Congress passed a technical correction in the last quarter of 2018. We have now thoroughly digested the new law. The good news is that the IRS has begun to issue instructions about how the new deduction works.
Typically, the new deduction equals the lesser of 20% of your sole proprietorship profits or of your share of a partnership or S corporation’s profits–or 20% of your taxable income after any capital gains or losses.
With all of the technical corrections out of the way, self-employed doctors, as well as other Dental Business owners, want to make sure they’re maximizing their 199A deduction.
I always recommend that my clients always assume you get the deduction. Granted the law does state that every “health care” professional are/could be disqualified from using the 199A deduction. But what we have seen is mosts individuals qualify for some if not all of the deduction. If your taxable income is over $207,500 for an individual or $415,000 for a married taxpayer than you completely lose out on this deduction. NOTE: We are talking about taxable income, not gross income here.
How to Lower Your Gross Income
To determine your taxable income, you start with your total income. Then you need to deduct the Form 1040 page 1 deductions for self-employment taxes, alimony, pensions, health insurance and health savings accounts. These deductions, should/may approach and may exceed $75,000. Then you need to deduct either the standard deduction or the total of your Schedule A itemized deductions, including state and local taxes up to $10,000, charitable contributions, and mortgage interest. These deductions for a high-income self-employed taxpayer could easily run another $25,000+.
Updating your Firms Partnership Agreement
This is actually a must for your partnership. The qualified business income amount you use to calculate the 20% deduction only includes the business income amount shown on your K-1. You do not get a 199A deduction for any guaranteed payments you receive from the partnership.
For example, suppose your group practice produces per partner profits of $150,000. Further suppose that the partnership makes a $10,000-per-month guaranteed payment to each partner, or $120,000, over the course of the year.
In this case, the 199A deduction equals 20% of the $30,000 that’s leftover from the $150,000 in profits after the $120,000 of guaranteed payments. This means a $6,000 199A deduction and maybe $1800 in federal tax savings.
If we look at an example of where a partnership just skips the guaranteed payments and instead just distributes $10,000 each month to partners. In this case, the 199A deduction equals 20% of the full $150,000. This means a $30,000 199A deduction and maybe $14,000 to $17,000 in federal tax savings.
S-Corporation
Most Subchapter S elections should still make financial sense. This is one of the most common business mistakes business owners make is not having an “S” Corp. structure. In rare occasions revoking the “S” election could provide a larger 199A deduction. However, the growth of your business in the near term and your individual circumstances dictate what the best course of action is. If your CPA has not revisited this section, he needs to do so AS SOON AS POSSIBLE.