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20% tax deduction for pass through entities is limited for…

Hi there. 20% tax deduction...
Hi there. 20% tax deduction for pass through entities is limited for service providers like doctors. My question is: An S-Corporation provide medical billing services like sending claim, collecting money from insurance etc for doctor offices. Is that S-Corporation still subject to phase out 315k MFJ 157.5 single? I think if S-corp claim itself management company it's not subject to that limit. Please advise.
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1/16/2018
Chad EA, CFP ®
Chad EA, CFP ®, Enrolled Agent
Category: Tax
Satisfied Customers: 1,371
Experience: Federally licensed IRS Enrolled Agent, Certified Financial Planner (R), MBA
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Hello!

A Medical billing company that is taxed as an S Corp in my opinion is not subject to the income phase out limitation.

The companies that will be subject to the income limitation are "Special Service Business."

Service Business has further been defined as any trade or business involving the performance of services in the fields of health, law engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerages services, including investing and investment management, trading or dealing in securities, partnership interests or commodities.

If you are providing the services of billing and collecting you are not specifically in the fields listed above. The limitation was put in place for businesses where the "principal asset is the reputation/skill of the employees or owners."-- This statement applies to almost any business, but I believe the intention is to cap the deduction for professionals with a specific specialization.

___

Your alternative would be to incorporate your business and be subject to a current corporate tax rate of 21% and capital gains on any distributions from the corporation to the shareholders.

Please let me know your follow up questions!

Thank you

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Customer reply replied 1 month ago
Thanks for your answer Chad. Won’t I double taxed if I change my company to C corp? My understanding is that C corp is taxed at corporate level and after tax net income will be taxed at individual level.

Corporations are taxed at a rate of 21% on the profit of the corporation as a separate entity.

THEN ...when the corporation distributes profits to the shareholders the shareholders are taxed on the distribution as long term capital gains, generally a rate of 15%.

Corporations can retain earnings and not distribute profits. You would pay yourself in the same manner as you do with a S Corp, which is "reasonable compensation." -

___

I would feel confident completing a tax return for an medically billing S Corp not being subject to the income phase out limitations.

I believe the new law was intended to cap the earnings of independent professionals such as Doctors, CPA's, Financial Advisors, investment companies and other commodity businesses.

Please let me know your thoughts!

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Customer reply replied 1 month ago
Appreciate your input Chad. I feel I should bonus you 100% after our session.S Corp has 2 operations.
1. It has own office and contractor doctors to see patients.
2. Also do billing for outside offices.So 2nd operation is not subject to phase out, correct? How to split the operations by doing it under sub S-corp?

Q: How to split the operations by doing it under sub S-corp?

A: To split the operations for tax purposes, you have to create a separate LLC and then elect that LLC to be taxed as an S- Corp using IRS Form 2553.

Additionally, you will need to keep separate books and bank account because you want to avoid co-mingling funds.

Assuming the companies are controlled by the same group of individuals, you want to make every effort to ensure the companies are run and maintained as separate entities so that the IRS has no reason to believe the companies are actually one entity and disallowed the pass through deduction.

___

"1. It has own office and contractor doctors to see patients." - If the S Corp's scope of business is hiring doctors as contractors, I believe that a hiring agency would also be allowed the pass through deduction. The doctors whom you hire would be subject to the pass through income limitations, but the hiring agency would not be subject to the income limitation.

I do agree with you that if you can split the operations into separate entities then you should do so to ensure the billings portion of your business remains eligible for the pass through deduction.

___

Here is a link to the Tax Cut and Jobs Act Bill- Deductions for qualified business income of pass thru entities starts on page 23. - Page 33 is the general definition of of a qualified trade or business.- Since I have given you my opinion, which is based off of reading the bill and speaking with colleagues, I do want to ensure you have the opportunity to view the information also.

https://www.congress.gov/bill/115th-congress/house-bill/1

____

Q: 2nd operation is not subject to phase out, correct?

A: The second operation is not subject to the income phase out for the pass through deduction.

I imagine the wording of the Tax cut and Jobs Act bill will be tested and refined in the future.

Please let me know if I was able to answer your questions clearly.--There are regulations and definitions in the bill that has the tax community asking for clarification

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Customer reply replied 1 month ago
Regarding #1: S-corp has staff like medical assistant who serve doctors and patients. Do you think it's still treated as a hiring agency not subject to phase out?Thanks in advance Chad.

A further question would be is the businesses principal asset the reputation or skill of the employees?

Having employees who are involved in the performance of health service is one requirement to be excluded along with the principal asset of the business being the reputation or skill of the employees or owners.

In my opinion, the 1st S Corp business model is close enough to go either way of being subject to the income limitation phase out or not. From the discussions I have had, the phase out limitation would apply to an office of practicing doctors who also hired medical assistance.

If you are a firm who offers staffing to doctors, then in my opinion that would not be subject to the phase out limitation.

As the year rolls out hopefully we will receive further clarification. Separating the two S Corps is the best course of action for now.

We do anticipate further clarification concerning the 20% pass through deductions section 199A as the year goes on.

Chad EA, CFP ®
Chad EA, CFP ®, Enrolled Agent
Category: Tax
Satisfied Customers: 1,371
Experience: Federally licensed IRS Enrolled Agent, Certified Financial Planner (R), MBA
Verified
Chad EA, CFP ® and 87 other Tax Specialists are ready to help you
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Customer reply replied 1 month ago
Thanks a lot.
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Chad EA, CFP ®
Chad EA, CFP ®
Chad EA, CFP ®, Enrolled Agent
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