PLLC or SCorp?

[Possi]

One of my favorite clients is a high income Dr. (over $350k)

Last year, he became a partner, and he himself is a PLLC.

The partnership pays him and issues the K1. No W2 at all.

He is asking me about becoming an S Corp to save taxes.

I told him that he already pays the max FICA and that he will always max out on it. He won't save FICA dollars by incorporating. And I told him that the net income from an S Corp is taxes at ordinary tax rates, so there isn't a savings there, either.

People watch a video online and think they can save on taxes. He called an 800 number and was told that if his PLLC CHOOSES to be taxed as an S Corp, it could save him upwards toward $30k in taxes!

He called me because I've done his taxes for many years and he trusts me. He was a military Dr. until a couple of years ago. Now that he is in private practice, his income has tripled and it's not so cut-and-dry anymore.

I would love to be able to help this guy save taxes, but I don't think this is the way to do it.

Any discussion?

[ILLMAS]

They probably want to incorporate him in Nevada, I once had a client come in and give a story about being incorporated in NV.

 

http://www.physicianspractice.com/blog/common-llc-myths-continue-harm-doctors

[Possi]

3 minutes ago, ILLMAS said:

They probably want to incorporate him in Nevada, I once had a client come in and give a story about being incorporated in NV.

 

http://www.physicianspractice.com/blog/common-llc-myths-continue-harm-doctors

No, he didn't mention a different state at all. Good reading, though.

[BHoffman]

How much NIIT does he pay, and would an S election allow him to avoid it?

[Possi]

His only NII was $582, NIIT was only $22, so it's not an issue.

His additional medicare tax was $1686.

[Lee B]

At this income level, you should be looking at is a custom designed pension plan.

[Abby Normal]

28 minutes ago, cbslee said:

At this income level, you should be looking at is a custom designed pension plan.

Except it sounds like he can't save any money.

[Terry D EA]

There are a lot of questions that need to be addressed to determine the best tax strategy for your client. I am assuming he is currently taxed as a disregarded entity and pays self-employment tax on the income minus expenses from the partnership. AT 350K plus income, the 30K savings if it were SE tax may very well be a close figure. It would take some time, but you really need to do a complete comparison with both entities to see the possibilities. 

[Possi]

On ‎8‎/‎18‎/‎2017 at 4:33 PM, Abby Normal said:

Except it sounds like he can't save any money.

Each partner maxes out the pension plan, shaving the max off their income.

 

On ‎8‎/‎20‎/‎2017 at 8:28 AM, Terry D said:

There are a lot of questions that need to be addressed to determine the best tax strategy for your client. I am assuming he is currently taxed as a disregarded entity and pays self-employment tax on the income minus expenses from the partnership. AT 350K plus income, the 30K savings if it were SE tax may very well be a close figure. It would take some time, but you really need to do a complete comparison with both entities to see the possibilities. 

He is taxed as a disregarded entity and pays SE tax on the income, but SS tax maxes out, and he pays the medicare tax plus the additional medicare tax on high income, so how can he save 30K? Even if he took a "reasonable salary," at that income level he will still max out on SS tax and be hit with add'l medicare.

So, I don't see how he can save by incorporating. Can you help me to see it?

[Lee B]

The only way that kind of money could be saved would be to pay an "unreasonably low salary" !

The only other avenue would be a Regular C Corp, maxing out all the fringe benefits.

[Terry D EA]

I agree an unreasonably low salary. Remember though that even though the SS is maxed there is still the match which totals the SE tax. Yes he gets 1/2 credit adjustment on form 1040 page 1 which lowers the income but he SE tax is calculated on the pass thru income. That is the only thing I could see that would not be calculated if he indeed  incorporated. I have done these comparisons as I mentioned. Taking into consideration the adjustment for SE, Amounts withheld as an employee, and other tax that would be paid out of pocket, the only savings is usually the SE tax. As a disregarded entity he is subject to SE tax but as an S-Corp, SE tax is not calculated on the pass thru.