Section 199A Deduction Will Make You Convert to a C Corporation

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If you stop and think about it, the Section 199A deduction is a scam. Even taxpayers who are eligible to claim the full 20 percent deduction on QBI will incur a maximum effective rate of 26.9 percent, which is beneficial. However, the government is dangling a carrot before you, lowering the C Corporation rate to 21 percent. It’s time to do some thinking.

We have all been brainwashed that C Corporations are bad, because of double taxation. However, let’s think about this in a different way. In an S Corporation, we have our clients pay a reasonable salary and then take distributions. I am suggesting that we raise these salaries.

For instance, let’s say we have a client paying $100,000 in salary and taking $300,000 in distributions. We simply raise the salary to $275,000. Suppose this company has employees. We start a Safe Harbor 401(k) that we have to offer to the employees. For the owner they can put $18,500 through salary deferrals, provided they are less than 50 years of age. They can put those deferrals into the Roth portion of the 401(k) and then can match their salary by 25 percent, up to $55,000 in 2018.

For the employees, the company simply offers them the plan. For whatever reason, most employees don’t want to participate. For the ones who do, you only have to match 3 percent of their salary. At year end, if you like giving bonuses, there is a profit sharing piece that you can give to the employees.

As an S Corporation, a more than 2 percent shareholder cannot participate in fringe benefits. So, you get group health insurance and couple it with a Health Reimbursement Account (HRA). HRAs have unlimited contribution limits. However, what you do for yourself, you have to do for your employees, and you can put some restrictions on HRAs. For instance, if you are married and have five years of service, you can put $10,000 into the HRA and then go down from there. If you have children, you can pay $5,000 in dependent care benefits. Another thought is to retitle your car into the name of the corporation or LLC and purchase commercial insurance so that you can write off your company car. All of these fringes are tax deductible.

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About Craig W. Smalley, EA

Craig Smalley

Craig W. Smalley, MST, EA, has been in practice since 1994. He has been admitted to practice before the IRS as an enrolled agent and has a master's in taxation. He is well-versed in US tax law and US Tax Court cases. He specializes in taxation, entity structuring and restructuring, corporations, partnerships, and individual taxation, as well as representation before the IRS regarding negotiations, audits, and appeals. In his many years of practice, he has been exposed to a variety of businesses and has an excellent knowledge of most industries. He is the CEO and co-founder of CWSEAPA PLLC and Tax Crisis Center LLC; both business have locations in Florida, Delaware, and Nevada. Craig is the current Google small business accounting advisor for the Google Small Business Community. He is a contributor to AccountingWEB and Accounting Today, and has had 12 books published on various topics in taxation. His articles have also been featured in the Chicago Tribune, New York Times, Yahoo Finance, Nasdaq, and several other newspapers, periodicals, and magazines. He has been interviewed and been a featured guest on many radio shows and podcasts. Finally, he is the co-host of Tax Avoidance is Legal, which is a nationally broadcast weekly Internet radio show.

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Jun 1st 2018 14:04

Craig,

On your Safe Harbor example above, if the 401k matches the owner salary 25 percent, isn’t that same option of 25 percent match open to all employees (not just the 3 percent)?

Thank you!

Frank

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