Are you an entrepreneur making less than $350,000
dollars?
Today, I talk tax strategies
he can use to reduce taxes on your 2018 tax
return.
Previously I talked
about entrepreneurs who make less than a
$100,000.
Even if you make above that amount,
I do recommend you watch that
video because there are some things you can learn.
In this video I specifically talk
about situations in addition
to that.
That might limit those deductions
for an income earner who is,
who makes $315,000 if
married jointly.
So which means you
and your spouse makes
$315,000. Or if single file
and makes about $157,500
and above.
I'm sure by now you've heard about the
qualified business income deduction.
The qualified business income deduction,
also known as QBI deduction
is 20% of your QBI income.
What is your QBI income?
For most people,
It will most likely be your net income.
So, when taxable income is below $315,000
for married person
and $157,500 for other
filing status,
there is nothing to worry about.
However, problems and
complication starts happening when
you go about this amount.
Let's talk QBI limitations.
But first, before I do that
I need you to understand what a specified
business is.
The rules change depending on whether
or not you are classified as specified
business or your other,
general businesses.
So, what is a specified business?
A specify trade
or business is a business involved in the
performance of services
in the field of health,
law,
accounting,
consulting,
financial services,
brokerage services,
or any trade
or business where the principal asset
of such a trading business is
the reputation
or skill award of one
or more of its employees.
In other words,
if you're service business where the business
depends on you - you are the business.
You are a specified business.
So, if you're not a specified business,
then you're a non-specified business.
A general business is what I call it.
Basically, you don't meet this definition.
As a general business owner
I would like to take a minute to talk about your
limitations.
If you make over $315,000
if you're married.
$157,500 if you're a single,
the QBI deduction is subject to phase
out limitations.
However,
it's at $415,000
for married and
$207,500 per single.
Your QBI cannot be more than 50% of
your wages
or the sum of 25% of
your wages plus 2.5% of
the unadjusted basis.And basically,
unadjusted basis is
the original costs you bought your assets.
So, let's look at a 50% of wages
limitation.
Here's an entrepreneur making about
$350,000 a year
without paying wages hHe
owes $96,198
in taxes.
With pay wages,
he pays $85,963
in taxes.
This is a $10,000 difference.
So, if he was not going to pay himself wages
because he was above that
income threshold he does
not get the QVI deduction.
Let's take a look at what this looks like.
Same situation. The only difference is
he took $50,000 in wages.
So, that the 50% limitation.
He can only take the maximum
of 50% of his wages,
which is the $25,000 to
intercept above the threshold.
So, 50% of
$50,000 is $25,000.
And that alone
brings his taxes down by $10,234.
So, now let's make the assumption that
this business owner has a million
dollars in assets.
So that means sitting on his books right now,
the cost of what he bought this asset,
less all the depreciation he's taken over the
years is a million dollars.
Well he gets to get 2.5%
of that plus 25% of his
wages if it's higher.
But the 50% of the wages is higher,
he gets to get that.
But in this case, the 2.5% of unadjusted bases,
plus 25% of wages were higher.
So, we can scroll down here
and we can see the test
that he gets $37,500 of QBI.
Now here when he paid no
wages or did nothing he gets zero which
we've talked about before.
But now he gets $37,500.
This brings his tax liability down to
$81,588.
So, that is a savings
of $14,609.
Same situation, only
difference is you've chosen
to pay wages versus not take wage.
Now as a specified business
you don't have to wage limitation like
the non-specified business has.
As a specified service business,
if are above the threshold
and your income reaches $415,000
for married files
and per $207,500 for
single you don't get a QBI.
So, at this level
it looks like the
C-Corp might actually be best for you because
you get that flat 21%.
Inbetween the $315,000 and $415,000
your income is phased,
your deductions phased out based
on how far above you are above
the threshold.
Let's take a look at a specified
business example.
So here I have checked
that I do want to be a specified business
and you can see this is exactly the same example
I have previously.
$50,000 in wages,
one million in assets for
the test.
So I already change that,
just like I did previously.
And we can see that
on the individual income tax side we
have a little break of $1,484.
However, because of the wages were paid.
There was an increase in payroll taxes of $3,825.
So that's actually,
and that means you actually end up paying more
if you include payroll taxes in the amount
of $2,340.
And you can see here that you don't get
any QBI deduction.
So, once you,
once you exceed that threshold as
a specified business,
the C-Corp test
becomes even more essential for you.
So, back to the C-Corp test,
say "yes" I want to test
from S-Corp to C-Corp and see what happens.
Whoa! Look at my tax liability!
It goes down $22,698.
As a specified business
with very high income,
I mean,
it went at that income level.
I think most people will agree that $22,000
is not a pocket change of money.
So,
it might be worthwhile looking at
a C-Corp. Because the 21% tax
rate is lower.
Most, more than likely lower
than what you're paying on your personal side.
If you're interested in this Excel file you
can download it by clicking the link below.
But in the meantime,
just let me know what you'd like me to talk about next.
Just leave your comment down below.
If there's any issue that bothering you that you like
to see me make a video on,
go ahead and leave a comment for me.
Also if you like the content,
be sure to subscribe so you get an alert
when a new video is posted.
And if there's any general comment you have,
how I can improve things,
you know,
go ahead and leave a comment.
I look forward to reading your comments.
Thank you.
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