QBI: 1120S vs. 1065/Sch C

Do we have a consensus yet on the most advantageous form of ownership with respect to QBI?

From what I have seen, if a business is operated as 1065/Sch C the QBI is equal (for discussion purposes) to net income before owner compensation while a business operated as 1120S the QBI is net income after owner compensation (assumimg theory of reasonable comp is followed).

For purposes of this discussion assume net income before owner compensation is $250,000 and 1040 is MFJ in order to keep it as simple as possible. Obviously high income individuals are a whole different animal.

[I]f a business is operated as 1065/Sch C the QBI is equal to net income before owner compensation after guaranteed payments (if any) while a business operated as 1120S the QBI is net income after owner reasonable compensation.

The determining factor in the fact pattern is "what is reasonable compensation?". At different levels of s-corp wages, one makes sense, the other doesn't.

Say reasonable comp is $100,000. If the partners work full time in the business there is no requirement to make guaranteed payments, the partners could decide to just distribute profits. That is not an option in an S Corp.

And what about a Sch C, where does reasonable comp come from in that scenario?

I think what the good Capt is trying to say is that it depends on the business. you cant lump all s corps in one basket. if the s corp is a service business, the reasonable comp may need to be 70 to 90% of the income. if the s corp is does manufacturing, the reasonable comp may only be 20-30% of the income.

BS card thrown down. It doesn't work like that, Pitch. Reasonable comp is reasonable comp regardless of business type. Read the case law.

And what about a Sch C, where does reasonable comp come from in that scenario?

The reasonable comp to the owner of a Schedule C is zero. So yes, the Schedule C (all else equal) could qualify for a higher QBI deduction than an S corp. On the other hand, the Schedule C owner pays SS/Medicare taxes (up to the limits) based on the entire net income from the business, plus owner health insurance, plus SEP/similar contributions while an S corp wouldn't.

BS card thrown down. It doesn't work like that, Pitch. Reasonable comp is reasonable comp regardless of business type. Read the case law.

Agreed. Reasonable comp is not based on a percentage of income but an analysis of the work done by the shareholder-employee.

And what about a Sch C, where does reasonable comp come from in that scenario?

The reasonable comp to the owner of a Schedule C is zero. So yes, the Schedule C (all else equal) could qualify for a higher QBI deduction than an S corp. On the other hand, the Schedule C owner pays SS/Medicare taxes (up to the limits) based on the entire net income from the business, plus owner health insurance, plus SEP/similar contributions while an S corp wouldn't.

But, assuming a single shareholder, isn't the Sch C in the same relative position at the end of the day if the owner contributes to a retirement plan and pays health insurance. The deduction is taken on the 1040 for self employed health insurance, but is QBI reduced? Same for SEP? Either way the "owner" is out of pocket and gets a tax deduction, but the Sch C has the larger QBI. Is the tax cost of the Sch C just the additional Medicare tax, if any?

Just trying to think it all through but it seems like entity choice becomes complicated.

The entity choice is a lot more complicated than it was a year ago, yes, and it's frustrated by the fact that we don't have all the regs yet. From my reading of §199A, I expect that SE Health insurance and SEPs to reduce QBI for both S corp and Schedule C businesses, but I'm waiting on confirmation of that.

The tax cost of the Sch C is the Medicare and social security taxes on the difference between reasonable comp and net Schedule C income. This differential would also have to take SEHI and SEP into account as they are not exempt from Medicare/social security in a Schedule C but they are as an S corp.

BS card thrown down. It doesn't work like that, Pitch. Reasonable comp is reasonable comp regardless of business type. Read the case law.

You guys are reading way too much into my comment. All I was pointing out is that reasonable comp is different for different businesses. Reasonable comp for a lawyer in a corporate law firm will generally be a higher % of the gross than an owner of a non-service business. The %s were just for convenience to point out that the reasonable comp levels would be different. You cant simply throw out some income/expense numbers and expect it to be applicable to all businesses.