$157,500 and $315,000 Question

[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]

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]

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.

[kathyc2]

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

[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!