Retirement Plans May Play a Unique Role in Qualified Business Income Deductions

Tax-law changes have increased the amounts that can be contributed, tax credits for contributions and administration costs are available, and technological improvements make administration functions easier. There are a number of reasons for an employer to sponsor a retirement plan:

• Contributions are generally tax-deductible and can reduce taxable income or wages for business owners or employees.
• Plan investments grow tax-deferred. Tax-deferred compounding allows plan assets to grow more quickly than non tax-deferred investments.
• A plan can help attract and retain valued employees, and ensure a financially secure retirement.

New deductions enacted with the passage of the Tax Cuts and Jobs Act (TCJA) define a category of income known as qualified business income (QBI) where owners of sole proprietorships, partnerships, and S corporations may be eligible to deduct up to 20% of this QBI for tax purposes.  This new deduction presents a unique opportunity for retirement plans to play a front and center role in managing tax deductions for these business owners.

Because the QBI deduction can be affected by an individual’s amount of taxable income, a well-positioned retirement plan can enhance the QBI deduction benefits available for certain business owners. Take the example of a sole proprietor who files a joint tax return, has Net Schedule C and qualified business income of $415,000.
Ordinarily this business owner would not qualify for a QBI deduction. However making a deductible retirement plan contribution of $100,000 through a Defined Benefit Plan may increase that business owner’s QBI deduction to $63,000. In addition, the retirement plan contribution itself is tax deductible, further reducing the owner’s taxable income.

Retirement plans can have complex tax implications for you and your business. Please speak with your independent tax advisor about these implications when evaluating the strategies discussed here or any others.
As new deductions and features become available to taxpayers such as small business owners, it makes sense to evaluate the role of your retirement plan in meeting your investment needs and overall financial goals. An Oppenheimer Financial Advisor can help evaluate the types of retirement plans available to your business and that meet these unique needs and goals.