Last December, President Trump signed into law a new tax code – The Tax Cuts and Jobs Act. This Act is the biggest comprehensive change to the tax laws since 1986. Section 199A of the Act provides a 20% deduction of the combined qualified business income, or net profits, for owners of sole proprietorships, S corporations, or partnerships whose principal asset is the reputation or skill of one or more of its employees or owners (for example, doctors, lawyers, and accountants).
Unfortunately, the 20% pass-through deduction phases out for single taxpayers whose taxable income is greater than $157,500 and married taxpayers whose taxable income is greater $315,000. Section 199A’s tax benefits cut off completely when a single taxpayer earns over $207,500 of taxable income and a married taxpayer earns over $415,000 of taxable income.
Below are four quick tips on how to maintain an income below the applicable threshold so that you can meet Section 199A’s 20% pass-through deduction and save big:
- Hire your kids
Each child can now earn up to $12,000 a year without paying any federal income taxes. By employing your kids through your practice and paying them the highest reasonable rate for their work, you can quickly and efficiently reduce your taxable income.
- Increase your rent or own your office building
The Act looks favorably upon rental income, so increase your rental payment for all real estate that you, your children, or your company own. In the alternative, buy your office building and own it in a pass-through entity. This would make the real estate entity a qualified trade or business, which will generate qualified business income and also qualify for the 20% deduction.
- Establish a management company (*but beware of strict anti-kickback laws)
For owners of larger companies with a significant amount of income, a management company may help you attain the 20% pass-through deduction. The newly-formed management company would handle billing, collection, and other administrative services at the highest reasonable rate.
Bonus tip for medical professionals:
- Create a separate lab or imaging business
Dental and medical practices often perform labs and imaging within the practice. Instead, create a new pass-through entity to perform labs and imaging and pay the new business the highest reasonable rate.
Disclaimer: This post it is not intended to provide legal advice.
Written by Attorney Megan Foosheé