Tax reform created a new 20% tax deduction for select pass-through entities. Will your business operation create the 20% tax deduction for you?
If not, and if that is due to too much income and a lack of (a) wages and/or (b) depreciable property, a switch to the S corporation as your choice of business entity may produce the tax savings you are looking for.
To qualify for the full 20% deduction on your qualified business income under new tax code Section 199A, you need defined taxable income of less than $157,500 (single) or $315,000 (married).
If your taxable income is greater than $207,500 (single) or $415,000 (married), you don’t qualify for the Section 199A deduction unless you have wages or property.
Example. Sam is single, not in the out-of-favor specified service trade or business group (doctors, lawyers, consultants, etc.), operates a sole proprietorship that generates $400,000 of proprietorship net income, and has taxable income of $370,000. In this condition, Sam’s 20 percent Section 199A tax deduction is zero.
Here’s how the S corporation helps Sam. The S corporation pays Sam a reasonable salary, let’s say that’s $100,000. With this salary, Sam pockets
- $10,871 on his self-employment taxes, and
- $17,500 on his new-found 20 percent deduction under new tax code Section 199A.
ABOUT PROVIDENT CPA & BUSINESS ADVISORS
Winning the game of chess and being successful in business share something in common: Both require strategic thinking and diligent execution. Provident CPA & Business Advisors serves successful professionals, entrepreneurs, and investors who want to get more out of their business and work less, so they can make a positive impact in their lives and communities. Typically, our clients reduce their taxes by 20 percent or more and create tax-free wealth for life and win the chess game of business. If you want more information, follow us on social media.
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