Many small anesthesia management practices are set up as a Limited Liability Company (LLC) or Subchapter S (S Corp) and are therefore taxed as pass-through entities, which are not subject to income tax at the entity level. Owners of pass-through entities have likely heard of the 20% deduction of qualified business income (QBI) outlined in the 2018 Tax Cuts & Jobs Act (TCJA) Section 199A. If you own an anesthesia practice, you are likely interested in learning more about QBI and how it can save you money. We’re here to help explain.
The IRS website states, “QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business. Only items included in taxable income are counted. In addition, the items must be effectively connected with a U.S. trade or business. Items such as capital gains and losses, certain dividends and interest income are excluded.” If you’re still confused, just keep reading.
Here are a few items that are not QBI as it relates to an anesthesia practice:
- Reasonable compensation
- This includes reasonable compensation paid by an S Corp to a shareholder
- Guaranteed Payments
- Any payment described in Section 707(a) paid to a partner in trade or business for services rendered.
Let’s also understand exactly what a “qualified trade or business” is. The IRS states it is any business with two exceptions:
1. Specified service trade or business (SSTB) “which includes a trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of its employee”
2. Performing services as an employee
Obviously, your pass-through anesthesia practice is an SSTB with regards to QBI (Sec.199A(d)(1)(A) and Sec.1202(e)(3)(A). What does this mean for you? The answer depends on your taxable income. The exception applies if your taxable income exceeds $315,000 for a married couple filing jointly (MFJ) or $157,500 for all other taxpayers. There is a phase-out range of $50,000 for non-MFJ taxpayers and $100,000 for MFJ taxpayers.
Other factors that come into the equation when determining your Qualified Business Income Amount (QBIA) include:
- Each trade or business of the taxpayer is examined separately
- The taxpayer needs taxable income taxed at ordinary income rates
- If your income exceeds the thresholds mentioned above, you need the amounts below to calculate the QBIA
- W2 wages
- Investment in Qualified Property
In essence, if a taxpayers taxable income is below their threshold, all SSTB income is QBI. There are other items that need to be addressed as you dive into details, but we are going to walk through some examples from a high level that are specific to an anesthesia practice. Let’s start by painting a picture:
An anesthesia group set up their practice as an LLC with two equal partners, Jack and Jill. The group provides part-time anesthesia services to a local surgery center. The company made $100,000 in 2018 as outlined below. Both Jack and Jill have $50,000 in ordinary business income for 2018. Jack is a CRNA that is married and files a joint return. He and his spouse have taxable income of $200,000. Jill is single and, consumed with the almighty dollar, is not savvy with tax reduction strategies. She has taxable income of $400,000.
Note: If Jack had REIT dividends, qualified publicly traded partnership income or net capital gains, the QBIA may be different.
Jack gets a $10,000 QBI Deduction while Jill is totally phased out since she is above the $207,500 taxable income amount.
Let’s take the same example above and assume that Jill has a taxable income of $180,000. This is above the threshold, but below the total phase-out. The taxpayer’s allocable share of W2 wages paid by the business is $10,000. The calculation below shows her allowed applicable percentage:
|Divided by Phase in Amount||$50,000|
|Applicable Percentage (1-Percentage above)||55%|
Next, we calculate the tentative deduction based on the applicable percentage:
|SSB – QBI||$50,000|
|Times Applicable Percentage Allowed||$5,500|
This amount is subject to the wages and investment limitation. Another limiting factor is the tentative QBIA for each trade or business is limited to the greater of:
- 50% of the taxpayers share of allocable wages of the qualified business or
- 25% of the taxpayers share of allocable wages of the qualified business, plus 2.5% of the unadjusted basis, immediately after acquisition of qualified property.
Instead of wading through the calculation of basis and the definition of qualified property, we are going to stick with the W2 wage scenario above.
|20% of QBI (multiplied by applicable percentage)||$5,500|
|Jill’s 50% share of allocable wages||$2,750|
|Reduction to QBI (2,750 x .45)||$1,237|
|Phaseout Deduction ($5,500-$1,237)||$4,263|
In this scenario, Jill would have a Sec 199A Deduction of $4,263.
As you can see, this is not a simple exercise and is compounded when individuals own multiple entities. Remember, your QBI amount needs to be determined separately for each qualified trade or business.
There a many useful resources available to assist in your own calculations. The Bradford Tax Institute has a 199A Deduction Calculator on their website that can be found here. There are also useful flowcharts that can be found online that walk you through the calculations. A couple of sites with a flow charts can be found here and here.
In the end, this is not a simple calculation. There are many strategies that can be employed to maximize your QBI deduction, and you should seek professional tax help to identify these strategies and put them in place to take full advantage of this new business deduction.