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Qualified Business Income Deduction (Sec 199A)

Introduction:

  1. The Tax Cuts and Job Act established new code Section199A, which provides potential deduction equal to 20% of Qualified Business Income (QBI) from sole proprietorships, S corporations, partnerships, and LLCs taxed as partnerships.
  2. The QBI deduction is claimed by individual taxpayers on their personal tax returns.
  3. The deduction is available for tax years beginning after December 31, 2017 and before January 1, 2026.
  4. 199A deduction cannot be higher than 20% of net taxable income excess of the capital gain before 199A deduction.

ELIGIBLE TAXPAYER

The QBI deduction is available to the business owner of the pass-through entities, includes:

Pass-through entities
- Sole proprietorships
- Partnership
- S corporation
- LLC
- Trusts, Estates
Rental properties & REITs

QUALIFIED BUSINESS INCOME


Include:
- Net income, gain, deduction and loss that are with respect to a qualified trade or business
- Only domestic trade or business qualify
- QBI include passive and active income both.

Exclude:
- Interest, Dividend, Capital gain and losses
- Commodity gain/loss
- Foreign currency net gain/losses, notional principal contracts and annuities unless directly related to business activates.

QBI LIMITATIONS

  1. The qualified business income of S corporation must be reduced by reasonable compensation paid to S corporation Owners and Officers.
  2. The qualified business income of partnership must be reduced by guaranteed payment made to the partner.
  3. Net QBI losses will be carried forward to reduce next year’s QBI deduction.

QUALIFIED TRADE OF BUSINESS

The term “Qualified Trade Business” means any trade or business other than
  1. A specified service trade or business
  2. the trade of business of being as an employee

This will be calculate separately for each qualified business of the taxpayer conduct in US.

SPECIFIED SERVICE TRADE OF BUSINESS

As specified service trade or business mean any trade or business involving the performance of service in the filed of –
  1. Heath
  2. Law
  3. Accounting
  4. Consulting
  5. Financial Services
  6. Brokerage Services
  7. Actuarial Services
  8. Athletics
  9. Performing Art
  10. Investment Management
  11. 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.

COMPUTATION OF §199A DEDUCTION

The deduction is equal to the sum of -
1. The Lesser of :
  • The “Combined Qualified Business Income” of Taxpayer
  • 20% of the excess of taxable income over the sum of any net capital gain plus the aggregate amount of qualified cooperative dividends
2. The Lesser of :
  • 20% of qualified cooperative dividend, or
  • Taxable income less net capital gain

COMBINED QUALIFIED BUSINESS INCOME

The CBQI is equal to the sum of -
1. The Lesser of :
• 20% of the taxpayer’s QBI, or
• The Greater of:
• 50% of W-2 wages with respect to the business, or
• 25% of W-2 wages with respect to the business + 2.5% of the unadjusted basis of all Qualified Property.

2. Plus:
• 20% of qualified REIT dividends
• 20% of qualified Publicly Traded Partnership Income


DEDUCTION IF TAXABLE INCOME IS:






CALCULATION OF §199A DEDUCTION






CALCULATION OF REDUCTION RATIO

  • Lower Threshold:- $315,000 of taxable income if filing jointly and $157,500 in all other cases
  • Upper Threshold:- $415,000 of taxable income if filing jointly and $207,500 in all other cases
  • Reduction Ratio:-
  • Taxable income above the lower income threshold
    100,000(Married) 50,000(Other)

Example for Result C

A and B file a joint return on which they report taxable income of $330,000, of which $300,000 is ordinary income from A's interest in an S corporation. The S corporation is not a specified service trade or business. A's allocable share of the business's W-2 wages is $80,000, and his share of the business's unadjusted basis in its qualified property is $600,000.


Solution






Example for Result E


A and B file a joint return on which they report taxable income of $330,000, of which $300,000 is ordinary income from A's interest in an S corporation. The S corporation is a specified service trade or business. A's allocable share of the business's W-2 wages is $80,000, and his share of the business's unadjusted basis in its qualified property is $600,000.

Solution






QUALIFIED BUSINESS INCOME CALCULATION FOR PARTNER




W-2 Wages
W-2 wages are the total wages subject to wage withholding under Code Sec. 3401 (a), elective deferrals, and deferred compensation paid by the qualified trade or business with respect to employment of its employees during the calendar year ending during the tax year of the taxpayer.

Practice Tip:
“Total wages subject to wage withholding” will generally correspond with the amount on Form W-2, Box 1. “Elective deferrals” and “deferred compensation” correspond with the amount in Box 12.

QUALIFIED PROPERTY
The term qualified property is generally defined to mean, with respect to any qualified trade or business, tangible property of a character subject to depreciation under section 167 that is
  1. Held by and available for use in the qualified trade or business at the close of the taxable year,
  2. Which is used at any point during the taxable year in the production of QBI, and
  3. The depreciable period for which has not ended before the close of the taxable year.

OTHER IMPORTANT FACTS
  1. This will be calculate separately for each qualified business of the taxpayer conduct in US.
  2. Taxpayer cannot save self-employment tax on the QBI deduction.
  3. C-corporation income receive from the pass through entity will not allowed for deduction.
  4. The Sec. 199A deduction cannot take in loss years. A net QBI loss is treated as a loss from a qualified trade or business in the succeeding taxable year

SPECIAL CONSIDERATION- MULTIPLE BUSINESS
  1. If individual have multiple businesses, deduction will calculated separately for each qualified business of the taxpayer.
  2. If one or more trade or businesses have negative qualified business income, the loss will be allocated proportionately in the ratio of qualified business income to other trade or business.
  3. However, wages and property amounts from the business with the loss will not be allocated to the other trades or businesses.
  4. If overall qualified business income for the tax year is negative, Section 199A deduction will be zero for the year. In this situation, negative amount will be carry forward the to the next tax year.

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