$157,500 and $315,000 Question

[DaveinTexas]

Only kidding about the Cheetos

Put down the Cheeto's. You don't want an orange keyboard!

My wife only buys organic chips; darn this health trend!!

You’re right. This new deduction will create many manipulation opportunities indeed. By the way, to assist with reasonable compensation, I got turned on to RCReports as of late; a good resource to assist the client in determining a reasonable salary. Not the end all be all, but at least this is an option as opposed to pulling a number from the ceiling!

[kathyc2]

Put down the Cheeto's. You don't want an orange keyboard!

[kathyc2]

There are going to be a lot of ways to game the system for an S corp. The way I see it is:

- S corp without employees other than S/H- benefit would be to have wages low and there fore more eligible for 20% if they are under threshold. If they are above the threshold it may work to increase W-2 to meet the 50% of W-2 wages limitation.

- S corp that has other employees sufficient to meet the 50% wage compared to pass through profits, I would think it's always going to be a tax advantage to keep S/H wages low.

- Then for S-corp's that own the business building personally or through a separate LLC, you would want to keep the rent high enough so that it always has a profit, or you are walking away from the 20%.

Like I said reasonable compensation takes on more importance. I for one hopes the IRS starts actually looking at it more to keep the sham preparers from telling people they can take unreasonably low salaries.

[DaveinTexas]

Yes, that’s right!

I think you were right the first time. Since he's over the threshold, the deduction would be limited to 50% of W-2 wages, or 18K in the example you used.

Yup, I wil definitely stop eating Cheetos whilst posting these comments!! You’re correct, above the phase out threshold, the W2 wage limit kicks in, regardless of the type of business.

So this law is designed to increase a “reasonable salary” and also to protect against these abuses (low salaries and high profit distributions). Funny how you can second guess yourself so easily with this new law. Time to make an Excel Spreadshet and put down the Cheetos!!

[kathyc2]

I think you were right the first time. Since he's over the threshold, the deduction would be limited to 50% of W-2 wages, or 18K in the example you used.

[DaveinTexas]

I knew I shouldn’t have been eating Cheetos and posting!

I think you have things reversed. The 20% reduction is NOT on salary (or Guaranteed Payments), it is on the pass-through income.

So in your example, the $36,000 salary could get a $100,000 reduction (based on $500,000 of pass-through income, and assuming the limitations did not restrict anything), and the $200,000 salary would only give a $60,000 reduction (based on $300,000 of pass-through income, and assuming the limitations did not restrict anything).

So increasing wages will decrease the 20% reduction. So this will encourage even more people to not tax reasonable salary.

You nailed it, you are most correct sir. My apologies, I was all mixed up there! I need a spreadsheet to keep this straight and if my head wasn’t attached, I’d need wood screws!!

[TaxGuyBill]

I wonder if part of the reasoning behind this law is to force S Corps (for shareholders with Taxable Income greater than the threshold) to pay Officer Compensation. Especially for those one man S Corps that are not Service Based (SSB). A guy that thinks he can get away with a $36,000 salary and another $500,000 in profit distributions will be limited to a measly $18,000 deduction. Where, if he increased his salary to say, $200,000, he could net a $60,000 deduction! Great way for the IRS to net more payroll taxes and he "might" be in better compliance. At some point, there will be a way to figure a break even point (tax savings from the deduction offset by the increase in payroll taxes).

Maybe there will be someone on this board that can create an Excel spreadsheet for this; kinda like the guy that came up with the spreadsheet to figure the affordability 8% for ACA....

I think you have things reversed. The 20% reduction is NOT on salary (or Guaranteed Payments), it is on the pass-through income.

So in your example, the $36,000 salary could get a $100,000 reduction (based on $500,000 of pass-through income, and assuming the limitations did not restrict anything), and the $200,000 salary would only give a $60,000 reduction (based on $300,000 of pass-through income, and assuming the limitations did not restrict anything).

So increasing wages will decrease the 20% reduction. So this will encourage even more people to not tax reasonable salary.

[DaveinTexas]

Good Point

I have to wonder to what extent IRS will crack down on reasonable salary. With 199A, taking a salary that is less than reasonable will not only effect FICA tax but also FIT. I got a chuckle from the example of the S-corp accountant without employees taking a 50K salary and 100K pass through income. Yeah, that 50K is reasonable. Not!

I wonder if part of the reasoning behind this law is to force S Corps (for shareholders with Taxable Income greater than the threshold) to pay Officer Compensation. Especially for those one man S Corps that are not Service Based (SSB). A guy that thinks he can get away with a $36,000 salary and another $500,000 in profit distributions will be limited to a measly $18,000 deduction. Where, if he increased his salary to say, $200,000, he could net a $60,000 deduction! Great way for the IRS to net more payroll taxes and he "might" be in better compliance. At some point, there will be a way to figure a break even point (tax savings from the deduction offset by the increase in payroll taxes).

Maybe there will be someone on this board that can create an Excel spreadsheet for this; kinda like the guy that came up with the spreadsheet to figure the affordability 8% for ACA....

[Twin Turbo Z]

The state of Ohio has had this type of "business deduction" for several years. Here in Ohio one can deduct up to $250,000 of business income for single and married filers. And $125,000 for MFS filers. This includes rental income too. A hell of a deal. Just hope the next Governor doesn't decide to scrap the credit. Thank you John Kasich !!!

[kathyc2]

Wow! How do these folks move so quick on this stuff? https://www.watsoncpagroup.com/secti...SAAEgKpQvD_BwE

Handy information indeed.

I have to wonder to what extent IRS will crack down on reasonable salary. With 199A, taking a salary that is less than reasonable will not only effect FICA tax but also FIT. I got a chuckle from the example of the S-corp accountant without employees taking a 50K salary and 100K pass through income. Yeah, that 50K is reasonable. Not!

[DaveinTexas]

They most certainly are included

Yeah, I've now heard some credible sources assert that rental activities are included.

Wow! How do these folks move so quick on this stuff? https://www.watsoncpagroup.com/secti...SAAEgKpQvD_BwE

Handy information indeed.

[TaxGuyBill]

Yeah, I've now heard some credible sources assert that rental activities are included.

[DaveinTexas]

2.5% and the Bob Corker kickback

This is known as the Bob Corker kickback. The 2.5% of depreciable assets provision was added at the last minute to save real estate folks quite a bit of money. If the undadjusted basis of a client's real estate portfolio is say, $10MM, and the flow through income (all 1040, Schedule E rentals) is $500,000, the deduction under this provision would be the lesser of $100,000 or $250,000.

Not bad for not paying a single dollar in W2 wages. In fact, if this provision weren't enacted, the deduction would've been $0.

I can't find the article at the moment, but someone said this tweak in the bill might save Corker hundreds of thousands in tax. Left untouched, he would've received nothing. Sometimes it pays to play the game.

[TaxGuyBill]

I'm undecided. I had originally thought "no", and was surprised when I had read that example on that CPA's website. However, I am now leaning slightly towards "yes".

A few thoughts:

(1) As a general rule, most tax preparers do NOT send out 1099-MISCs for services for rental properties. That means we have not been treating it as a "trade or business". If it is a "trade or business", then 1099-MISCs would be required.
(2) The questions on Schedule E and the Instructions do seem to indicate that 1099s are "generally" required. That would mean it would be a "trade or business".
(3) The 3.8% NIIT from §1411 further confuses the matter.
(4) Letter ruling 9840026 is interesting. In part, it says "the rental of even a single property may constitute a trade or business under various provisions of the Code."
(5) If a Single rental property was not a "trade or business", what about multiple properties? What about Real Estate Professionals? What about those who meet Material Participation?


I really, really hope the IRS or Treasury gives clear, definite direction in this matter.

[kathyc2]

NYEA:

Even though rental income is not normally what we think of as a "trade or business", I'm guessing the regs will allow it. The guess is based mainly on the REIT income qualifying.