FYI on the QBI featuring Cash Balance Plans

FYI on the QBI featuring Cash Balance Plans

Tycor Benefit Administrators, Inc. Confidence in your plan FYI on the QBI featuring Cash Balance Plans Presented by: Patricia Hansen, QPA, ERPA Senior Pension Administrator May 16, 2019 850 Cassatt Road, Suite 310 Berwyn, PA 19312 610.251.0670 Agenda Qualified Business Income (QBI) PassThrough Deduction Cash Balance Plans Case Studies FYI on QBI Get your clients a slice

of that pie! Qualified Business Income; Code 199A Creation of New Deduction for PassThrough Entities Can deduct up to 20% of QBI Applies to various passthrough entities Introduced "Specified Service" Providers Net Income Excludes Guaranteed Payments and W2 Wages

Starts at BUSINESS Level Cannot exceed 20% of total taxable income, less net capital gains. Section 199A: Qualified Business Income (QBI) Business owners of pass-through entities in ANY type of profession, who have incomes below a specified threshold ($157,500 single filer/$315,000 married filing jointly). Who qualifies

for deduction? Business owners of pass-through entities that are specified services firms but have incomes above the threshold. However, their deduction is subject to limitations. Specified Service Trade or Business (SSTB) A specified service trade or business is any business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or

owners. Specified service businesses Any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees Investing Investment management Trading Dealing in securities, partnership, interests, or commodities

Health Law Accounting Actuarial science Performing arts Consulting Athletics Financial services Brokerage services Engineering and Architecture Firms were specifically excluded No soup for you: Who does NOT qualify for deduction? A Specified Service Trade or Business and have taxable income

above $207,500 single / $415,000 married filing jointly. C-Corporation owners do not qualify. A Non-Specified Service that has no employees or business property Phase out at Threshold Amounts Taxable Income Married Filing Jointly: $315,000 Threshold Amount $415,000 Phase out Others (Single, Married Filing Separately) $157,500 Threshold Amount $207,500 Phase out Computing

the 199A Deduction Where taxable income is under the threshold amounts ($315,000 married filing jointly; $157,000 others), the deduction will simply be 20% of QBI When taxable income fully phasedin ($415,000 mfj; $207,500 others), the deduction is the LESSER of: 20% of QBI 20% taxable income Wage based limit Wage Based Limit The greater of: 50% of W2 Wages; or 25% of W2 Wages plus 2.5% of the unadjusted

basis of all qualified property Only applies if the taxpayers taxable income exceeds the threshold amount Small Architecture Firm, established as an S-Corp, John is the sole owner. QBI Eligibility: Example 1 John the Architect Qualified Business Income $100,000 W-2 Wages $150,000 Taxable Income, Married filing jointly $300,000 Questions:

Is John eligible for QBI Deduction? YES How much is the QBI Deduction? Example 1: How to calculate deduction Small Architecture Firm (NOT an SSTB), S-Corp Qualified Business Income $100,000 W-2 Wages (reasonable) $150,000 Taxable Income - John is married and files jointly $300,000 What is the Deduction? Qualified Business Income $100,000 x 20%

Taxable Income $300,000 x 20% = = $20,000 $60,000 It is the lesser of these figures, or $20,000 (the wage limit is not applicable) QBI Example 2 Assume same facts, except 25% owner and total Taxable Income = $370,000 John, 25% owner of an Architecture S-Corp (not SSTB) Qualified Business Income ($500,000 x 25% owner) $125,000 W-2 Wages ($300,000 x 25% owner) $ 75,000 Taxable Income - John is married and files jointly

$370,000 What is the Deduction? Qualified Business Income $125,000 x 20% Wage Limit $ 75,000 x 50% = Taxable Income $370,000 x 20% = It is the lesser of these figures, or $25,000 = $25,000 $37,500 $74,000 QBI Example 3 Assume same facts, except W2 Wages = $180,000

John, 25% owner of an Architectur S-Corp (not SSTB) Qualified Business Income ($500,000 x 25% owner) $125,000 W-2 Wages ($180,000 x 25% owner) $ 45,000 Taxable Income - John is married and files jointly $370,000 What is the Deduction? Qualified Business Income $125,000 x 20% = $25,000 Wage Limit $ 45,000 x 50% = $22,500 Taxable Income of $370k is $55k over threshold. The taxpayer loses 55% ($55k/$100k) of the excess amount, $2,500 x 55% = $1,375 QBI deduction is $23,625 ($25,000 less $1,375 phase-out) QBI Example 4 Assume same facts, except Taxable Income = $500,000

John, 25% owner of an Architectur S-Corp (not SSTB) Qualified Business Income ($500,000 x 25% owner) $125,000 W-2 Wages ($180,000 x 25% owner) $ 45,000 Taxable Income - John is married and files jointly $500,000 What is the Deduction? -Taxable income over $415,000 -Deduction limited to 50% of wages = $22,500 Alice is a 25% owner of an Accounting Firm S-Corp. (SSTB) QBI Eligibility: Example 5 Alice the Accountant QBI for S-Corp

$500,000 W-2 Employee Wages $180,000 Taxable Income, Married filing jointly $200,000 Questions: Is Alice eligible for QBI Deduction? YES How much is the QBI Deduction? QBI Example 5 - SSTBs Alice, 25% owner of an Accounting S-Corp

Qualified Business Income ($500,000 x 25% owner) $125,000 W-2 Wages ($180,000 x 25% owner) $ 45,000 Taxable Income - Alice is married and files jointly $200,000 What is the Deduction? Qualified Business Income $125,000 x 20% Wage Limit n/a = n/a Taxable Income $200,000 x 20% = = $25,000 $40,000 It is the lesser of these figures, or $25,000 (no phase out if not over threshold)

QBI Example 6 - SSTBs Assume same facts, except Taxable Income = $370,000 Alice, 25% owner of an Accounting S-Corp Qualified Business Income ($500,000 x 25% owner) $125,000 W-2 Wages ($180,000 x 25% owner) $ 45,000 Taxable Income - Alice is married and files jointly $370,000 What is the Deduction? Reduction (over threshold) Qualified Business Income $125,000 x (1-.55) =$56,250 x 20% = $11,250 Wage Limit $ 45,000 x (1-.55) =$20,250 x 50% = $10,125 Reduction in the excess amount = $1,125 x 55% = $618.75 QBI deduction = $10,631.25 ($11,250 - $618.75)

QBI Example 7 - SSTBs Assume same facts, except total Taxable Income = $500,000 Alice, 25% owner of an Accounting S-Corp Qualified Business Income ($500,000 x 25% owner) $125,000 W-2 Wages ($180,000 x 25% owner) $ 45,000 Taxable Income - Alice is married and files jointly $500,000 What is the Deduction? Qualified Business Income $125,000 x (1-1) =$0 x 20% = $0 Wage Limit $ 45,000 x (1-1) =$0 x 50% = $0 Reduction in the excess amount = $0 x 100% = $0 As a SSTB, no QBI deduction because income is over $415,000. Effect of limit for specified service

Doctor (SSTB) QBI: $500,000 TI: $450,000 199A: $0 Restaurant chain owner QBI: $500,000 TI: $450,000 199A: $90,000 Cash Balance Plans CB Plans: WHO What type of entity can sponsor a Cash Balance Plan?

What demographics work best? CB Plans: WHAT What are Cash Balance Plans? Cash Balance Plans are DEFINED BENEFIT Plans and they operate differently than 401(k) Profit Sharing Plans. Contribution credits and Interest credits are allocated to participants theoretical accounts. Assets are co-mingled into a single account

(not individual participants). CB Plans: WHEN Must sign the legal Plan Documents into place by December 31 in order for the Plan to be effective for that year. It takes time to design a formula and write the Plan Documents dont wait until December 30th! The contribution to the plan does not have to be made by the plan year-end the client has until their companys filing due date, including extensions.

CB Plans: WHERE Where is your client right now, in terms of retirement and their business? CB Plans: WHY Why put a Cash Balance Plan into place? CB Plans: HOW YOU the trusted partner, Client, Third Party Administrator, Actuary, Investment advisor

Bringing Cash Balance Plans and the QBI Deduction Together Case Studies https://www.youtube.com/watch?v=8v2FEaW9p8k Plan Example 1 Doctor: Sole proprietor, married filing jointly Bottom line schedule C: $450,000 Itemized deductions $40,000 Net tax benefit of plan = $11,500, 20.9% of $55,000 QBI without plan QBI with PS plan Bottom line schedule C

$450,000 $450,000 Retirement plan deduction $0 $55,000 Taxable Income Before QBI $410,000 $355,000 199A deduction $82,000 $71,000

Final taxable income $328,000 $284,000 Tax $63,111 $51,611 Plan Example 2 S Corporation Medical Practice Owner, age 61, Compensation $275,000 Staff Employee 1, Age 41, $51,000 Employee 2, Age 34, $41,000 Employee 3, Age 27, $34,000 Employee 4, Age 44, $21,000

Plan Example 2 2018 Illustration Owners Non-Owners $ $ Deferrals 24,500.00 $ $ Total $ 24,500.00 $ Prepared on 12/20/2018 by: Tycor Benefit Administrators, Inc. 850 Cassatt Road

(610) 251-0670 Suite 850 (610) 640-0989 (fax) Berwyn, PA 19312 Employee Name Owner Emnployee 1 Emnployee 2 Emnployee 3 Emnployee 4 Eligible Compensation $ $ $ $ $ 275,000.00 51,000.00

41,000.00 34,000.00 21,000.00 3% Safe Harbor to All Ees Totals 5% Owner Allocation Class 61 41 34 27 44 Y N N N

N A B B B B 65.17% $ 34.83% $ 6,045.00 6,615.00 47.75% $ 268,000.00 52.25% $ 2,800.00 12,660.00 $

12,660.00 $ 270,800.00 24,500.00 - Non-Owners 3% Safe Harbor to All Ees Details Deferrals $ $ $ $ $ $ $ $ $

$ Cash Balance - Totals 8,250.00 4,410.00 Owners Age @ PYE Discretionary New Comparability - Totals 8,250.00 1,530.00 1,230.00 1,020.00 630.00 3.00%

3.00% 3.00% 3.00% 3.00% How do the retirement plans help the tax situation? Owners Non-Owners Discretionary New Comparability - Details $ $ $ $ $ 6,045.00 2,295.00 1,845.00

1,530.00 945.00 2.20% 4.50% 4.50% 4.50% 4.50% 98.97% 1.03% Total Employer Contributions and Owner's Deferral - Totals $ $ 306,795.00 13,825.00 $

320,620.00 Owners Non-Owners Owners 95.69% 4.31% Non-Owners Cash Balance - Details Total Employer Contributions and Owner's Deferral - Details $ 268,000.00 $ 700.00

$ 700.00 $ 700.00 $ 700.00 $ $ $ $ $ 97.45% 1.37% 1.71% 2.06% 3.33% 306,795.00 4,525.00 3,775.00

3,250.00 2,275.00 111.56% 8.87% 9.21% 9.56% 10.83% Plan Example 2 As a Medical Practice, it is a Specified Service Total Taxable Income is $650,000, over the $415,000 limit Need to reduce to Taxable Income to $315,000, getting below the threshold and get full deduction $650,000 - $315,000 = $335,000 contribution to the retirement plans Plan Example 2 Impact of the new deduction: Taxable Income is $315,000 (or $650,000-$335,000)

Breaking this down further, $200,000 is W-2 wage and $115,000 is QBI 20% pass-through deduction on $115,000 = $23,000 Final Taxable income is $292,000 ($315,000 - $23,000) Tycor Benefit Administrators, Inc. Confidence in your plan For More Information Tycor Benefit Administrators, Inc. Patricia Hansen, QPA, ERPA 610.251.0670 [email protected] 850 Cassatt Road, Suite 310 Berwyn, PA 19312 610.251.0670

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