Benefits and Compensation

Business Owner Tax Deductions and the Tax Cuts and Jobs Act of 2017

In part 1 of this article we began to explore the effect that the Tax Cuts and Jobs Act of 2017 (TCJA) has on personal tax deduction for business owners. Today we are going to explore reporting requirements for Relevant Passthrough Entities (RPEs) as well as some timing considerations.

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Reporting Requirements for RPEs

Most of the information that an owner will need to calculate the QBI Deduction will be provided by each RPE. An RPE must determine whether it is an SSTB. There are common ownership aggregation rules for RPEs that are similar to common ownership aggregation rules for retirement plans used to test for participant coverage and nondiscrimination. Note that aggregating a business that is an SSTB with a business that is not an SSTB results in both businesses being considered as SSTBs. This is less favorable for the owners.

W-2 wages and payroll

Each RPE must report each owner’s share of W-2 wages. W-2 wages are determined using one of the three methods provided in Internal Revenue Service (IRS) Notice 2018-64. Each RPE will allocate the W‑2 wages to partners or to shareholders in the same way that wage expenses are allocated.

Each RPE should confirm now that its payroll is ready to report W-2 wages for the QBI Deduction. There could be as little as two weeks’ time between the reporting cutoff date and the due date to file the tax returns for RPEs that are not sole proprietorships.

UBIA

Each RPE must report each owner’s share of UBIA. Each RPE will have to review its holdings of property considered to be qualified property under Section 199A. These holdings most likely will be a subset of an RPE’s collective property holdings. UBIA will be allocated in the same way that depreciation is allocated.

Timing Considerations

If an RPE has an existing retirement plan, the RPE could amend the plan by December 31, 2018, to  increase contributions or benefits. If the existing plan is a safe harbor 401(k) plan, be careful that the amendment is structured not to inadvertently cause the plan to lose its safe harbor protection.

If an RPE does not have a retirement plan, then the RPE can adopt a plan during the remainder of 2018 and create a deduction for 2018. An RPE without a retirement plan also can establish a Simplified Employee Pension plan (SEP) up until the due date for the 2018 tax return to create a 2018 deduction.

If the existing plan is a defined contribution plan that has discretionary non-employer contributions or if the plan is a defined benefit plan, consider how changes in the contribution amounts could affect the QBI Deduction. An increased contribution to the plan may increase the owners’ QBI Deductions.

Keep in mind that retirement plans are intended to be long-term arrangements that continue year after year. Do not adopt a retirement plan solely to increase the 2018 QBI Deduction. Also, do not adopt a retirement plan or increase benefits in an existing plan if that will negatively affect the RPE’s finances in future years. Work with the plan’s design consultant or Employee Retirement Income Security Act (ERISA) attorney and the RPE’s accountant before taking action.

Paul ProtosA. Paul Protos is president and cofounder of ATR Inc., a third-party administration and benefits consulting firm that provides services related to Forms 5500, plan documents, summary plan descriptions, recordkeeping services, and compliance/operational reviews. Protos has more than 40 years of benefits consulting and administration experience. He has achieved the enrolled retirement plan agent (ERPA) designation. Protos is the contributing editor of the Pension Plan Fix-It Handbook.