QBI Sole Proprietor vs. S Corp

Technical topics regarding tax preparation.
#1
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College Station, TX
New client came to me and provided 2020 tax return. for review. Taxpayer is an architect (not a specified business) who reported his business on Sch C. His net income on the Sch C was in excess of $600k. Since his taxable income is above the upper threshold and his business had no W-2 wages, his QBI deduction was limited to $4,165, i.e. 2.5% of unadjusted basis.

I believe that had he been an S Corp, and paid himself reasonable compensation, his tax savings would be very significant. I prepared a "what if" tax return, deleting the Sch C, and adding a W-2 and K-1 using $150,000 as a reasonable comp number. The result was his QBI would have been $75,000, i.e. 50% of wages.

The bottom line was that the tax savings were about $58K, with about $24K coming from the additional QBI and $34K from self-employment tax savings.

I am thinking that there could not be that much difference. What am I overlooking?

Thank you.

David
 

#2
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Alabama
Your self-employment tax savings seems a little high. On $450k difference in the amount subject to Medicare tax, it seems like the savings should be about half what you calculated.

Also, I'm thinking $150k may be a bit low for the reasonable salary for someone making that much money, but I have no idea what architects make.

You may also be overlooking unemployment tax, extra payroll & tax prep fees for the S corp, other fees related to incorporation, a lower limit on retirement plan contributions, possible complications from S corp status such as basis limitations and higher penalties if they don't file on time, etc.

But still, I think you'll end up with significant tax savings even after addressing all of those issues.
 

#3
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WA State
Agreed.
Not sure how you got your SE tax savings. I get ~$13K (=$450K * 2.9%)
~Captcook
 

#4
Andrew  
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What are you charging for this type of desperately needed tax planning for a client like this?
 

#5
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MA
Don’t forget the extra .9 % Medicare tax so it is really a 3.8% savings on the $450k

I am guessing you backed out the $34k in SE tax on the current return but did not add back the payroll tax on $150k salary. I am getting a $17k savings like beard.

I have been to so many seminars where they have pushed S Corp, S Cor,p, S Corp for the last 30 years so it is automatic for me. But I do sense there are still some who do not want to deal with S Corps. I am not looking for another reasonable comp argument but with those savings (annually)/how can you not opt for S Corp
 

#6
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196
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College Station, TX
Thanks everyone. Yes, I did misfigure the SE tax savings.

David
 


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