The Tax Cuts and Jobs Act passed in December 2017 made massive changes in the tax code, possibly the most complex of which is the new “Qualified Business Income (QBI)” deduction. This provision may allow owners of “pass-through” businesses a deduction of up to 20% of “qualified business income”.
Without getting into the weeds of the details (the devil is always in the details) of the deduction, definitions and the final regulations issued in January, on the surface it sounds good, doesn’t it? Especially if you are a small business owner.
But things may not always be what they seem to be. More important, assessing a major tax change like this in isolation may not tell the whole story. My clients have heard me say for years that their financial neck bones are connected to their financial leg bones.
As a result of this tax provision, business owners may need to think differently…maybe even about some things that were considered S.O.P.
Take business retirement plans for instance. Common planning advice in the “old days” (pre-QBI deduction days) for small businesses included things like using deductible retirement plan contributions to reduce profits and therefore, reduce taxes. But now, reducing profits may mean reducing the amount to which the new QBI deduction may be applied.
So what might this mean? It may mean that the retirement plan contribution though deductible, resulting in a loss of some QBI deduction attributable to that contribution.
I don’t think this signals the death of 401(k) plans or other retirement plans. I do think that some re-assessment of the potential impact of small business retirement plan contributions may be in order. For example, in this new tax environment might Roth 401(k’s) and after-tax plan contributions become more valuable?
If you would like to re-think your planning, please contact us. Remember, we are here to help.
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