Assumptions (You may assume):

The taxpayer has no wages paid or investment in depreciable assets (i.e., the floor does not apply so the QBI is zero)

The taxpayer claimed the standard deduction.

Notes:

The phase-out of the QBI deduction varies due to filing status.

* Reference

Pence Company operates a commerical business using the cash method of accounting and the calendar year. Business income minus business expenses other than owners' salaries and benefits is $500,000 Owner compensation is estimated to be $150,000. These items can be varied in the spreadsheet: Assume that the net income minus the entity tax is distributed to the owners. Net business income Owner's compensation Owner's benefits Individual tax rate (flat tax) $ 500,000 $ 150,000 $ 40,000 22% Entity Comarison Sole s Regular Proprietor Corporation Corporation Net income before tax, owners' salary and benefits Owner compensation Owner benefits--Medical insruance and retirement contributions Entity tax $ 500,000 S 500,000 $ 500,000 $ 150,000 $ 150,000 $ 150,000 $ 40,000 $ 40,000 $40,000 QBI deduction (if applicable) Taxable income to owners: Tax to owners--flow through (if applicable) Tax to owners-- dividend at 20% (if applicable) FICA tax on salary (if applicable) Self-employment tax (if applicable) Cash remaining Sole Proprietorship Not an entity, files Schedule C General Partnerships Limited Partnership Limited Liability Partnership (LLP) Limited Liability Company (LLC) Corporation Taxed as a partnership, can Check-the-box to be taxed as a corporation Taxed as a partnership, can Check-the-box to be taxed as a corporation Taxed as a partnership, can Check-the-box to be taxed as a corporation Taxed as a sole proprietorship or partnership, can Check-the-box to be taxed as a corporation Check-the-box Regulations allow any partnership to elect to be treated as a corporation Pass-thru Entities (PTES)- Sole Proprietorship Regular Corporation Partnership s Corporation Profits and losses flow thru Profits and losses flow thru Profits and losses flow thru Profits and losses are taxed Self-employment tax Self-employment tax Except for LIMITED partners Limited benefits # No self-employment tax Salaries are subject to FICA Limited benefits, >2% stock* No self-employment tax Salaries are subject to FICA Benefits (including meals and lodging) Limited benefits # QBI Deduction--Section 199A QBI Deduction --Section 199A QBI Deduction--Section 199A Non-tax legal characteristics Limited liability if LLC Otherwise NOT Non-tax legal characteristics Non-tax legal characteristics Limited liability if LLP, LLC Limited liability Not for general partnership Non-tax legal characteristics Limited liability Ability to raise capital Capital transactions generally Capital transactions generally Capital transactions generally tax-free taxable, but no double tax taxable, with double tax * Medical is ok (corporation takes a deduction, employee has income, shareholder/employee gets a deduction), others may be limited, no meals and lodging. # Essentially, only medical (deduction for AGI) Qualified Business Income (QBI) Deduction Basic deduction is 20% of QBI Unlimited for taxpayers with taxable income before the QBI Deduction of $157,500 or less; $315,000, for marrieds The basic deduction is phased down over $50,000; $100,000 for marrieds However, the phase-out is limited based on the wage and capital investment limits The wage limit is 50% of W-2 wages The wage and capital limit is 25% of W-2 wages + 2% of capital investment The wage and capital limits are pahsed-out for professional service businesses and other businesses involving the value of personal activities. If I am single and a financial planner with business income of $100,000 My taxable income before the QBI deduction is $155,000 My QBI deduction is $20,000 Before 1981 1981 - 1986 1988- 2017 now Top corporate rate 48.0% 46.0% 34.0% 35.0% 21.0% Top individual rate 70.0% 50.0% 28.0% 39.6% 37.0% Tendencies (Selected): Switch status (S corporation, partnership) to regular corporation due to 21% rate; still use generous fringe benefits for employee-shareholders. Re-evaluate employee-shareholder salaries and benefits. Switch worker status from W-2 income to Independent contractor (but you must consider the self-employment tax v. FICA) Etc. Pence Company operates a commerical business using the cash method of accounting and the calendar year. Business income minus business expenses other than owners' salaries and benefits is $500,000 Owner compensation is estimated to be $150,000. These items can be varied in the spreadsheet: Assume that the net income minus the entity tax is distributed to the owners. Net business income Owner's compensation Owner's benefits Individual tax rate (flat tax) $ 500,000 $ 150,000 $ 40,000 22% Entity Comarison Sole s Regular Proprietor Corporation Corporation Net income before tax, owners' salary and benefits Owner compensation Owner benefits--Medical insruance and retirement contributions Entity tax $ 500,000 S 500,000 $ 500,000 $ 150,000 $ 150,000 $ 150,000 $ 40,000 $ 40,000 $40,000 QBI deduction (if applicable) Taxable income to owners: Tax to owners--flow through (if applicable) Tax to owners-- dividend at 20% (if applicable) FICA tax on salary (if applicable) Self-employment tax (if applicable) Cash remaining Sole Proprietorship Not an entity, files Schedule C General Partnerships Limited Partnership Limited Liability Partnership (LLP) Limited Liability Company (LLC) Corporation Taxed as a partnership, can Check-the-box to be taxed as a corporation Taxed as a partnership, can Check-the-box to be taxed as a corporation Taxed as a partnership, can Check-the-box to be taxed as a corporation Taxed as a sole proprietorship or partnership, can Check-the-box to be taxed as a corporation Check-the-box Regulations allow any partnership to elect to be treated as a corporation Pass-thru Entities (PTES)- Sole Proprietorship Regular Corporation Partnership s Corporation Profits and losses flow thru Profits and losses flow thru Profits and losses flow thru Profits and losses are taxed Self-employment tax Self-employment tax Except for LIMITED partners Limited benefits # No self-employment tax Salaries are subject to FICA Limited benefits, >2% stock* No self-employment tax Salaries are subject to FICA Benefits (including meals and lodging) Limited benefits # QBI Deduction--Section 199A QBI Deduction --Section 199A QBI Deduction--Section 199A Non-tax legal characteristics Limited liability if LLC Otherwise NOT Non-tax legal characteristics Non-tax legal characteristics Limited liability if LLP, LLC Limited liability Not for general partnership Non-tax legal characteristics Limited liability Ability to raise capital Capital transactions generally Capital transactions generally Capital transactions generally tax-free taxable, but no double tax taxable, with double tax * Medical is ok (corporation takes a deduction, employee has income, shareholder/employee gets a deduction), others may be limited, no meals and lodging. # Essentially, only medical (deduction for AGI) Qualified Business Income (QBI) Deduction Basic deduction is 20% of QBI Unlimited for taxpayers with taxable income before the QBI Deduction of $157,500 or less; $315,000, for marrieds The basic deduction is phased down over $50,000; $100,000 for marrieds However, the phase-out is limited based on the wage and capital investment limits The wage limit is 50% of W-2 wages The wage and capital limit is 25% of W-2 wages + 2% of capital investment The wage and capital limits are pahsed-out for professional service businesses and other businesses involving the value of personal activities. If I am single and a financial planner with business income of $100,000 My taxable income before the QBI deduction is $155,000 My QBI deduction is $20,000 Before 1981 1981 - 1986 1988- 2017 now Top corporate rate 48.0% 46.0% 34.0% 35.0% 21.0% Top individual rate 70.0% 50.0% 28.0% 39.6% 37.0% Tendencies (Selected): Switch status (S corporation, partnership) to regular corporation due to 21% rate; still use generous fringe benefits for employee-shareholders. Re-evaluate employee-shareholder salaries and benefits. Switch worker status from W-2 income to Independent contractor (but you must consider the self-employment tax v. FICA) Etc