A Possible Reduced-Rate Roth Conversion for Business Owners

Here’s an idea that can be very powerful for some business owners.  The 2017 Tax Act provides business owners with a 20% deduction on their business profits (Qualified Business Income or QBI).  The catch is that the 20% is applied to taxable income if that’s lower.  In other words, if taxable income is going to be lower than QBI, then you miss the opportunity to have some income that will receive a 20% deduction.

Therefore, if you accelerate income, some of the cost of doing so will be eliminated by the increase you are creating with a larger QBI deduction.  There are a number of ways to accelerate income.  However, one of the most exciting ones is creation of an account that can grow tax free and be withdrawn on a tax-free basis: the Roth IRA. 
 
In conclusion, if your 20% deduction is not being applied to your full QBI, then check with your CPA and financial advisor about a Roth conversion.  You may be able to create an income tax-free account at a reduced cost.

*Intended as general guidance only and not as legal advice.