Pass Through Business - do you have one? Do I need one?

[Konza]

Given the proposed tax plan I'm curious:

 

1) Do you have a pass through business? If so, how do you use it?

2) Should others start one? how?

 

 

[VagabondMD]

Konza wrote:

Given the proposed tax plan I’m curious:

 

1) Do you have a pass through business? If so, how do you use it?

2) Should others start one? how?

 

 

Click to expand...

Here's an immediate disqualifier. If you and your spouse (MFJ) earn greater than $415k, STOP!

[Ronason]

What if I make 500K W2 as a 50% owner of an S-Corp, 300K of which is salary. And then 400K as an IC sole proprietor, another 75K in K1’s minus 160K put into 401K/CBP?

[PhysicianOnFIRE]

Ronason wrote:

What if I make 500K W2 as a 50% owner of an S-Corp, 300K of which is salary. And then 400K as an IC sole proprietor, another 75K in K1’s minus 160K put into 401K/CBP?

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Then you'll end up wealthy no matter what as long as you don't spend like a sailor on leave.

The deduction for clinical pass-through income phases out from a taxable income of $315,000 to $415,000. You're well beyond that.

[The White Coat Investor]

Vagabond MD wrote:

Konza wrote:

Given the proposed tax plan I’m curious:

 

1) Do you have a pass through business? If so, how do you use it?

2) Should others start one? how?

 

 

Click to expand…

Here’s an immediate disqualifier. If you and your spouse (MFJ) earn greater than $415k, STOP!

Click to expand...

Nonsense. That only applies to clinical income. If you have some other business, this can be a major deduction, even with a clinical income of $415K+.

As near as I can tell, we'll get a $150K+ deduction from this next year.

[VagabondMD]

The White Coat Investor wrote:

Vagabond MD wrote:

Konza wrote:

Given the proposed tax plan I’m curious:

 

1) Do you have a pass through business? If so, how do you use it?

2) Should others start one? how?

 

 

Click to expand…

Here’s an immediate disqualifier. If you and your spouse (MFJ) earn greater than $415k, STOP!

Click to expand…

Nonsense. That only applies to clinical income. If you have some other business, this can be a major deduction, even with a clinical income of $415K+.

As near as I can tell, we’ll get a $150K+ deduction from this next year.

Click to expand...

Okay, assuming that your pass through income is from something like a tool-and-dye manufacturing company, an architectural or engineering firm, a construction business, or even a blogging empire, yes, you can benefit from the pass through deduction. As I read it, if your pass through is from traditional medical/dental business income, those limits are in place.

[PhysicianOnFIRE]

Vagabond MD wrote:

As I read it, if your pass through is from traditional medical/dental business income, those limits are in place.

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That's my understanding. A "service business" is phased out at taxable income from $315,000 to $415,000.

[VagabondMD]

  PhysicianOnFIRE wrote:

Vagabond MD wrote:

As I read it, if your pass through is from traditional medical/dental business income, those limits are in place.

Click to expand…

That’s my understanding. A “service business” is phased out at taxable income from $315,000 to $415,000.

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Looks like we might need a pro/con on this topic, too. Actually, it is super confusing as written. :roll:

[Dr. Mom]

We have 2 pass through businesses.  My husband runs his practice as an S Corp so will be limited to the 315-415K phaseout here.  He plans to take a salary of 275K next year to be able to fully max his 401k.  We also own an LLC that passively holds all his ophthalmology equipment.  We pay rent to ourselves from the S Corp to use it.  Another practice in town rents a laser from it also.  The S Corp money that we can move to the LLC as rent is then considered passive and should get the full 20% deduction.  It flows to us on a K-1.  So, we will favor using this set up instead of dividends from the S Corp that would push us over 315K.  He has been wanting some new eye toys, so will be shopping in 2018.

[gulfcoastdoc]

So I’m super confused. I am organized as an S Corp and average about 500K yearly in gross business earnings. I am also employed by another hospital and have a W2 salary there. My question is does the phase out start after all other business deductions have been subtracted or is it from gross income? Also, any advise on what to do if I am unable to get earnings under 415K? Of note, I currently contribute max to both a 403b and 457b offered by employer as well as a sep. Would it make sense to stop contributing to employer plans and funnel those contributions to my sep to lower business income?

[Sergio Estavillo]

gulfcoastdoc wrote:

So I’m super confused. I am organized as an S Corp and average about 500K yearly in gross business earnings. I am also employed by another hospital and have a W2 salary there. My question is does the phase out start after all other business deductions have been subtracted or is it from gross income? Also, any advise on what to do if I am unable to get earnings under 415K? Of note, I currently contribute max to both a 403b and 457b offered by employer as well as a sep. Would it make sense to stop contributing to employer plans and funnel those contributions to my sep to lower business income?

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The phase out is based on taxable income (line item #43 of your personal returns).  If married and taxable income exceeds $415k, you would not be eligible for the Qualified Business Interest Deduction.

Specific to your circumstances, your taxable income would be your S Corp K-1 #1 plus W2 box minus HSA minus standard or itemized deductions.

[Bartl007]

I would think optical revenue could be separated as an LLC as well to further subdivide income for ophthalmology practices looking to find avenues for pass through income?

If I'm understanding it correctly, if you can find ways to separate physician/owner income into lots of smaller businesses, (Equipment LLC,building real estate LLC, optical LLC, ASC ownership LLC) those dollars do not count towards the individual taxpayers MFJ $315-415 phase-out cap? All of the above, in my estimation, would not be service related because the principal asset of the business is not tied to the “reputation or skill of 1 or more of its employees”.

At this point my understanding of the new rules is as clear as mud!

[spiritrider]

It doesn't matter how many business entities you set up. Eligibility is not based on individual businesses, but rather it is based on your personal taxable income i.e. Form 1040 line 43.

[Dr. Mom]

spiritrider wrote:

It doesn’t matter how many business entities you set up. Eligibility is not based on individual businesses, but rather it is based on your personal taxable income i.e. Form 1040 line 43.

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Can you please expound on this comment?  I understand the eligibility of a service business depends on the personal taxable income.  But, non-service businesses do not.

[Dr. Mom]

Bartl007 wrote:

If I’m understanding it correctly, if you can find ways to separate physician/owner income into lots of smaller businesses, (Equipment LLC,building real estate LLC, optical LLC, ASC ownership LLC) those dollars do not count towards the individual taxpayers MFJ $315-415 phase-out cap? All of the above, in my estimation, would not be service related because the principal asset of the business is not tied to the “reputation or skill of 1 or more of its employees”.

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My husband (ophthalmologist) disagreed about segregating out the optical.  To him it is a service business.  Rental and real estate businesses are different to our interpretation, anyway.  How much you segregate depends on your need for deductions.  The AMT limits the point of creating too many deductions.  For us, if his business W-2 income is truly deductible as pass through income, then the "equipment" LLC is not needed.  I read different interpretations of the legalese on that issue.