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My Professional S Corporation Trump Tax Plan Strategy as a “High Income Earner”

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Update by Howie, December 2018: Unfortunately if you own real estate in a separate LLC/ entity, or create another non specified service business to try to make income eligible for the pass through deduction, there are severe limitations on if it will be eligible for the 20% pass through deduction.

The IRS provided clarification in August. There are rules to prevent “cracking”, or ways to strip money out of a specified service business (all docs are SSB and therefore have a total income limit from all sources for which the pass through deduction gets phased out at $315,000-415,000 for married filing jointly, half for single.
To make a long story short, if a business gets 80% of income from a SSB, then it’s not eligible for the pass through deduction if the two businesses have at least 50% common ownership. And if a business gets less than 80% income, then only the portion to the non affiliated group gets the pass through deduction.
Example:  Ho Sun leases 50% of his office to a podiatrist. He isn’t eligible to get a pass through deduction on the portion leased to his ophthalmology practice, but he is eligible to get a pass through deduction of 20% of profits leased to the podiatrist.
Of course, one way to get around this if you own your own practice is to get two unrelated individuals (not spouse) to own the LLC controlling the building so your ownership is 33%. But this probably isn’t worth it, due to the minimal tax savings compared to the cost and headaches of the legal fees and paperwork.

3. Change my practice into a C corporation

Since my professional S corporation has no chance of seeing any pass through deductions, I thought about converting to a C corporation instead. By doing so, I would pay the 21% corporate tax rate on all my earnings, and then just keep everything undistributed in my corporate account. Thus, avoiding the remaining 14.8 to 18.8% in capital gains tax. Then, I would let everything grow in some sort of investment vehicle. Sort of like an unlimited modified 401(k). Then, when I die, all the assets in the corporation would be passed down to my children, where up to $5.6 million dollars per individual (2018) would be tax free.

But alas, the elegance of the tax code strikes once again. Enter the accumulated earnings tax, where the IRS assesses a 20% tax on retained earnings considered beyond what is ordinary and necessary for business. As a personal service corporation, you can accumulate up to $150,000 in excess of any amount that is necessary to run your business. So, as a hedge fund, you can justify sitting on millions in dollars in stocks without incurring the accumulated earnings tax. However, as a medical practice, it’s kind of difficult to justify holding 1,000 shares of Amazon as an ordinary business expense. Hence, converting to a C corp is out as well.

As you can see, if you make over $415,000 as a couple or $207,500 as a single person, you’re pretty much screwed. Of course, no one’s going to feel sorry for you. Is it really worth all this corporate juggling and acrobatics to save $5,000? Probably not. As you can see, in conclusion, there really is no tax strategy for the high earning pass through entity in the Trump era. >:(

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