Twenty Percent Small Business Deduction

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1Twenty Percent Small Business Deduction:How to Calculate Qualified Business Income (QBI) on the 1040Presented By:Larry Gray, CPA, CGMANational Association of Tax Professionals

2Code §199A - Qualified Business Income Deduction for Qualified Business Income of Pass-Through Entities arealso known as: 20% deduction QBI deduction Code §199A deduction Deduction for qualified business income Pass-through deduction§199A; §11011

3Qualified Business Income In a NutshellThe deduction is equal to1 Basically provides a topmarginal rate of 29.6% Below the line deduction SE tax calculation isunaffected20% of domestic“qualified business income” (QBI)2from apass-through entity3

4Pass-through Entities – Qualified Trade or Business3 PartnershipS-CorporationSole proprietorshipLLCsReal estate investorsTrusts, estates, REITs and qualifiedcooperativesAnything other than a C-Corp

5“Qualified Business Income” (QBI)2 QBI is generally defined as “ the net amount of qualified items ofincome, gain, deduction, and loss with respect to any qualified tradeor business of the taxpayer” “Qualified items of income, gain, deduction, and loss” “Effectively connected with the conduct of a trade or businesswithin the U.S., within the meaning of §864(c)” “Included or allowed in determining taxable income for thetaxable year”

6What is NOT in QBI2 Items used in determining net long-term capital gain or loss Dividends, or anything looking like a dividend Interest income, except trade or business Reasonable compensation Guaranteed paymentsCont.

7What is NOT in QBI, Cont.2 Any amount paid or incurred by a partnership to a partner who is actingother than in his or her capacity as a partner for services Commodities transactions, except trade or business Foreign currency gains from §988 transactions Income from notional principal contracts Income from annuity not used in trade or business

8“Qualified Business Income Deduction”1 The lesser of combined qualifiedPlus the lesser of qualified cooperative dividends, orbusiness income amount or 20% of the excess (if any) of Taxable income, over20% of the aggregate amount of the Taxable income, reduced by the netcapital gain The sum of any net capitalgainNot part of today’s discussionDeduction can’t exceed taxable income

9QBI: A Below-the-Line DeductionNew QBIDeduction?Net QBI deduction never 20% of QBINet QBI deduction never 20% of taxable income

10Example – QBI Deduction 1040 - MFJW-2 incomeSchedule C income 24,000What is the QBI deduction? 100,000?

11“Combined qualified business income amount” The sum of the deductible amounts determined for each qualified tradeor business of the taxpayer, PLUS 20% of the aggregate amount of qualified real estate investment trust(REIT) dividends and qualified publicly traded partnership incomeSee spreadsheet on handout

12Example – Combined QBI Deduction 1040; MFJW-2 income 24,000Schedule C income 100,000S-Corp K-1 100,000What is the QBI deduction?

13How It Works Pass-through Entities

14“Threshold Amount” – 1040 Taxable Income In general, the term means 315,000 MFJ; 157,500 all others Phaseout is limited based on 1040 taxable income Phased out 315,000 - 415,000 MFJ; 157,500 - 207,500 all others Adjusted for inflation beginning after 2018

15Deductible Amount for Each Qualified Trade or BusinessWhen 1040 taxable income Threshold Amount Lesser of 20% of QBI for that trade or business ORGreater of 50% of W-2 wages for that trade or business OR 25% of W-2 wages for that trade or business PLUS 2.5% of the unadjustedbasis immediately after acquisition of all qualified propertyNet Tentative QBI deduction total of each tentative QBI

16“W-2 Wages” The total wages subject to wage withholding, elective deferrals, anddeferred compensation paid by the qualified trade or business withrespect to employment of its employees during the calendar year endingduring the taxable year of the taxpayer It does not include any amount which was not properly included in areturn filed with the Social Security Administration on or before the 60thday after the due date (including extensions)

17 “Qualified business property” The unadjusted basis, immediately after acquisition, of tangible property of acharacter subject to depreciation that is held by and available for use in, thequalified trade or business at the close of the taxable year, and which is used inthe production of qualified business income, and for which the depreciableperiod has not ended before the close of the taxable year“Depreciable period” The period beginning on the date the property is first placed in service by thetaxpayer and ending on the latter of: The date 10 years after that date, orThe last day of the last full year in the applicable recovery period that would applyto the property under §168

18 “Qualified trade or business” “Any trade or business other than a specified service trade or business and otherthan the trade or business of being an employee.” Nor reasonable comp and guaranteed payments“Specified service trade or business” “Any trade or business involving the performance of services in the fields of health,law, consulting, athletics, financial services, or any trade or business where theprincipal asset of such trade or business is the reputation or skill of one or moreof its employees or owners, or which involves the performance of services thatconsists of investing and investment management trading, or dealing in securities,partnership interests, or commodities.” Engineering and architecture are excludedfrom the list.

19Specified Service BusinessesDisqualified under Section 1202 but Allowed under Section 199A include BankingInsuranceFinancingLeasing Farming Any business giving rise todepletion Any business of operatinga hotel, motel, or restaurantSpecified Service Business above phaseout no QBI deduction

20Threshold Phaseouts1040TaxableIncomeCalculated atEntity LevelMFJ All Others 315,000 157,500 315,000; 415,000 157,500; 207,500 415,000 207,500No wage No 2.5%N/A0 – 100%0Yes wage No 2.5%N/A0 – 100%50% of wages0 – 100%25% of wages 2.5%.No wage Yes 2.5%N/AYes wage Yes 2.5%N/A0 – 100%50% of wages or25% 2.5%.SpecifiedService Bus.N/A0 – 100%0

21Rentals and §199A Hazard v. Comm’r., (1946) Tax court ruled that even onesingle family residential rentalwas a trade or business Remains authority for the TaxCourt in every area of thecountry, except in the 2nd Circuitwhere Grier v. U.S., (1955)Held that “broader activity” wasneeded for a rental to constitutea trade or business It appears the intent was the20% deduction is intended toapply to rental income because alast minute change was made tothe limitation on the deductionspecifically to accommodaterental owners

22QBI and Qualified Business Loss (QBL)Year OneYear TwoQualified Business A 20,000 QBIQualified Business A 20,000 QBIQualified Business B( 50,000) QBLQualified Business BNo deduction allowed( 30,000) QBL 50,000 QBI 70,000 QBIQBL carried over to next year 70,000 CQBI x .20 14,000- 30,000 QBL x .20 6,000Deduction allowed 8,000

23Do You Qualify for the QBI Deduction?

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trade or business and other than the trade or business of . being an employee.” Nor reasonable comp and guaranteed payments “Specified service trade or business” “Any trade or business involving the performance of services in the fields of health, law, consulting, athletics, financial services, or any trade or business where the

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