Fiduciary Is Fun!
(a.k.a. I heart taxes)
(a.k.a. I heart taxes)
The 2018 tax filing year is over for most, but many owners, partners, and members of pass through tax entities are still on extension as they try to make sense of all the tax changes that went into effect for 2018. Many partners and LLC members are still trying to understand what the Tax Cut and Jobs Act of 2017 has done to their net income and taxes. While there were a number of positive changes for high income earners there were also some caps, particularly in the areas of State and Local Taxes (“SALT”).
For those individuals who might be looking at a tax bill that is larger than what was expected, the question could be asked “what can we do now?” The general answer is “not much”, but there is one area of planning that is still available post the close of the year, assuming you are on extension, and that includes making profit sharing contributions to your retirement plan. Such contributions can have a meaningful impact, potentially, on Qualified Business Income (“QBI”) and the available 20% income deduction. These situations are extremely fact dependent, obviously, and everyone’s situation does vary.
There are many ways to make contributions, but for partners and LLC members, the calculation is more than a little complex to say the least. The IRS did create a 21 Step Process for calculating your earnings and your deduction in Publication 560 to help make it a little easier for you. Suffice to say, however, it’s not that easy. But given the importance in getting this tax deduction contribution correct, you should consult an expert.
For those of you looking to explore your tax planning options with your retirement plan and to understand how those changes will impact your personal situation, please reach out to us for a free consultation. We work collaboratively with your tax and legal advisors to get you the maximum deduction.
Pete Welsh aka 401kGuy
Financial Planning for Partners, LLC Members, and Shareholders of S-Corps can be challenging. The planning, tax, and legal rules for these individuals is often dramatically different from those that apply to employees and shareholders of C-Corps. Our firm is dedicated to helping this unique set of entrepreneurs manage their financial affairs.
Today, we want to cover a unique area of property exchanges. It is quite common in an partnership, LLC, or S-Corp for one or more of the partners to have contributed property to the business in the form of a building or real estate. Such contributions are often critical in the early stages of the business, but over time, there surfaces the need for another building or property and a desire to relinquish, sell, or otherwise dispose of the original building or property.
This is where the planning opportunity surfaces. If the original building or property is simply sold and the proceeds used to purchase something new, the original contributing partner will most likely find himself with a tax bill that is less than desired. If the contributed building or property has appreciated over time, the tax bill could be quite large indeed.
What’s the firm to do? You need a new building or property to grow, but no one wants to hit the partner with the large tax bill. In comes a Section 1031 Exchange to the rescue! A 1031 Exchange allows the firm to exchange the original property for a new property in an exchange that effectively defers any recognition of gain. We kick the tax down the road so to speak. What is great about a properly executed 1031 Exchange is that the properties “exchanged” do not need to be for each other. When executed with the proper “Intermediary”, you can sell your property on the open market and purchase what you want and still postpone any tax gain.
Want to learn more? Give me a shout!
401kGuy aka Pete Welsh