New Law: The Truth About Pass-Thru Income

[jfoxcpacfp]

Finally, an article that explains as much as can be explained at the moment (before regulations are put into place) about calculating the new pass-through QBI tax deduction:

Tax Geek Tuesday: Making Sense Of The New '20% Qualified Business Income Deduction

[CM]

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[ENT Doc]

Holy ************************ that was a headache.  Wish he had presented it in a different manner.

[jfoxcpacfp]

Interesting the difference in perspective - I thought that was a great explanation, especially the examples. Should I presume it is too technical? Or not technical enough? Both of you strike me as having a higher financial IQ than most doctors.

[CM]

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[cgossage]

I agree. It’s the best article I’ve read on the subject. Thanks for sharing.

[DMFA]

I read it a few days ago. That guy's manic. Makes sense once you get past the bits of ridiculousness.

[pulmdoc]

It's a really excellent article. The two things I did not realize (for the TLDR folks) is that the W2 limitations for high earners phases in (which makes sense, otherwise there would be a cliff where 314,999 has more after tax income than 315,001) and that there is debate among tax professionals whether a small residential landlord would qualify for the deduction (I assumed they would automatically).

[ENT Doc]

Didn't like the Q&A format or organization in general. Thought it could have been presented (after the set-up in the beginning) more crisply. Even a flow diagram with questions would have been better.

[Lithium]

Agree with ENT Doc.  No reason to try to make something as dull as tax policy minutia a longform style piece - just get to the point.  A nuts and bolts breakdown with some examples (like typical WCI articles) is all I care to read.

[Dr. Mom]

Johanna-

I'd appreciate your take on the following:  For a doctor who is structured as an S-Corp and is below the 415K MFJ total phase out of taxable income, would the 20% deduction apply to both his/her wage income from the S-Corp which is reported on a W-2 and the dividend income from his/her S-Corp which is reported on a K-1?  I read the law the way this author did which is that the deduction does not apply to reasonable wages as it is excluded from QBI, so the deduction only applies to the dividend income from the S-Corp.  There has been much discussion on the forum and WCI's recent blog post that seems to differ in interpretation.  Curious if you have an opinion?  Either way we get a deduction and will just wait to how the IRS interprets it.  Frustrating to me that intelligent sources differ so much on this point which materially effects our long range planning.  Thanks for posting the article.  I found it last week.  It takes multiple reads to really sink in. In the end, it is still just his interpretation though.  Happy New Year!

[cgossage]

My reading of WCI’s post and the article mentioned above are both consistent in there discussion of the tax calculation. That is S-Corp salary isn’t eligible for the 20% deduction. Only the business income. Salary comes into play in that 50% of the S-Corp wages places a limit on the eligible 20% deduction.

[jfoxcpacfp]

>>Curious if you have an opinion?<<

QBI is the net "pass-through" income of the S-corp and does not include wages (i.e. this figure is net of the payment of wages). The s-corp does not necessarily have to pay out the "distributions" (dividends are typically paid by c-corps only except in very special circumstances for s-corps).

I have purposely not gotten into these discussions because it won't matter what I say at this point in the life of TCJA and I just don't have the time to speculate  :? . Plus I'm old enough to know that this is how all big pieces of legislation begin - a lot to sort out that was not originally defined. Will be interesting as unintended consequences pop up and are corrected (or, at least, changed to clarify the original text). But I think my understanding of the definition of QBI is accurate.

[jfoxcpacfp]

Addendum to the above:

1. The taxable income (net pass-through) can differ from the "distributable" net income and other adjustments come into play for calculating these figures so it's still not black and white.


2. Calculating the 20% for partnerships is even more intriguing since partners do not receive wages.

[Dr. Mom]

Thanks Johanna.  His article also bugged me that from the start he just crossed out the second half of the provision used to calculate the deduction and left it "for another day."  Really?  That rambling of an article to only cover half of the provision was frustrating.  I am curious to see the final IRS worksheet and their interpretation of the jargon.  Please keep us updated with any other articles that apply to the Pass-Thru Income that you think are good. Thanks again!