Cash Balance Opportunities under the Tax Cuts and Jobs (TCJA) of 2017

Wait a minute, shouldn’t an article about the tax benefits of Cash Balance Plans be written after yet another round of tax increases?  The Act says “Tax Cuts” right in the title!

Some Taxpayers Not Eligible for Pass Through Deductions

A major tax reduction strategy of TCJA was to provide some businesses with pass through income (Qualified Business Income (QBI)) deductions.  TCJA allows a deduction of 20% of QBI of a pass through entity if the income is generated by the investment of capital.

For businesses where the income is generated by services or the knowledge of the business owner, the deduction is only permitted if the taxable income is below certain limits.  If business owner earnings are over $207,500 for a single return or $415,000 for a joint return AND the business owners are in the following professions:

  1. Physicians
  2. Attorneys
  3. Actuaries
  4. Financial Advisors
  5. Accountants
  6. Consultants
  7. Lobby Organizations

Then the QBI deduction is not allowed.  Business owners for the above businesses would continue to be candidates for Cash Balance Plans as one of the major deductions of TCJA is not available.  These business owners may be specifically interested in participating in the tax cuts of many other tax payers by implementing a Cash Balance Plan!  Of course any Cash Balance Plan should be designed with input of the CPA of the business.

Let’s look at several examples.

Let’s consider a doctor, as follows:

W-2 Compensation $150,000
QBI, if eligible $300,000
QBI Deduction, not eligible $0
Taxable Income, Joint Return, over $415,000 $450,000

Owners of the above businesses with taxable income below certain levels ((157,500 for single return, $315,000 for a joint return) are eligible for the QBI deduction.

This second example is the same as the first except that business owner implements a Cash Balance Plan and makes a first year contribution of $175,000:

W-2 Compensation $150,000
QBI, if eligible $125,000 (net of tax deductible Cash Balance contribution)
Less: QBI Deduction, eligible! $25,000
Taxable Income, Joint Return, less than $315,000 $250,000

Let’s compare the examples.  In the example above, a Cash Balance contribution of $175,000 reduces taxable income by $200,000!  Assuming an incremental tax rate of 40% (may be higher for many), the tax savings are $80,000 on a retirement contribution of $175,000.

To briefly review, many businesses are not eligible for the QBI deduction if income exceeds certain limits.  Many of these business owners are looking for the same tax savings that others realized under TCJA and a Cash Balance Plan is a good answer.  For examples such as the second above, a retirement contribution can actually result in a reduction of income greater than the amount of the contribution!

Cash Balance Plan might be the best option when looking for a creative way to meet retirement goals while also generating a sizeable tax deduction! TRA has the industry relationships, expertise, and proven record of success when designing a new and innovative retirement plan. Contact your RSC today.

John Markley – Director of Industry Relations
At Markley Acturial – A Division of TRA

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