H2R CPA Blog

Will the new QBI tax deduction impact your retirement contribution?

by Kathy D. Sisler, CPA, CGMA
Before the Tax Cuts and Jobs Act, owners of pass-through entities and sole proprietors embraced the idea of a retirement plan for their employees, since it provided them with a tax deduction and permitted them to set aside retirement money for themselves. If you’re a professional firm, a retirement plan contribution might be an even better idea than before.
There’s been a lot of discussion around the new Qualified Business Income (QBI) tax deduction since the passage of the tax bill. But how does that impact your retirement plan if you are a pass-through business owner like an S-Corporation, an LLC or a sole proprietor? What if you are a specified service business?
The 20% deduction is limited in 2018 for owners with income greater than $315,000 (married) or $157,500 (single). Once income exceeds $415,000 (married) or $207,500 (single) the deduction is completely eliminated. Remember, if your income is under the threshold, you get the entire deduction, regardless if you are in a service industry or not. Making a retirement plan contribution can drive income down, allowing not only money to be set aside for your retirement, but driving your income under the threshold for the 20% deduction.
For example, Rob is 50 years old, married and is a partner in a service firm. His share of the profits are $375,000. By maxing out his 401(k) contribution and maximizing his profit sharing contribution of $60,000, his income drops to $315,000 and he is now entitled to a 20% QBI deduction of $63,000. Federal income tax on his taxable income is $43,299 instead of $66,468 computed without the 20% deduction. Rob has saved $23,169 in income tax, contributed $60,000 to his retirement and has reduced his taxable income by $93,232.
Members of firms with even higher profits might benefit from other types of plans which permit them to contribute larger amounts to their retirement. Of course, establishing a new plan entails time and money, but the savings could well outweigh the effort and cost.
There is just about one month left to establish a plan for 2018 and each person’s circumstances are unique, requiring some planning and decision making and a signed plan document before December 31st.

Contact H2R CPA at 412-391-2920 or team@h2rcpa.com if you have questions about your individual or business tax planning.