The new IRS tax code Section 199A may affect you if you own a pass-through trade or business, including a proprietorship, partnership, or S corporation. It implements the new qualified business income (QBI) deduction, which may enable you to deduct up to 20 percent.
QBI and Eligibility
Essentially, qualified business income is taxable net income. The new QBI deduction was created by the 2017 Tax Cuts and Jobs Act (TCJA). It’s available for tax years that begin after December 31, 2017. C corporations are not able to take advantage of the new deduction. Eligible structures include:
- Sole proprietorships
- S corporations
- Certain trusts
- Rental properties
Pass-through business owners and individual taxpayers may be eligible. Individual taxpayers must have a 2018 taxable income at or below $315,000 (joint returns) or $157,000 (non-joint filers).
QBI for Sole Proprietorships
Sole proprietors should refer to their net business profits as shown on their Schedule C form. To find the QBI, perform the following calculations on that net business profit:
- Subtract your deduction for self-employed health insurance
- Subtract your deduction for one-half of the self-employment tax
- Subtract any qualifying retirement plan deductions
- Subtract net Section 1231 losses
In the last step, ignore any gains. Then, find 20 percent of this figure to determine the maximum QBI deduction you may be eligible for.
QBI for Partnerships
In a pass-through partnership, a partner may receive distributed income as a payout of the profits. Alternatively, a partner may receive a “guaranteed payment,” or a Section 707 payment. When a partner receives a payout of the profits, the profits will be considered qualified business income. The same adjustments used for sole proprietorships are performed on these profits. However, Section 707 payments are not considered QBI. These payments will reduce the net income of the partnership.
QBI for S Corporation Shareholders
Shareholders who hold more than 2 percent of an S corporation will calculate QBI in the same way as a sole proprietor. Shareholders cannot count as QBI the wages paid to the shareholder-employee, although these wages will reduce the net income of the S corporation.
QBI for Rental Properties
Individuals who own rental property, and those who own rental property through a pass-through, single-member LLC, will use Schedule E of Form 1040 to report the rental activity. Begin calculating QBI from the net income of the Schedule E if you can claim the property is a trade or business. If Section 1231 net losses are generated, they must be subtracted from the QBI.
QBI for Trusts and Estates
Trusts and estates are treated as pass-through entities under Section 199A. They are subjected to the same income thresholds.
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