The 2017 Tax Act was rushed in order to make it effective as of January 1, 2018. Anything that is rushed certainly will create opportunities for creative estate planners who will exploit the new tax laws for the benefit of their clients. The greatest opportunity business owners received from the Trump Tax Act is the new IRC 199A pass-thru business deduction. This deduction allows certain taxpayers to deduct 20% of their Qualified Business Income.
The Taxable Income Limitations
For a married couple with taxable income of no more than $315,000 and for an unmarried individual with taxable income of no more than $157,500, there are minimal rules and the 20% federal income tax deduction is available. There is a phase-out of the deduction from $315,000 to $415,000 for married taxpayers and from $157,500 to $207,500 for unmarried taxpayers. These figures are for total income, not just based on Qualified Business Income.
Specified Service Businesses Not So Lucky
For a Specified Service Business, unfortunately no IRC 199A deduction is available for owners whose taxable income exceeds the dollar amounts in the foregoing paragraph. A specified service trade or business means any trade or business involving the performance of services in the fields of: Health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, including investing and investment management, trading, or dealing in securities, partnership interests, or commodities, and 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.
Limitations for a Non-Specified Service Business
Different rules apply for a business that is not considered a Specified Service Business. For those businesses, an IRC 199A deduction is available for owners whose taxable income exceeds the dollar amounts outlined above. However, it’s limited to the greater of (a) 50% of W-2 wages or (b) 25% of W-2 wages plus 2.5% of Qualified Property (certain depreciable property such as buildings and equipment).
Exploiting IRC 199A using Multiple Taxpayers
Business planning in 2018 and beyond has now changed drastically. The goal now is to separate the business interests into as many different owners as possible, often using separate non-grantor trusts in order to create as many different owners as possible to each receive up to $157,500 of taxable income.
There are many options:
- Single Persons – $157,500
- Married Couples – $315,000
- Estates – $157,500
- Incomplete Gift Non-Grantor Trusts – $157,500
- Completed Gift Non-Grantor Trusts – $157,500
- Completed Gift Non-Grantor Domestic Asset Protection Trusts – $157,500
- Children of the Client – $157,500
- Beneficiary Defective Trusts – $157,500
In many cases, the Client has multiple children and grandchildren so the number of separate trusts can be further magnified! Do the math! The 20% pass-thru business deduction is huge. And for a Specified Service Business that can be transferred to different owners, the otherwise unobtainable pass-thru deduction can be taken simply by using enough separate owners.
Beware of IRC Section 643(f)!
All planners should read IRC Section 643(f) before doing IRC Section 199A planning. Under this Code Section, the IRS will combine trusts that have substantially the same grantor and primary beneficiary where the principal purpose of the separate trusts is to avoid income tax. This certainly doesn’t stop the creative planning. However, it does restrict it somewhat, so planners must be careful to consider these rules when creating structures that at designed to exploit the new rules.
The new IRC Section 199A pass-thru business rules are the greatest gift that estate planners could have ever received from Congress. Creative planners who make use of these new rules to save their clients significant income taxes will be very busy with more work than they ever imagined!
Check out these programs specifically on Section 199A:
- The New Section 199A 20% Small Business Deduction – Sophisticated Tax Planning and Trust Strategies for Lawyers, CPAs & Financial Advisors
- Section 199A: An In-Depth Look
The Ultimate Estate Planner has a number of educational programs related to the Tax Reform that you may be interested in.
- What Every Advisor Needs to Know About Tax Reform for 2018 Planning & Beyond
- Planning for Professional Practices & Other Business Entities Under the Tax Reform Bill
- Estate Planning After Tax Reform
- Tax Planning for Real Estate Under the Tax Reform Bill
ABOUT THE AUTHOR
Steven J. Oshins, Esq., AEP (Distinguished) is an attorney at the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada, with clients throughout the United States. He is listed in The Best Lawyers in America®. He was inducted into the NAEPC Estate Planning Hall of Fame® in 2011 and was named one of the 24 Elite Estate Planning Attorneys in America by the Trust Advisor. He has authored many of the most valuable estate planning and asset protection laws that have been enacted in Nevada. He can be reached at 702-341-6000, ext. 2, at firstname.lastname@example.org or at his firm’s website, www.oshins.com.