How to Avoid Losing the 20% QBI Deduction on Pass-Through Income (New Tax Law)

The new tax law added a limit to the income owners of many kinds of professional corporations (like many medical practices) can earn and still keep the 20% qualified business income deduction this year. For those filing jointly, the phaseout of eligibility starts at $315,000 and ends completely at $415,000 in 2018 income. Losing that deduction will cost them tens of thousands in extra income tax, so many are asking how to avoid that.

They need to lower their taxable income and two ways to do that are to:

  1. Start a cash balance plan and contribute as much as $300,000 a year, sheltering the money in a qualified retirement plan and reporting less income for taxes
  2. If the 401(k) profit sharing plan is not age-weighted with respect to profit sharing contributions, the plan can be modified to allow that. As in the cash balance plan, if there is a significant age difference between owners and staff, the vast majority of the contribution will go to the owners

Of the two, the cash balance plan can be more more efficient in how much goes to the owners, maybe as much as 95%, but the change to the 401(k) is much quicker to do and the deadline for doing this in 2018 is either Sept. 15 or Oct. 15, depending on the structure of the business, so time is very short.

If you’re interested, let me know immediately so we can try to beat the deadline and save you or your partners a great deal of tax.