS. She is currently a partner at Bala Financial Group, Inc. and is owner and CEO of Phoenix Tax Consultants LLC. Her firm works with individuals and businesses to provide tax preparation, development of tax minimization strategies, and all aspects of planning include retirement plan design, succession planning and individual financial planning. She founded her firm 25 years ago and works with clients in Philadelphia and surrounding suburbs. She is a contributor to publications including The Wall Street Journal, Advisor Today and Money Matters. She can be contact for consultations at 610 933-3507.