Taking advantage of the new tax law to reduce taxes

 

The new tax law will affect everybody. Many individuals and companies will have opportunities to make planning decisions that could potentially reduce taxes.

Here’s an example:

For instance, let’s say you have an S Corp that has $500,000 of net income before any compensation to you, the 100% owner. Before the new tax act (Prior to tax year 2018) it would be best to pay yourself a reasonable salary and let the rest of the income flow to the bottom line. Being that both are taxable to you the salary  and the net income to you as S Corp income.

With the new tax law, the scenario will change and look more like this:

Using the example above.  You could pay yourself a reasonable $200,000 salary and let the $300,000 fall to the bottom line as net income. The new tax law states you would receive a 20% deduction on your personal tax return, or $60,000.  But wait! The House Committee reports suggest that you add back any owner compensation in computing the “Qualified Business Income” to the bottom line net income. The Senate version was silent on this. If the House version is interpreted by the IRS as the Act’s intent, the QBI would be the entire $500,000, giving you a deduction of $100,000 on your form 1040.

We will keep a close watch on this as IRS regulations and interpretations as they begin coming out, and will keep you updated. Don’t hesitate to call us anytime to discuss.