Tax Reform Basics for the Qualified Business Income Deduction (199A)

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1 Tax Reform Basics for the Qualified Business Income Deduction (199A)
Richard Furlong, Jr. Senior Stakeholder Liaison December 12, 2018 CPA Continuing Education Society of PA

2 Objectives Discuss who is eligible
Provide an overview of the deduction Define terms Explain the general computation

3 Overview, Definitions and Eligibility
Eligibility, Overview, and Definitions

4 Who is Eligible? Taxpayers, other than C corporations, with qualified business income (QBI) from a qualified trade or business (QTB) or qualified publicly traded partnership (PTP) income and Section 199A real estate investment trust (REIT) dividends may take this deduction, including: Individuals, Certain trusts and estates.

5 What is the Deduction? Generally, individuals and certain trusts and estates may be entitled to a qualified business income deduction (QBID) of up to 20% of: qualified business income (QBI), plus combined Section 199A REIT dividends and qualified PTP income. The deduction is subject to limitations.

6 Qualified Business Income
QBI is the net amount of income, gain, deduction, and loss from any qualified trade or business (QTB) including those conducted through: Sole proprietorships, S corporations, Partnerships, Trusts, and Estates.

7 QBI Does Not Include Items that are not properly includable in taxable income Investment items such as capital gains or losses or dividends Interest income not properly allocable to a trade or business Wage income Income that is not effectively connected with the conduct of a business within the United States

8 QBI Does Not Include (cont’d)
Certain commodities transactions or foreign currency gains or losses Certain dividends and payments in lieu of dividends Certain income, loss, or deductions from notional principal contracts Annuities (unless received in connection with the trade or business)

9 QBI Does Not Include (cont’d)
Reasonable compensation received from an S corporation Guaranteed payments received from a partnership Payments received by a partner for services other than in a capacity as a partner

10 Qualified Trade or Business
QTB is any trade or business that is allowed a deduction for ordinary and necessary business expenses (section 162), with two exceptions: the trade or business of being an employee, and specified service trade or business (SSTB) Note: The SSTB exception only applies if a taxpayer’s taxable income, before QBID, exceeds the threshold.

11 Specified Service Trade or Business
A specified service trade or business is any trade or business described in section (e)(3)(A) (with certain modifications) That is, any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.

12 Specified Service Trade or Business
A specified service trade or business is also any trade or business: Which involves the performance of services that consist of investing and investment management, trading, or dealing in securities, partnership interests, or commodities.

13 Specified Service Trade or Business5
The specified service exclusion does not apply to taxpayers whose taxable income is less than $157,500 ($315,000 married filing jointly (MFJ)). The deduction is reduced for taxpayers in a specified service trade or business whose taxable income is between $157,500 and $207,500 ($315,000 and $415,000 MFJ). Income from a specified service trade or business is not income from a qualified trade or business for taxpayers with taxable income above $207,500 ($415,000 MFJ).

14 Section 162 Trade or Business
In general, to be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity and the primary purpose for engaging in the activity must be for income or profit. For interests owned in a pass-through entity, the trade or business determination is made at the entity level.

15 Rentals Rentals qualify for the QBID if:
The rental activity rises to the level of a section 162 trade or business, or The rental or licensing of property is to a commonly controlled trade or business Sometimes referred to as self-rental

16 REIT Dividends & PTP Income Defined
REIT Dividends (Form 1099-DIV, box 5): Any dividend received from a REIT, except capital gain dividends under § 857(b)(3) and qualified dividends under § 1(h)(11). PTP Income: Qualified items of income, gain, deduction, and loss from a PTP, plus any gain or loss recognized on the disposition of the PTP interest not treated as a capital gain or loss.

17 Pass-Through Entity Reporting
S Corporations & Partnerships For each QTB, the entity must provide the necessary information to its eligible shareholders or partners (Schedule K-1, Other Information). Estates & Trusts Split QBI items between the estate/trust and its beneficiaries, and Report necessary information items allocated to eligible beneficiaries (Schedule K-1, Other Information).

18 Pass-Through Entity Reporting (cont’d)
Required items reported by S corporations, partnerships, trusts and estates to owners: qualified business income, whether any trades or businesses conducted by the entity are SSTBs,* W-2 wages,* unadjusted basis of qualified property,* Section 199A REIT dividends and qualified PTP income, domestic production activities deduction (199A(g)) passed through from cooperative. * Needed for limitations.

19 Computation QBID Computation

20 General Computation In general, the QBID equals the lesser of:
QBI Component plus 20% (REIT Dividends + PTP Net Income) or 20% (Taxable Income* – Net Capital Gains) * Calculated before the QBID

21 QBI Component Taxpayers at or below the threshold:
= QBI x 20% (less the Patron Reduction) Taxpayers above the threshold but within the phase-in range: = QBI x 20%, adjusted by: Applicable percentage for SSTB Limitation for wages and basis (phased-in), and Patron Reduction

22 QBI Component (cont’d)
Taxpayers above the threshold and phase-in range: = QBI x 20%, adjusted by: Limitation for wages and basis and Patron Reduction An SSTB is not a QTB for taxpayers with taxable income above the threshold and phase-in range.

23 Threshold Amount and Phase-In Range
Threshold is taxable income of $157,500 or $315,000 if married filing jointly. Phase-in range equals the threshold amount plus $50,000 or $100,000 if married filing jointly: More than $157,500 to $207,500, or More than $315,000 to $415,000 if married filing jointly.

24 Taxable Income Taxable income is computed before the QBID.
The taxpayer’s taxable income for QBID = Adjusted gross income (line 7) Less: Standard or itemized deductions (line 8)

25 Net Capital Gain Net capital gains for section 199A include:
Qualified dividends from Form 1040, line 3a PLUS The smaller of the amounts reported on Schedule D line 15 or 16, if blank or a loss, your net gain is zero, or When Schedule D is not required, the gain on Form 1040, Schedule 1, line 13.

26 Loss Netting – QBI Component
Losses from a QTB must offset the income of other QTBs in proportion to their net income. An overall net loss for the year carries over to offset future year’s QBI.

27 Negative Combined REIT Dividends and PTP Income
Deductible losses from a PTP must offset income from other PTPs and REIT Dividends. An overall net loss for the year carries over to offset future year’s REIT Dividends and PTP Income but does not offset QBI from a trade or business.

28 Computation At or Below the Threshold

29 General Computation At or Below Threshold
The QBID is limited to the lesser of: QBI Component Plus 20% (REIT Dividends + PTP Net Income) or 20% (Taxable Income* – Net Capital Gains) * Calculated before the QBID.

30 QBI Component At or Below the Threshold
The QBI component when taxable income, before QBID, is at or below the threshold: = QBI x 20% (less the patron reduction) Note: The SSTB exclusion does not apply

31 Example – At or Below Threshold Taxable Income Limitation
Abel, who is single, operates a bakery as a sole proprietorship. In 2018 he had the following: Abel’s QBID is $14,800 computed as follows: QBI $100,000 Net capital gains $7,000 Taxable income, before QBID $81,000

32 Example – At or Below Threshold Taxable Income Limitation (cont’d)
QBI $100,000 Net capital gains $7,000 Taxable income, before QBID $81,000 QBID is limited to the lesser of: 20% x $100,000 (QBI) = $20,000, or 20% x ($81,000 (TI) – $7,000 (NCG)) = $14,800

33 Most Important Points General computation is 20% QBI plus 20% REIT/PTP income (subject to limitations) QBID cannot exceed 20% (Taxable Income – Net Capital Gains) Threshold is $157,500; $315,000 MFJ

34 Most Important Points Pass-through Entities provide information on Form K-1 QBI only includes net amounts of qualified items of income, gain, deduction and loss from a qualified trade or business Specified Service Trades or Business subject to certain limitations

35 Resources IRS.gov/TaxReform
REG Proposed Regulations Qualified Business Income Deduction Notice Methods for Calculating W-2 Wages for Purposes of Section 199A Instructions to Form 1040 Publication 535, Business Expenses

36 Contact information Richard Furlong, Jr. Senior Stakeholder Liaison