“The Qualified Business Income Deduction in a Nutshell”

Section 199A provides a deduction of up to 20 percent of QBI from a U.S. trade or business operated as a sole proprietorship or through a partnership, S corporation, trust, or estate (section 199A deduction). The section 199A deduction may be taken by individuals and by some trusts and estates. A section 199A deduction is not available for wage income or for income earned by a C corporation (as defined in section 1361(a)(2)).

Many owners of sole proprietorships, partnerships, S corporations and some trusts and estates may be eligible for a qualified business income (QBI) deduction – also called the Section 199A deduction – for tax years beginning after December 31, 2017. The deduction allows eligible taxpayers to deduct up to 20 percent of their QBI, plus 20 percent of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. Income earned through a C corporation or by providing services as an employee is not eligible for the deduction. For more information on what qualifies as a trade or business, see Determining your qualified trades or businesses in the Instructions for Form 8995-A or Form 8995. Qualified Business Income is all the income, gains, deductions, and losses that are effectively connected with a qualified U.S. trade or business.

Obviously, the complexities surrounding this substantial new deduction can be formidable, especially if your taxable income exceeds the threshold discussed above. If you wish to work through the mechanics of the deduction, with particular attention to the impact it can have on your specific situation, please contact a member of the Bowles Rice Tax Team.Download this article as a PDF. (iii) Shareholder A, a United States person, receives a dividend from X of $100x on December 31, 2020, of which $20x is reported as a section 199A dividend.

Which Business Types Can Claim the QBI Deduction?

The February 2019 Proposed Regulations expanded this rule to provide that previously disallowed losses or deductions are treated as losses from a separate trade or business in the year they are taken into account in determining taxable income. Further, the attributes of the previously disallowed losses or deductions, including whether they are attributable to a trade or business and whether they would otherwise be included in QBI, are determined in the year the loss or deduction is incurred. QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts. These includable items must be effectively connected with the conduct of a trade or business within the United States. Generally, in computing QBI, account for any deduction attributable to the trade or business. This includes, but is not limited to, the deductible part of self-employment tax, self-employed health insurance, and deductions for contributions to qualified retirement plans (such as SEP, SIMPLE and qualified plan deductions).

The qualified business income deduction (QBI) allows small business owners to take a 20% deduction based on the net income of their business, in addition to regular business deductions. The details of this deduction are in section 199A of the tax code, which is why the deduction is sometimes called a 199A deduction. Other limitations may apply in certain circumstances, e.g., for taxpayers with qualified cooperative dividends, qualified real estate investment trust (REIT) dividends, or income from publicly traded partnerships.

What is Form 8995?

If your taxable income before the qualified business income deduction is above the threshold, or you’re a patron of a cooperative, you must use the more complicated form. Total taxable income refers to all the taxpayer’s income before the QBI deduction is applied. This may include wages from other jobs, wages earned by your spouse (if married and filing a joint return), interest and dividends, capital gains, rental income, and more.

The Tax Cuts and Jobs Act provides businesses with a variety of changes in tax reporting starting with tax year 2018. One such change in the latest tax reform is the 20% deduction for pass-through entities’ qualified business income. If your business is not an SSTB, and your total taxable income is between $170,050 and $220,050 ($340,100 and $440,100 if married filing jointly), you can claim the full 20 percent deduction.

Lines 1-4: Qualified business income

However, as you’ll see, there are many limitations that may prevent you from taking a qualified business income deduction. Pass-through entities can be aggregated on an individual level to maximize the QBI deduction, but in some instances aggregation might not be beneficial. In addition to meeting the aggregation requirements, netting losses and income from the various businesses can get tricky.

On March 31, 2021, X pays a dividend of $35,000x, and reports $5,000x of the dividend as a section 199A dividend in written statements to its shareholders. Another economic loss that would likely arise in the absence of these regulations is due to the costs of acquiring information. RICs, including mutual funds and exchange-traded funds, simplify decision-making for investors by finding, indexing, and vetting REITs. This is an efficient market organization due to economies of scale in gathering relevant information.

Partners and S-Corporation Owners

In the meantime, you can review the basic rules and strategies and see how they may apply to you, and what questions you may want to explore further. In accordance with the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby certified that this final rule will not have a significant economic impact on a substantial number of small entities. There are also other limitations for “specified services.” Doctors, lawyers, accountants, etc. fall under this category. The information reflected in this article was current at the time of publication.

First, the total QBI for the business is calculated on one of the two forms above. Then, each owner’s share of the QBI is calculated and entered in a separate line on the owner’s Schedule K-1, along with other income of the owner. The information on Schedule K-1 is entered with the owner’s other income on the owner’s personal tax return.

Sign up to get the latest tax tips, information on personal finance and other key resources sent straight to your email. QBI can get confusing once you’re above these income thresholds, but the IRS has a detailed FAQ page to help you figure out if you qualify. Taking the QBI deduction can help you save on taxes by significantly reducing your overall tax burden. Any opinions, projections, or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.

The Treasury Department and the IRS are also aware that taxpayers and practitioners have questioned how the phase-in rules apply when a taxpayer has a suspended or disallowed loss or deduction from a Specified Service Trade or Business (SSTB). If the individual’s taxable income is at or below the threshold amount in the year the loss or deduction is incurred, and such loss would otherwise be QBI, the entire disallowed loss or deduction is treated as QBI from a separate trade or business in the subsequent taxable year in which the loss is allowed. If the individual’s taxable income is within the phase-in range, then only the applicable percentage of the disallowed loss or deduction is taken into account in the subsequent taxable year. If the individual’s taxable income exceeds the phase-in range, none of the disallowed loss or deduction will be taken into account in the subsequent taxable year. These final regulations clarify this treatment and provide an example of a taxpayer with taxable income in the phase-in range and a suspended loss from an SSTB.

How is the QBI deduction calculated?

The best way to figure out whether it applies to your business is to take it step-by-step. This may influence which products we review and write about (and where those products appear on the site), but it in no way affects our recommendations or advice, which are grounded in thousands of hours of research. Our partners cannot pay us to guarantee favorable reviews of their products or services.

• This deduction is claimed on the business owner’s individual return.
• Full Service Business is perfect for Partnerships, S-Corps, and Multi-Member LLCs.
• If your business is above the income threshold for QBI, the deduction depends on the nature of your business and whether you are a specified service trade or business (SSTB).
• In order to claim the QBI deduction and take this tax break, small businesses are subject to two requirements.
• Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.

Section 199A of the TCJA provides taxpayers other than corporations a deduction of up to 20 percent of QBI from domestic businesses plus up to 20 percent of their combined qualified REIT dividends and qualified publicly traded partnership income. Because the section 199A deduction had not previously been available, regulations are necessary to provide taxpayers with computational and definitional guidance regarding the application of section 199A. The Treasury Department and the IRS received no comments on these rules and these final regulations adopt these rules as proposed. Like the preamble to the February 2019 Proposed Regulations, this preamble refers to this treatment as “conduit treatment.” The Start Printed Page 38062February 2019 Proposed Regulations include rules providing conduit treatment for qualified REIT dividends earned by a RIC. The Treasury Department and the IRS received one comment requesting that the proposed rules providing this treatment be finalized. Pass-through business interests may be gifted to children or grandchildren.

If your business is above the income threshold for QBI, the deduction depends on the nature of your business and whether you are a specified service trade or business (SSTB). (iv) A receives a dividend from X of $35x on March 31, 2021, of which $5x is reported as a section 199A dividend. If A meets the holding period requirements in paragraph (d)(4)(ii) of this section with respect to the stock of X, A may treat the $2x section 199A dividend as a qualified REIT dividend for Qualified business income deduction A’s 2021 taxable year. The term post-December reported amount means the aggregate reported amount determined by taking into account only dividends paid after December 31 of the taxable year. On the basis of these effects, the Treasury Department and the IRS also project that these regulations will lead investors, on average, to hold more real estate in their portfolios (relative to the no-action baseline) and thus hold a smaller share of investment in other industries.