Even in an optimized plan, you want the legal ability to use a QNEC (Qualified Nonelective Contribution) in the future, especially if regulations change or if you decide to add a matching contribution down the road.
QNEC language is a standard part of any modern, professional plan document, but it must specify the criteria (or “source”) for making the contribution and ensure it meets IRS requirements for vesting and distribution.
Here is a template for the essential QNEC terms you would reserve in your 401(k) plan document. Note: This is general language; the final text must be provided by your Third-Party Administrator (TPA) and the document provider.
📄 Reserved QNEC Terms for 401(k) Plan Document
I. Purpose and Source of QNEC
The following provisions establish the Plan Sponsor’s right to make Qualified Nonelective Contributions (QNECs) to the Plan, which shall be used exclusively for the purposes of satisfying the requirements of the Internal Revenue Code (IRC) §401(a)(4), correcting Plan operational failures under the Employee Plans Compliance Resolution System (EPCRS), or, if necessary, to assist the Plan in meeting the non-discrimination requirements of the Actual Deferral Percentage (ADP) Test and the Actual Contribution Percentage (ACP) Test, as permitted under IRC §401(k) and §401(m) regulations.
II. Allocation and Determination (The Method)
Discretionary Nature: The Plan Sponsor shall have the sole and absolute discretion to determine whether a QNEC shall be made for any Plan Year, subject to the conditions of this Section.
Targeted Allocation: QNECs shall be allocated exclusively to the accounts of Non-Highly Compensated Employees (NHCEs) or specific participants, only to the extent necessary to cure a failure of the ADP or ACP Test or to correct a specific operational failure (e.g., a missed deferral opportunity).
Determination Method: For purposes of correcting a failed ADP or ACP Test, the QNEC amount shall be calculated as the minimum amount required to raise the NHCE Actual Deferral Percentage (ADP) or Actual Contribution Percentage (ACP) to a level necessary to satisfy the respective test, pursuant to the ratio percentage method defined under Treasury Regulations.
No Contingency: The Plan Sponsor may make a QNEC regardless of the Plan Sponsor’s profitability.
III. QNEC Compliance Requirements
Contributions designated as QNECs must satisfy the following requirements, irrespective of any other Plan provision:
Immediate Vesting (Nonforfeitability): All QNECs, including any earnings attributable thereto, shall be 100% vested and nonforfeitable immediately upon allocation to the Participant’s account.
Distribution Restrictions: QNECs, and any earnings attributable thereto, shall be subject to the same distribution restrictions applicable to Elective Deferrals under IRC $\S 401(\mathrm{k})$. Specifically, such amounts shall not be distributable earlier than upon the Participant’s separation from service, death, disability, attainment of age 59½, or the termination of the Plan.
IV. Timing of Correction
QNECs used to cure a failed ADP or ACP test must be deposited by the Plan Sponsor no later than 12 months after the close of the Plan Year to which the test relates.
Why this Language is Important in Your Optimized Plan
In your current low-cost scenario, you are relying on the Safe Harbor status to automatically satisfy the ACP Test. However, retaining these QNEC terms is a crucial insurance policy because:
Future Match: If you ever decide to add a matching contribution, the ACP test will be required, and the QNEC terms will allow you to correct a failure.
Operational Errors: If your payroll/TPA makes an error and excludes an eligible employee, the QNEC language provides the legal mechanism to make the required corrective payment to the excluded employee’s account.
🚀 The Owner’s Guide to 401(k) Maximization: Achieve a $77,500 Roth Contribution at Minimum Cost
As a business owner, you face a unique challenge: providing a valuable retirement benefit to your team while also maximizing your personal, tax-advantaged savings. When your non-highly compensated employees (NHCEs) are low-income and choose not to contribute, your plan faces mandatory IRS testing that can limit your contributions.
The good news? There is one specific 401(k) design that legally bypasses these limitations and guarantees you can achieve the highest possible Roth savings—up to $77,500 for owners age 50+ (2025 limits)—for the lowest employer cost.
Here is the essential blueprint for your optimized 401(k) plan.
Part I: The Owner’s Contribution Goal (The $77,500 Target)
Your goal is to maximize your contribution to the tax-free Roth bucket. This requires leveraging the Mega Backdoor Roth strategy, which uses three contribution components that must fit under the total Annual Additions cap (Section 415 limit: $70,000 in 2025, plus an additional $7,500 catch-up contribution for owners 50 and older).
Contribution Component
Source
2025 Amount (Owner Age 50+)
Purpose
Roth Deferral (Base + Catch-up)
Employee Salary
$31,000
Maxes out the annual deferral limit.
Safe Harbor Contribution
Employer
$6,000 (Example: 3%×$200K salary)
Required to guarantee compliance.
After-Tax Contribution
Employee Salary
$40,500
The “Mega Backdoor” contribution, filling the space up to the $70,000 cap.
Total Max Savings
$77,500
All $77,500 can be converted to or designated as Roth.
This owner goal is fixed—it is the maximum the IRS allows. The challenge is ensuring the plan passes the non-discrimination tests without forcing expensive, unpredictable contributions to your lower-income employees.
Part II: The Optimal Plan Design: The “Free Pass” Solution
The key to minimizing employer cost is to avoid the Actual Contribution Percentage (ACP) Test, which is the test that would restrict the owner’s After-Tax contribution.
🔑 The Solution: The 3% Safe Harbor Nonelective (SHNEC)
To achieve the lowest possible employer cost while maximizing the owner’s contribution, your plan must be structured as follows:
Feature
Requirement
Why It Works
Safe Harbor Choice
Elect the 3% Nonelective Contribution (SHNEC).
Automatically satisfies the ADP Test (for deferrals).
Matching Contribution
DO NOT OFFER ANY MATCHING CONTRIBUTION.
This is the crucial step. Without a match, the SHNEC also automatically satisfies the ACP Test, providing a “free pass” for your Mega Backdoor Roth contributions.
QNEC Provision
DO NOT RELY ON QNEC.
Since the ACP test is automatically satisfied, the costly, corrective QNEC is $0.
The Calculation of the Employer’s Minimum Cost
The only mandatory employer cost is the 3% SHNEC, applied to all eligible employees (owner and NHCE), regardless of whether they contribute.
Using the example of an Owner 200,000$ and NHCE 35,000$ salaries:
Total Minimum Employer Cost = (Owner SHNEC) + (NHCE SHNEC)
Total Minimum Employer Cost = ($200,000 times 3%) + ($35,000 times 3%)
Total Minimum Employer Cost = $6,000 + $1,050 = $7,050
By adopting this design, the employer’s cost is simply the mandatory $7,050 Safe Harbor Contribution, and $0 is required for corrective QNECs.
Part III: The Action Plan for Implementation
To implement this structure and guarantee your ability to use the Mega Backdoor Roth, you must take the following steps:
Adopt the Plan Amendment: Ensure your 401(k) Plan Document is formally amended to include:
The 3% Safe Harbor Nonelective Contribution provision.
A provision allowing Voluntary Employee After-Tax Contributions (the MBDR source).
A provision allowing In-Plan Roth Conversions or In-Service Withdrawals of the after-tax money.
A provision explicitly removing all Employer Matching Contributions (if they currently exist).
Notify Employees: Provide the required Safe Harbor notice to all eligible employees at least 30 days before the start of the new plan year.
Execute the Mega Backdoor: Once the plan is in effect, the owner’s contribution strategy is:
Contribute the $31,000 (base + catch-up) as Roth Deferral through payroll.
Contribute the remaining $40,500 as a Voluntary After-Tax Contribution.
Immediately execute the In-Plan Roth Conversion or roll the $40,500 out to a personal Roth IRA to start tax-free growth immediately.
This simple, low-cost structure is the most effective way for small business owners to secure maximum personal retirement savings while maintaining full IRS compliance.
Disclaimer: The limits used are for the 2025 tax year. This article is for informational purposes only. Business owners should consult with a qualified third-party administrator (TPA) and tax advisor before implementing any changes to their retirement plan.
The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, introduces a wide range of tax changes that will impact both businesses and individuals, primarily for the 2025 tax year and beyond. These changes will affect tax returns filed in early 2026. This overview, based on a presentation by Xinyi Cindy Yu, CPA MBA CFP, highlights some of the most significant updates.
Key Changes for Businesses
The OBBBA makes several key changes that will impact corporate tax returns (Form 1120) and pass-through entities.
R&E Expenses: Research and experimentation (R&E) expenses will again be immediately deductible, reversing the prior law that required them to be capitalized and amortized.
Depreciation: The law permanently restores 100% first-year bonus depreciation for qualified property acquired and placed in service after January 19, 2025. The expensing limit for Section 179 is also increased to $2.5 million, with the phase-out threshold rising to $4 million for 2025. These changes will be reflected on Form 4562.
Business Interest Limitation: The calculation for the business interest expense limitation (Form 8990) will revert to the original TCJA rule, allowing businesses to deduct more interest expense by including depreciation, amortization, and depletion in the calculation of Adjusted Taxable Income (ATI).
Updates to Individual Tax Forms
Individual taxpayers will also see a number of changes, which will be reflected on Form 1040.
New “Above-the-Line” Deductions: The OBBBA introduces new deductions for qualified tips, overtime pay, and auto loan interest for the years 2025 through 2028.
Standard vs. Itemized Deductions: The temporary increase to the State and Local Tax (SALT) deduction cap to $40,000 and a permanent increase to the standard deduction may influence whether a taxpayer chooses to itemize on Schedule A.
Deduction for Seniors: A new, additional deduction for seniors will be factored into the final taxable income calculation.
Excess Business Loss Limitation: The limitation on excess business losses for non-corporate taxpayers is now permanently extended and will not expire after 2028. Form 461 is used to calculate this loss and determine the deductible amount for the current tax year.
Changes to Tax Credits and Other Provisions
The new law also modifies several tax credits and administrative rules.
Clean Energy Credits: The OBBBA eliminates or phases out many clean energy credits. For example, the credit for qualified commercial clean vehicles will be eliminated after September 30, 2025.
Employer-Provided Credits: The employer credit for paid family and medical leave is made permanent. Additionally, the maximum employer-provided child care credit is permanently increased to 40% of qualified expenses, up to $500,000 annually.
Information Reporting Thresholds: For payments made after December 31, 2025, the reporting thresholds for Forms 1099-NEC and 1099-MISC will increase from $600 to $2,000, which is intended to reduce the administrative burden on small businesses. The Form 1099-K threshold will also revert to its pre-2021 level of $20,000 and 200 transactions.
For more details, please consult a tax professional. The presentation was prepared by Xinyi Cindy Yu, Partner at CINDIE and EliteCPA P.C., cindy.yu@cindiecpa.com, located at 200 Centennial Ave, Suite 106, Piscataway, NJ 08854.
驾驭2025年税收变化：OBBBA法案（One Big Beautiful Bill Act）概述
2025年7月4日签署成为法律的《OBBBA法案》（One Big Beautiful Bill Act）引入了一系列广泛的税收变化，将主要影响2025年及以后的企业和个人。这些变化将影响在2026年初提交的2025纳税年度的纳税申报表。本文根据注册会计师、工商管理硕士、注册理财规划师（CPA MBA CFP）Xinyi Cindy Yu的演示文稿，概述了其中一些最重要的更新。
Unlocking a Powerful Retirement Strategy: The Mega-Backdoor Roth 巨额后门 Roth
For high-income earners who have maxed out their traditional retirement accounts, the Mega-Backdoor Roth is an advanced strategy that can significantly increase tax-free savings for retirement. Unlike a standard Roth IRA, which has strict income limits, the Mega-Backdoor Roth leverages an often-overlooked feature in many 401(k) plans to allow for massive after-tax contributions that are then converted into a Roth account.
1. Eligibility: Who Can Use This Strategy?
The Mega-Backdoor Roth is not a universally available option. It hinges on the specific features of your employer-sponsored retirement plan. To be eligible, your 401(k), 403(b), or 457 plan must allow for two critical components:
After-Tax Contributions: Your plan must permit you to make after-tax contributions beyond the regular employee deferral limit (the standard pre-tax or Roth 401(k) contributions).
In-Service Distributions or Conversions: The plan must allow you to either take “in-service” distributions (withdrawals while you are still employed) of these after-tax funds or perform an “in-plan” conversion, moving the after-tax money directly into a Roth 401(k) within the same plan.
It is essential to check with your human resources department or plan administrator to confirm if these features are available in your plan. If your plan does not allow in-service distributions or conversions, you may have to wait until you leave your job to execute the conversion, which could result in a significant tax bill on any earnings that have accrued in the after-tax portion of your account.
2. The Flow of the Mega-Backdoor Roth
The process is a two-step maneuver that takes advantage of the total annual contribution limit for defined contribution plans. This limit is much higher than the employee elective deferral limit. Here is a step-by-step breakdown:
Maximize Your Standard Contributions: First, you must max out your regular employee contributions to your 401(k). This can be a pre-tax or Roth 401(k) contribution, up to the annual limit ($23,500 in 2025, with higher catch-up limits for those age 50 and over).
Make After-Tax Contributions: Once you have reached the employee deferral limit, you then make additional contributions to your 401(k) on an after-tax basis. The maximum you can contribute here is the difference between the total annual contribution limit for your plan ($70,000 in 2025) and the sum of your employee contributions and any employer contributions (e.g., matching funds).For example, if you contribute the maximum employee deferral of $23,500 and your employer matches $10,000, you could potentially contribute up to $36,500 ($70,000 – $23,500 – $10,000) in after-tax dollars.
Perform the Conversion: The final and most crucial step is to convert the after-tax contributions into a Roth account. This is typically done as soon as possible after the contributions are made to minimize any investment gains in the after-tax portion, which would be taxable upon conversion. The conversion can be either:
To a Roth IRA: You roll the after-tax funds out of your 401(k) and into a separate Roth IRA.
To a Roth 401(k): If your plan offers an in-plan Roth conversion, you can move the funds into a Roth 401(k) within the same plan.
Once the funds are in a Roth account, they can grow tax-free, and qualified withdrawals in retirement will also be tax-free.
3. Mega-Backdoor Roth vs. Backdoor Roth IRA
While both strategies are designed to help high-income earners save more in Roth accounts, they target different contribution limits and mechanisms.
Feature
Mega-Backdoor Roth
Backdoor Roth IRA
Primary Goal
To supercharge Roth savings using high 401(k) contribution limits.
To bypass income limits for direct Roth IRA contributions.
Annual Limit
The total 401(k) contribution limit ($70,000 in 2025) minus employee and employer contributions.
The annual IRA contribution limit ($7,000 in 2025).
Mechanism
Making after-tax contributions to a 401(k) and converting them to a Roth IRA or Roth 401(k).
Making a non-deductible contribution to a traditional IRA and converting it to a Roth IRA.
Eligibility
Dependent on specific 401(k) plan features (after-tax contributions and in-service distributions/conversions).
Anyone with earned income, regardless of income level, as long as they don’t have pre-tax money in other traditional IRAs (due to the pro-rata rule).
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The key difference is the scale. A Backdoor Roth IRA allows a person to contribute a modest amount each year, whereas the Mega-Backdoor Roth can be used to funnel tens of thousands of dollars into a Roth account, making it a much more powerful tool for accumulating tax-free wealth.
4. Institutions Offering Mega-Backdoor Roth
The availability of a Mega-Backdoor Roth strategy is determined by your employer’s plan, not the financial institution itself. The plan provider simply facilitates the features that the employer has chosen to include. However, certain companies are well-known for offering this valuable benefit to their employees. This is a crucial detail to consider when evaluating a job offer, especially for high earners.
While a comprehensive list is difficult to maintain as plan details can change, major financial institutions that serve as 401(k) plan administrators, such as Fidelity Investments, Vanguard, and Charles Schwab, can often support the administrative functions required for a Mega-Backdoor Roth, provided the employer’s plan is set up to allow it.
Additionally, some specialized companies and financial advisors, like IRA Financial, focus on helping self-employed individuals and small business owners set up Solo 401(k) plans that are explicitly designed to enable the Mega-Backdoor Roth strategy.
Ultimately, whether you can use a Mega-Backdoor Roth is a matter of checking with your employer and ensuring your plan has the right features. If so, it can be a highly effective way to turbocharge your tax-free retirement savings.
For more details, please consult a tax professional. The presentation was prepared by Xinyi Cindy Yu, Partner at CINDIE and EliteCPA P.C., cindy.yu@cindiecpa.com, located at 200 Centennial Ave, Suite 106, Piscataway, NJ 08854
Effective Date: __________________[Insert Date] Applies to: _____________________[Your Company Name]
1. Purpose
This policy defines the accounting treatment for fixed assets, low-cost purchases, and employee fringe benefits, ensuring IRS compliance and maximizing available tax deductions and incentives.
** This policy needs to be updated each year with latest tax law requirements.
2. Capitalization & Expense Policy
2.1 Capitalization Threshold
Assets costing $2,500 or more per unit will be capitalized and depreciated under IRS MACRS guidelines.
2.2 De Minimis Safe Harbor
Under Reg. §1.263(a)-1(f), items costing $2,500 or less per item/invoice will be expensed. Applicable items: laptops, mobile devices, tools, furniture, software, etc.
2.3 Section 179 Expensing (2025)
Deduction limit: $1,220,000
Applies to tangible property used >50% for business
Limited by taxable income and phase-out thresholds
2.4 Bonus Depreciation (2025)
60% immediate deduction for qualified assets
Remaining basis depreciated via MACRS
Automatically applied unless opted out
3. Repairs & Maintenance
Routine maintenance costs that do not improve or extend asset life will be fully deductible as incurred.
4. 401(k) Safe Harbor & Profit Sharing Plan
The company may sponsor a qualified 401(k) plan with optional Safe Harbor and profit-sharing provisions.
4.1 Safe Harbor Contributions
Option 1: 3% non-elective to all eligible employees
Option 2: Match 100% of first 3% + 50% of next 2% deferred
Contributions are 100% vested immediately
4.2 Employee Deferral Limits (2025)
Up to $23,000 (under age 50)
Plus $7,500 catch-up for age 50+
4.3 Profit Sharing
Up to 25% of compensation (limit: $345,000)
Combined total (employee + employer) capped at:
$69,000 (or $76,500 with catch-up)
4.4 Vesting & Administration
Safe Harbor: fully vested
Profit sharing: may follow a graded schedule
Administered per IRS and ERISA rules with annual compliance testing
5. Employee Fringe Benefits
The company may offer tax-qualified fringe benefits, deductible by the company and often tax-free to employees.
5.1 Educational Assistance (IRC §127)
Up to $5,250/year per employee
Covers tuition, books, fees (not meals or lodging)
Requires a written plan
5.2 Job-Related Training
Fully deductible if it maintains/improves job skills
Examples: seminars, CPA/CPE, software courses
Must not qualify employee for a new trade or profession
5.3 Health & Fitness (IRC §132, §106)
Onsite gym: deductible and tax-free
Offsite memberships: generally not deductible unless included in a medical or taxable fringe program
5.4 Meals & Entertainment (IRC §274)
Meals for employer convenience:
50% deductible (100% if de minimis or for company events)
Entertainment: not deductible
5.5 Commuter Benefits (IRC §132(f))
Monthly exclusion (2025):
$315 for parking
$315 for transit
Must be part of a qualified transportation plan
5.6. Summary of Fringe Benefit Limits (2025)
Benefit Type
Annual Limit
Deductible?
Tax-Free to Employee?
Educational Assistance
$5,250
✅ Yes
✅ Yes
Job-Related Training
No limit
✅ Yes
✅ Yes
Onsite Gym
N/A (facility cost)
✅ Yes
✅ Yes
Offsite Gym
N/A
⚠️ No*
⚠️ No (unless taxable)
Transit / Parking
$315/month ($3,780/year)
✅ Yes
✅ Yes
Meals (on premises)
N/A
✅ 50–100%
✅ Sometimes
5.7. Documentation Requirements
To support deductions and IRS compliance, the company will maintain:
Receipts and vendor invoices
Proof of employee participation in eligible programs
Written plan documents (education, commuter benefits, etc.)
Payroll records for fringe benefit reporting (W-2 where applicable)
5.. Annual Election & Compliance
Each year, the company’s accountant or tax preparer will: – Elect De Minimis Safe Harbor with the federal tax return – File Form 4562 for Section 179 and depreciation schedules – Track all fringe benefits provided to employees – Ensure W-2 reporting for any taxable fringe benefits
6. Home Office Reimbursement Policy
The company may reimburse employees or owners for the business use of a home office, provided the space meets IRS criteria and reimbursement is made under an accountable plan.
6.1 IRS Qualification Criteria
– The space must be used **regularly and exclusively** for business.
– It must be the **principal place of business** or used to meet clients or perform administrative functions.
– A dedicated room or clearly defined portion of a room may qualify.
6.2 Reimbursement Methods
– The company may reimburse based on:
• The **Simplified Method**: $5 per square foot, up to 300 sq ft ($1,500/year max), or
• The **Actual Expense Method**: Based on the business-use percentage of eligible home expenses (e.g., rent, mortgage interest, utilities, insurance, repairs).
– Reimbursement is only allowed under an **accountable plan** with supporting documentation.
6.3 Documentation Requirements
– Employees/owners must submit:
• A written request with square footage or percentage used
• Utility bills, rent/mortgage statements, and other substantiating documents
• A signed declaration that the space is used exclusively and regularly for business
– Reimbursements will be excluded from employee income if properly documented.
7. Overall Documentation and Compliance
To support deductions and IRS compliance, the company will maintain:
Receipts and vendor invoices
Documentation for fringe benefits and reimbursements
Proof of employee participation in eligible programs
Written plan documents (education, commuter benefits, etc.)
Payroll records for fringe benefit reporting (W-2 where applicable) etc
Each year, the company’s tax preparer will:
Elect the De Minimis Safe Harbor on the tax return
To determine whether an S Corporation (S Corp) or a Single-Member LLC (disregarded entity) is more tax-advantageous to a business owner with $100,000 net income, let’s compare both from a U.S. federal tax perspective (assuming the owner is a U.S. resident individual):
📌 Summary Table:
Factor
Single-Member LLC
S Corporation
Federal Tax Treatment
Disregarded entity – taxed as sole proprietorship on Schedule C
Pass-through entity – files Form 1120S, income reported on Schedule K-1
Self-Employment Tax
Applies to entire $100,000
Applies only to reasonable salary portion
Payroll Setup
Not required
Required for owner-employee
Reasonable Salary Required
❌ No
✅ Yes
Distributions (no SE tax)
❌ N/A
✅ After salary, remaining profits can be distributed without SE tax
Additional Admin Costs
Low
Higher (payroll, extra tax filings, compliance)
💰 Tax Impact Comparison (Assuming $100,000 Net Income)
🔹 Single-Member LLC (default)
Self-Employment Tax (15.3%) on full $100,000: → ≈ $15,300
Federal Income Tax (assumed 22% for illustration): → ≈ $22,000
Total Estimated Taxes: ≈ $37,300
🔹 S Corporation (assume $60,000 salary, $40,000 distribution)
FICA Tax on $60,000 salary: → Employer + Employee share ≈ $9,180 (7.65% x 2)
No SE tax on $40,000 distribution
Federal Income Tax on full $100,000: → ≈ $22,000
Total Estimated Taxes: ≈ $31,180
🟢 Savings with S Corp: ≈ $6,000+ (mainly by avoiding SE tax on $40,000)
✅ When S Corp Is Better:
You’re earning $50K+ annually in net profit
You’re comfortable with payroll setup & compliance
You want to reduce self-employment tax legally
⚠️ Watch Out:
You must pay yourself a reasonable salary (IRS scrutiny)
Additional costs: payroll service, 1120S filing, possible state-level S corp fees
Some states tax S corps differently (e.g., California has a minimum S corp tax)
Impact on Retirement Plan Contribution
Adding a retirement plan contribution changes the comparison between an S Corp and a Single-Member LLC—especially when using self-employed retirement plans like a Solo 401(k) or a SEP IRA.
Let’s break it down:
✅ Overview of Retirement Contribution Options
Plan Type
Single-Member LLC (Schedule C)
S Corporation
Solo 401(k)
Up to:
– $23,000 employee deferral (under age 50)
– + 20% of net SE income as employer contribution
Up to:
– $23,000 employee deferral (W-2 salary)
– + 25% of W-2 salary as employer contribution
SEP IRA
Up to 20% of net SE income
Up to 25% of W-2 salary
Assumes 2025 IRS contribution limits; age < 50.
💰 Example Scenario: $100,000 Net Business Income
Let’s assume:
Under 50 years old
You want to contribute the maximum retirement amount
You’re the only employee/owner
🔹 Single-Member LLC (Disregarded Entity)
Net Schedule C income: $100,000
Adjust for 1/2 SE tax: ~$92,350
Solo 401(k):
$23,000 (employee)
~$18,470 (20% of adjusted SE income)
Total Retirement Contribution: ≈ $41,470
Tax deduction reduces income subject to SE and income tax
SE tax still applies to full net income
🧮 Estimated tax savings:
Reduces taxable income to ≈ $58,530
Self-employment tax ≈ $14,000
Federal income tax ≈ $12,800
Total taxes ≈ $26,800
With $41,470 in retirement savings
🔹 S Corporation (Assume $60,000 salary, $40,000 distribution)
Solo 401(k):
$23,000 (employee deferral)
$15,000 (25% of $60,000 salary)
Total Contribution: $38,000
Retirement contribution is a corporate deduction (lowers net corp income)
SE tax (FICA) applies only to $60,000 salary: ≈ $9,180
Federal income tax applies to full $100K, but K-1 income drops to ≈ $22K
Total taxes ≈ $24,180
With $38,000 in retirement savings
🔍 Tax Comparison Summary with Retirement Contribution
Metric
Single-Member LLC
S Corp
Total Retirement Contribution
~$41,470
~$38,000
Self-Employment / FICA Tax
~$14,000
~$9,180
Income Tax (est. 22%)
~$12,800
~$15,000
Total Tax Liability
≈ $26,800
≈ $24,180
Net Advantage
✅ ~$2,600 saved
🧾 Final Conclusion:
S Corp still has a slight edge in overall tax savings due to lower SE tax.
LLC can make slightly larger retirement contributions (due to including net business income instead of W-2 limits).
If maximizing retirement savings is your #1 goal, LLC wins by ~$3,470 in contribution room.
If reducing total tax liability is the goal, S Corp wins by ~$2,600.
The OBBBA aims to make several Tax Cuts and Jobs Act (TCJA) provisions permanent and introduces new deductions and adjusted thresholds, while also ending certain energy-related tax credits. For high-income earners, the focus remains on navigating complex deduction limitations and understanding bracket adjustments.
1. Income Inclusion:
Foreign Earned Income Exclusion: The maximum exclusion amount is adjusted annually for inflation. For 2025, it remains $126,500. This can be significant for clients with international income.
Net Investment Income Tax (NIIT): The 3.8% NIIT on investment income remains for individuals with Modified Adjusted Gross Income (MAGI) above $200,000 (Single) or $250,000 (Married Filing Jointly).
2. Deduction Changes (Increase, Decrease, or Demolish):
Standard Deduction: Permanently extended at higher levels from TCJA.
2025 Standard Deduction Amounts:
Single/Married Filing Separately: $15,750 (up from $14,600 in 2024)
Married Filing Jointly/Qualifying Widow(er): $31,500 (up from $29,200 in 2024)
Head of Household: $23,625 (up from $21,900 in 2024)
Additional Standard Deduction (Seniors): A new extra deduction of $6,000 per senior (age 65+) is available from 2025-2028 ($12,000 for qualified couples), phasing out at $75K MAGI (single) and $150K (joint). This is in addition to the existing additional standard deduction for age/blindness ($2,000 for single/HOH, $1,600 for MFJ/MFS per qualifying individual in 2025).
State and Local Tax (SALT) Deduction Cap: Temporarily raised to $40,000 (from $10,000) for taxpayers earning under $500,000, through 2029. This provides increased deductibility for high earners in high-tax states, though the phase-out begins at $500,000 MAGI (single) and $600,000 (joint).
New Deductions (2025-2028):
Qualified Tip Income: Up to $25,000 deduction per filer, phasing out at $150K MAGI (single) and $300K (joint).
Overtime Pay: Capped at $12,500 (single) / $25,000 (joint), with the same phase-outs as tip income.
Auto Loan Interest: Up to $10,000 per year for interest on loans for U.S.-assembled vehicles taken after 2024, phasing out at $100K/$200K income.
Charitable Contributions (Non-Itemizers): A new above-the-line deduction of $150 (single) / $300 (married) for those not itemizing.
Qualified Business Income (QBI) Deduction (Section 199A): Permanently extended and expanded to 23% (from 20%) for pass-through business income. Rules limiting the deduction for high-income taxpayers have been eased.
Personal Exemptions: Permanently repealed (were scheduled to return in 2026).
Mortgage Interest Deduction: The limitation on mortgage interest indebtedness allowed for the deduction remains at $750,000 (permanently extended).
3. Lost Tax Credits and Additional Tax Credits:
Lost/Expiring Credits (Effective after December 31, 2025):
Residential Clean Energy Credit (e.g., solar panels, wind, geothermal, battery storage systems)
Energy-Efficient Home Improvement Credit
New Energy Efficient Home Credit
Investment Tax Credit for Solar & Wind
Child Tax Credit (CTC): Permanently extends the $2,000 per child credit amount. Also, provides a temporary $500 per child boost (max $2,500) from 2025-2028. The refundable amount (currently $1,700 per child) is permanently extended and adjusted for inflation. Phase-out remains at $200,000 (single) and $400,000 (married).
Earned Income Tax Credit (EITC): Income limits and maximum credit amounts are adjusted annually for inflation. While primarily benefiting lower and moderate-income taxpayers, some higher earners may still qualify for a partial credit depending on dependents and specific income levels.
4. Tax Rate Changes:
Permanent TCJA Brackets: The current federal income tax rates (10%, 12%, 22%, 24%, 32%, 35%, and 37%) are made permanent for 2025 and future years. This avoids the scheduled reversion to higher pre-TCJA rates.
Inflation Adjustment: Tax brackets are adjusted annually for inflation. The IRS will announce the exact 2026 inflation-adjusted income ranges later this year.
Alternative Minimum Tax (AMT): Higher AMT exemption amounts and thresholds are permanently extended, reducing the likelihood of high-income taxpayers being subject to AMT.
5. Example of Taxable Income of $300,000 (Married Filing Jointly – 2025):
Assumptions:
Married Filing Jointly
Taxable Income: $300,000
No unusual deductions or credits beyond standard calculation for illustration
No children
Under 65 and not blind
No new specific deductions (tip, overtime, auto loan) to simplify
Disclaimer: This is a simplified summary. Individual tax situations vary greatly. Clients should consult with their tax professional for personalized advice based on their specific financial circumstances. Tax laws are subject to change.
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To obtain a Transfer Certificate from the IRS for a nonresident decedent’s estate, which is often required to release U.S. assets (like bank or brokerage accounts) after death, follow these key steps:
🧾 STEP-BY-STEP: How to Obtain a Transfer Certificate (IRS)
✅ 1. Determine If a Transfer Certificate Is Required
A Transfer Certificate (IRS Form 5173) is generally required if the decedent was not a U.S. citizen or resident at time of death, and owned U.S. assets (e.g., U.S. stocks, real estate, bank accounts).
U.S. financial institutions may not release assets until this certificate is received.
✅ 2. Prepare and File IRS Form 706-NA
File Form 706-NA (United States Estate Tax Return for Nonresident Not a Citizen).
Include:
All required schedules (especially Schedule A for U.S. situs assets)
Death certificate (translated if not in English)
Will or Letters Testamentary (if available)
Power of Attorney (Form 2848) if you’re representing the estate
📌 Note: If the gross U.S. situs assets exceed $60,000, filing Form 706-NA is required. Even if under the threshold, the IRS may still require 706-NA to process the transfer certificate.
✅ 3. Include a Written Request for Transfer Certificate
There is no separate IRS form to request the certificate — you must include a written request in the cover letter with Form 706-NA.
The cover letter should:
Request issuance of a Transfer Certificate (IRS Form 5173)
Identify the decedent (full name, date of death)
Provide the TIN (if issued) or write “NRA”
List all U.S. assets held at death (attach a brokerage or bank letter showing date-of-death values)
State who is making the request (executor, attorney, CPA)
✅ 4. Mail the Return and Request to the IRS
Mail the Form 706-NA and attachments to:
Department of the Treasury Internal Revenue Service Center Cincinnati, OH 45999 USA
✅ 5. Respond to IRS Inquiries
The IRS may send a Letter 6272 or 6273 requesting more information or documentation.
Respond promptly and include:
Additional asset valuation support
Foreign estate tax filings (if any)
Ownership documentation
✅ 6. Wait for IRS Processing (Takes ~6–12 Months)
After processing the estate tax return and confirming no further U.S. tax is due (or that tax has been paid), the IRS will issue Form 5173: Transfer Certificate.
✅ 7. Provide the Certificate to U.S. Financial Institutions
Once received, send copies of the Transfer Certificate to the financial institutions holding U.S. assets. This will allow them to release the assets.
📎 Optional: If Under $60,000 Threshold (No Tax Owed)
You can still request a Transfer Certificate by submitting:
A letter requesting the certificate
A statement of assets and liabilities
A death certificate
Documentation of asset ownership and valuation
Proof the decedent was not a U.S. citizen/resident
Even without filing Form 706-NA, the IRS may still require additional documentation before issuing the certificate.
Please review your YTD income in addition to your W2 income. Please consider 1) how much tax was paid in last year 2) how much tax you might owe on the additional income. A 20% on additional income for federal and 8% for state might be a safe net for potential estimated tax penalty and interests.
Here are some simple things taxpayers can do throughout the year to make next filing season less stressful.
Organize tax records. Create a system that keeps all important information together. Taxpayers can use a software program for electronic recordkeeping or store paper documents in clearly labeled folders. They should add tax records to their files as they receive them. Organized records will make tax return preparation easier and may help taxpayers discover overlooked deductions or credits.
Check withholding. Since federal taxes operate on a pay-as-you-go basis, taxpayers need to pay most of their tax as they earn income. Taxpayers should check that they’re withholding enough from their pay to cover their taxes owed, especially if their personal or financial situations change during the year. To check withholding, taxpayers can use the IRS Tax Withholding Estimator. If they want to change their tax withholding, taxpayers should provide their employer with an updated Form W-4.
Save for retirement. Saving for retirement can also lower a taxpayer’s AGI. Certain contributions to a retirement plan at work and to a traditional IRA may also reduce taxable income.
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