The New Qualified Business Income & Deduction
(2018 Seminars)
While considerable effort has been spent preparing this material, errors or omissions may be present. Further, tax laws are constantly changing. This material is not intended to cover all tax laws (such coverage would require the entire code), or provide legal advice.
In addition to the statement above, please keep in mind that this is a brand new area of tax code. The Proposed Regulations have only recently been issued. The law has had no court cases, or any challenges. The information presented here is the best information I am able to provide at this time. However, not all circumstances, or events can be covered in this class. Research is the responsibility of each tax professional when unusual questions, or situations, arise. I hope this will point you in the right directions for such research.
The New Qualified Business Income & Deduction
CA Unit – OSTC Class
IRS Class ID# 7WV7Q‐T‐00467‐18‐I
Sandra J Collins, EA, LTC
Canyon Bookkeeping & Tax LLC #82454‐EA #4477‐C OBTP# B‐5586
P.O. Box 1151, Mill City, OR 97360 canyontax@wavecable.com
Table of Contents
QBI – Introduction ……….. 3
Code Section 199A Qualified Business Income……….. 3
Qualified Trade or Business (QTB)………. 4
Specified Service Trade or Business (SSTB)……….. 5
The ‘Basic’ Deduction……….. 6
Examples 1 & 2 ……… 7
DRAFT Worksheet from 1040 Instructions ………... 8
Computations Affected by the Thresholds……….. 9
Exceeding the Maximum Threshold………. 9
Unadjusted Basis Immediately after Acquisition (UBIA)……… 10
Example 3………... 11
Example 4………... 12
Income Between the ITA and MTA – the Phase-In Range…….. 13
Example 5……….. 14
Reduction Amount ……… 15
Excess Amount……….. 15
(Temporary) Worksheet for QTB’s in Phase-In Range……….. 16
Example 6……….. 17
‘Applicable Percentage’……… 18
(Temporary) Worksheet for SSTB’s in Phase-In Range………. 19
Other Comments and Facts about the QBI Deduction………… 20
Partners & Shareholders, SE & NIIT Tax………. 23
Partnership Special Basis Adjustments………. 23
Interest Income, Reasonable Compensation……….. 24
Guaranteed Payments………. 25
Additional Reporting by Pass Through Entities………… 26
Allocation of Wages & UBIA………. 26
Aggregation of Businesses……….. 28
Rental, Cooperative Income of Patrons………. 30
Qualified Property Improvements & Allocation of UBIA 31 SSTBs listed in section 199A(d)(2)(A)………. 32
Conclusion………. 36 References
Due to this being a new code section, with very little official information released, my main references are:
Code Section 199A
Proposed Regulations 107892-18
2018 Form 1040 Draft Instructions
While references to existing code section may appear throughout the text.
QBI (Qualified Business Income)
IntroductionThe Tax Cuts and Jobs Act bill that passed in December of 2017 contains some of the most drastic changes we have seen to tax law in many years. Contained within the many provisions of this new law is the Deduction for Qualified Business Income. This provision has, perhaps, received more press than any other single provision of this law. Yet, there are still misconceptions, and confusion, relating to this provision. Likely much will be clarified by future Regulations.
Proposed Regulations were issued in August, and are available at irs.gov at this location: https://www.irs.gov/pub/irs-drop/reg-107892-18.pdf
In addition, expect more proposed, and final, regulations as time passes.
In this class we will look specifically at the Deduction for Qualified Business Income.
Code Section 199A Qualified Business Income
Code Section 199A has 8 subsections, and they are titled as follows:
(a) Allowance of deduction
(b) Combined qualified business income amount (c) Qualified business income
(d) Qualified trade or business (e) Other definitions
(f) Special rules
(g) Deduction for income attributable to domestic production activities of specified agricultural or horticultural cooperatives, and
(h) Anti-abuse rules.
These will not all be covered in class today, but are included for your information.
You will see a number of acronyms used in this material. Some of these will be familiar, and some are new because of this law. The first time an acronym is used I will provide the full description, along with the acronym. In addition, there is a separate acronym reference page provided with this handout.
Also, there are too many special rules, and exceptions, for us to cover them all in this class. Thus, our goal will be to start with the situations you will most commonly encounter, and work from there.
The Basics
To understand the basics of this provision, we need to understand that we are really dealing with (at least) 4 separate types of income sources. They are described in Code Section 199A as:
1) Qualified Trade or Business (QTB)
2) Specified Service Trade or Business (SSTB)
3) Real Estate Investment Trust (REIT) and Publicly Traded Partnership (PTP) 4) Income attributable to domestic production activities of specified
agricultural or horticultural cooperatives.1
Each of these income sources has a different set of rules for purposes of the Qualified Business Income Deduction.
So, what is a Qualified Trade or Business (QTB)?
The Code does something interesting here by describing a Qualified Trade or Business by giving us a definition of what it is NOT.
Code Section 199A (d) Qualified trade or business.
For purposes of this section- (1) In general.
The term “qualified trade or business” means any trade or business other than – (A) A specified service trade or business, or
(B) The trade or business of performing services as an employee.
So, is it a business?
Is it NOT a specified service trade or business (SSTB)?
Is it NOT services as an employee?
Then it is a Qualified Trade or Business.
The next obvious question: What is a specified service trade or business (SSTB)?
That answer might be subject to interpretation. However, be careful in your decision-making. The Proposed Regulations (mentioned on page 2) include a special provision to the Code 6662 penalties for underpayment of tax. Instead of defining such an underpayment as ‘the greater of 10% of the tax required to be shown on the return, or $5,000’, for purposes of Code Section 199A it will read
‘the greater of 5% of the tax required to be shown on the return, or $5,000.’ (Code Section 6662(d)(1)(A).) Thus, misclassifying an SSTB, as a QTB, (when the threshold – discussed later - applies) could subject one to this penalty.
1 While we will touch on income from cooperatives in this class, time will not allow us to cover it in depth.
Specified Service Trade or Business
Code Section 199A(d)(2) Specified service trade or business.
The term “specified service trade or business” means any trade or business-
(A) which is described in section 1202(e)(3)(A) (applied without regard to the words
“engineering, architecture,”) or which would be so described if the term “employees or owners” were substituted for “employees” therein, or
(B) which involves the performance of services that consist of investing and investment management, trading, or dealing in securities (as defined in section 475(c)(2)), partnership interests, or commodities (as defined in section 475(e)(2)).
Code Section 1202(e)(3)(A): any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees, Now to adjust it as Code Section 199A(d)(2)(A) states:
Code Section 1202(e)(3)(A): any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees or owners employees,
Note the phrase: any trade or business. In theory this could apply to anyone whose business has as its principal asset ‘the reputation or skill of 1 or more of its employees or owners’. Understandably this phrasing had opened up a great deal of speculation as to whether the IRS will try to paint with a ‘broad brush’, OR apply the definition narrowly. The difference, in potential deduction, can be enormous.
However, the proposed regs. would appear to indicate a more narrow meaning.2 The next factor I should mention here are the thresholds.
The Initial Threshold Amounts (ITA) and Maximum Threshold Amounts (MTA) are as follows:
Joint Return All Others Initial Threshold Amount (ITA) $ 315,000. $ 157,500.
Maximum Threshold Amount (MTA) $ 415,000. $ 207,500.
It is of interest to note that the calculations for the QTB and the SSTB work exactly the same IF the Taxable Income (explained in next section) is BELOW the Initial Threshold Amount (ITA). (Code Section 199A(d)(3).) So, for many smaller businesses, the question of QTB verses SSTB will not be an issue. Also, the thresholds have been indexed to inflation. So they may change from year to year.
2 We will discuss this more, later in class, as time allows.
Before we take a look at the effect of the threshold on the different businesses, let us first take a look at the ‘basic’ QBI deduction calculation.
The ‘Basic’ Deduction
The beginning of Code Section 199A describes it in section (a).
Code Section 199A(a) reads:
(a) Allowance of deduction.
In the case of a taxpayer other than a corporation, there shall be allowed as a deduction for any taxable year an amount equal to the sum of—
(1) lesser of—
the combined qualified business income amount of the taxpayer3, or an amount equal to 20 percent of the excess (if any) of—
(A) the taxable income of the taxpayer for the taxable year, over
(B) the net capital gain (as defined in section 1(h)) of the taxpayer for such taxable year.
So, let’s start by breaking that apart, piece by piece.
First, this is for non-corporate taxpayers.
Does that mean S Corporation shareholders are eliminated?
No. For the code section states at the beginning of subsection (f), the following:
Code Section 199A(f)
(1) Application to partnerships and s corporations.
(A)In general. In the case of a partnership or s corporation –
(i) this section shall be applied at the partner or shareholder level,
Thus, the deduction is at the individual taxpayer level. C Corporations are NOT pass-through entities, so this doesn’t apply to their stockholders. This makes sense when you consider that the new lower tax rates for C Corporations.
Secondly, it speaks about the Combined Qualified Business Income Amount (CQBIA) of the taxpayer. The CQBIA is the sum of the amounts determined (as a deduction) for each qualified trade or business, PLUS 20 percent of the aggregate amount of the qualified REIT dividends and qualified publicly traded partnership (PTP) income of the taxpayer for the taxable year4.
Third, the taxable income (TI) it refers to in this Code Section is taxable income computed without regard to any deduction allowable under this section5.
3 My footnote: 20% of the net of each QTB, and SSTB, IF Taxable Income is below the threshold amount
4 We will briefly discuss the REIT and PTP income later in this class.
5 In calculating the deduction for income attributable to domestic production activities of specified agricultural or horticultural cooperatives (not covered in this class), taxable income must also be reduced by the QBI deduction allowed under subsection (a) of this Code Section
Lastly, it references the ‘net capital gain (as defined in section 1(h)) of the taxpayer for such taxable year’.
Code Section 1(h)(11)(A):
For purposes of this subsection, the term “net capital gain” means net capital gain (determined without regard to this paragraph) increased by qualified dividend income.
So, we must reduce the taxable income of the taxpayer, by the Capital Gain and qualified dividend income, for purposes of this calculation.
Again, this makes sense when you consider that Capital Gains and Qualified Dividends already receive a lower tax rate.
Example 1:
John & Mary file a joint tax return for 2018. John has wages of $165,000. Mary has net self-employment income of 170,000. They have $1,000 in Qualified Dividends. These items, combined with other items of income & deduction, result in Taxable Income (before the QBI deduction) of $300,000. What, if anything, is there Qualified Business Income (QBI) deduction?
Since they are below the threshold ($315,000 for a married couple filing jointly), we do not have to worry about other limitations. We use the ‘basic’ calculation:
The lesser of:
1) The Combined Qualified Business Income Amount (CQBIA) of the taxpayer (in this case $170,000 X 20% = $34,000), OR
2) An amount equal to 20 percent of the excess (if any) of –
A) The taxable income of the taxpayer for the taxable year ($300,000) over B) The Net Capital Gain of the taxpayer for such taxable year ($1,000) In other words $299,000 (X 20% = 59,800).
The LESSER of 1) or 2) above is $34,000. This is their QBI deduction.
Example 2:
Same as above, EXCEPT, John’s income is also from net self-employment.
1) The CQBIA is $67,000 (($165,000 X 20%= $33,000) + (Mary’s $34,000)) 2) Step 2 still computes to $59,800 (as in Example 1).
The LESSER of 1) or 2) above is $59,800. This is their QBI deduction.
As you can see, the ‘basic’ calculation is not complicated.
IRS draft 1040 instructions issued on 9/26/2018 provide a set of brief instructions, and a Simplified Worksheet, for those under the Initial Threshold amounts.
The DRAFT Worksheet is provided below.
Computations Affected by the Thresholds As a reminder, the thresholds are as follows:
Joint Return All Others Initial Threshold Amount (ITA) $ 315,000. $ 157,500.
Maximum Threshold Amount (MTA) $ 415,000. $ 207,500.
Exceeding the Maximum Threshold Amount (MTA)
If the taxable income (before QBI deduction) EXCEEDS the MTA, the results are as follows:
SSTBs received NO QBI deduction.
QTBs must use a different calculation:
Code Section 199A (b) Combined qualified business income amount.
For purposes of this section- (1) In general.
The term "combined qualified business income amount" means, with respect to any taxable year, an amount equal to-
(A) the sum of the amounts determined under paragraph (2) for each qualified trade or business carried on by the taxpayer, plus
(B) 20 percent of the aggregate amount of the qualified REIT dividends and qualified publicly traded partnership income of the taxpayer for the taxable year.
(2) Determination of deductible amount for each trade or business.
The amount determined under this paragraph with respect to any qualified trade or business is the lesser of-
(A) 20 percent of the taxpayer's qualified business income with respect to the qualified trade or business, or
(B) the greater of-
(i) 50 percent of the W-2 wages with respect to the qualified trade or business, or
(ii) the sum of 25 percent of the W‐2 wages with respect to the qualified trade or business, plus 2.5 percent of the unadjusted basis immediately after acquisition of all qualified property.
So, what this means is that if a QTB has income exceeding the Maximum Threshold Amount (MTA), the business MUST have paid W-2 wages6 and/or have depreciable property, OR there is NO QBI deduction.
6 The Proposed Regulations DO allow a business to count wages paid by a 3rd party, on their behalf, IF the employees actually worked for the QTB, AND the wage deduction is taken by the QTB. This allows the QBI deduction for businesses with employees, who choose to use 3rd party payors, the same benefits as those who pay the employees directly.
The Qualified Property (QP) mentioned in subsection (b)(2)(B)(ii) refers to the Unadjusted Basis Immediately after Acquisition (UBIA) of depreciable property. Since it applies to ‘depreciable’ property, land is excluded.
Also, there is a ‘time limit’ on how long you can count the UBIA of Qualified Property (QP). Here is the Code description of Qualified property (QP):
Code Section 199A(b)(6) Qualified property For purposes of this section:
(A) In general The term “qualified property” means, with respect to any qualified trade or business for a taxable year, tangible property of a character subject to the allowance for depreciation under section 167—
(i) which is held by, and available for use in, the qualified trade or business at the close of the taxable year,
(ii) which is used at any point during the taxable year in the production of qualified business income, and
(iii) the depreciable period for which has not ended before the close of the taxable year.
(B) Depreciable period. The term “depreciable period” means, with respect to qualified property of a taxpayer, the period beginning on the date the property was first placed in service by the taxpayer and ending on the later of—
(i) the date that is 10 years after such date, or
(ii) the last day of the last full year in the applicable recovery period that would apply to the property under section 168 (determined without regard to subsection (g) thereof).
Thus, the ‘depreciable period’ for purposes of this section will usually be longer than the period over which the property is actually depreciated. Hopefully our software will be able to track this data for us. (In a few cases it may be wise to consider whether a taxpayer’s ‘Safe Harbor’ figure – for purposes of the Repair Regs – will need to be revised.)
At this point it would be good to calculate the QBI deduction for QTBs that have EXCEEDED the Threshold Limitations.
Keep in mind that the new formula will be the lesser of:
1) The Combined Qualified Business Income Amount (CQBIA)7 of the taxpayer, OR
2) An amount equal to 20 percent of the excess (if any) of – A) The taxable income of the taxpayer for the taxable year over B) The Net Capital Gain of the taxpayer for such taxable year.
7 The CQBIA is calculated differently when one exceeds the threshold amounts, as explained on page 9.
Example 3
John & Mary file a joint tax return for 2018. John has wages of $285,000. Mary has net self-employment income of 170,000 from a non-SSTB. They have $1,000 in Qualified Dividends. These items, combined with other items of income &
deduction, result in Taxable Income (before the QBI deduction) of $420,000.
Mary has paid out $50,000 in wages, but has no Qualified Property. What, if anything, is their Qualified Business Income (QBI) deduction?
Since their income EXCEEDS the Maximum Threshold Amount (MTA) we MUST take into consideration the Wage & Property Limitations (W&PL or WPL) when calculating the CQBIA, below.
Their QBI deduction will be the lesser of:
1) The Combined Qualified Business Income Amount (CQBIA) of the taxpayer, OR
2) An amount equal to 20 percent of the excess (if any) of – A) The taxable income of the taxpayer for the taxable year over B) The Net Capital Gain of the taxpayer for such taxable year.
Remember, now the CQBIA is calculated as the lesser of-
(A) 20 percent of the taxpayer's qualified business income with respect to the qualified trade or business, ($170,000 X 20% = $34,000) or
(B) the greater of-
(i) 50 percent of the W-2 wages with respect to the qualified trade or business, ($50,000 X 50% = $25,000) or
(ii) the sum of 25 percent of the W-2 wages with respect to the qualified trade or business, ($50,000 X 25% = $12,500) plus 2.5 percent of the unadjusted basis immediately after acquisition of all qualified property (in this case -0-). ($12,500 + $0 = $12,500)
B is the greater of i or ii. In this case that amount is $25,000.
The lesser of A ($34,000) or B ($25,000) is $25,000. This is the Combined Qualified Business Amount (CQBIA) of the taxpayer.
The QBI Deduction is the lesser of 1) The CQBIA ($25,000) or 2) An amount equal to 20 percent of the excess (if any) of –
A) The taxable income of the taxpayer for the taxable year ($420,000) over B) The Net Capital Gain of the taxpayer for such taxable year. ($1,000) ($420,000-$1,000=$419,000 X 20% = $83,800).
The lesser of $25,000 or $83,800 is $25,000. This is their QBI deduction.
Example 4
John & Mary file a joint tax return for 2018. John and Mary are both self- employed in non-SSTB businesses. Their data is as follows:
John Mary Combined
Net SE Income 250,000. 250,000. 500,000.
Wages Paid Out 20,000. 50,000. 50,000.
UBIA (Property) 100,000. 0. 100,000.
They also have $10,000 in qualified dividend income.
Their taxable income before QBI is $450,000.
They have clearly exceeded the Maximum Threshold Amount.
1) First we calculate John’s share of the CQBIA. The lesser of:
A) 20% of his QBI with respect to his QTB. $250,000 X 20% = $50,000.
B) The Greater of-
(i) 50% of the W2 wages paid out of his QTB. $20,000 X 50% = $10,000.
(ii) 25% of the same wages: $20,000 X 25% = $5,000. PLUS
2.5% of the UBIA (property) $100,000 X $ 2.5% = $2,500 = $7,500.
A = $50,000 B = $10,000.
The lesser of the 2 is B. John’s share of CQBIA is $10,000.
Next we calculate Mary’s share of the CQBIA. The lesser of:
A) 20% of the QBI with respect to her QTB. $250,000 X 20% = $50,000.
B) The Greater of-
(i)50% of the W2 wages paid out of her QTB. $50,000 X 50% = $25,000.
(ii) 25% of the same wages: $50,000 X 25% = $12,500. PLUS 2.5% of the UBIA (property) $0 X $ 2.5% = $0 = $12,500.
A = $50,000 B = $25,000.
The lesser of the 2 is B. Mary’s share of CQBIA is $25,000.
The CQBIA for John and Mary is $35,000 ($10,000 + $25,000).
2) Now we calculate an amount equal to 20 percent of the excess (if any) of – (A) The taxable income of the taxpayer for the taxable year ($450,000) over (B) The Net Capital Gain of the taxpayer for such taxable year ($10,000) So, $450,000 - $10,000 = $440,000. AND $440,000 X 20% = $88,000.
The lesser of 1) and 2) is $35,000. This is their QBI Deduction. X
It should be remembered that if ANY of the businesses used in Examples 3 and 4 were Specified Services Trades or Businesses, their portion of the QBI deduction would automatically be ZERO. This is because NO QBI deduction is allowed for a SSTB when taxable income (before the deduction) exceeds the Maximum Threshold Amount.
The calculations so far have been fairly straight-forward. Now we come to the more complex part of the formulas. If the taxpayer has taxable income (before the QBI deduction) BETWEEN the Initial and Maximum Threshold Amounts.
In this situation the calculations are not only more complex, but are completely different for QTBs than for SSTBs. Before we get to the examples, let’s discuss some of these differences.
Income BETWEEN the Initial Threshold Amount (ITA) & the Maximum Threshold Amount (MTA) – Income in the Phase-In Range
If the income is between the ITA and MTA figures, we also have another element to consider. These are the Wage and Property Limitations.
The Wage and Property Limitations can allow a QTB to still receive the same deduction (percentage-wise) as if the threshold did not apply. This is provided that they have enough in wages paid and/or depreciable property.
However, for the SSTBs, once they enter the threshold phase-in, their deduction (percentage-wise) will ALWAYS be smaller than if they were below the threshold.
The goal of the Wage and Property Limitations is to encourage HIRING and PURCHASES. However, the purpose of the Phase-In (The amount between the Initial and Maximum Threshold amounts) is two-fold:
1) For a QTB, it is designed to limit, or eliminate, the deduction for QTBs that have not paid out enough for Wages and/or Property.
2) For a SSTB, it is to effectively reduce, until elimination, the QBI deduction.
Moreover, the Wage & Property Limitations further restrict this reduction – for those who have not paid enough for Wages or Property.
The following are examples, from the Proposed Regulations, of taxpayers within the Phase-In Range.
Example 5. Phase‐in range.
(i) B and C are married and file a joint individual income tax return. B is a shareholder in M, an entity taxed as an S corporation for Federal income tax purposes that conducts a single trade or business. M holds no qualified property.
B’s share of the M’s QBI is $300,000 in 2018. B’s share of the W‐2 wages from M in 2018 is $40,000. C earns wage income from employment by an unrelated company. After allowable deductions unrelated to M, B and C’s taxable income for 2018 is $375,000. B and C are within the phase‐in range because their taxable income exceeds the applicable threshold amount, $315,000, but does not exceed the threshold amount plus $100,000, or $415,000. Consequently, the QBI component of B and C’s section 199A deduction may be limited by the W‐2 wage and UBIA of qualified property limitations but the limitations will be phased in.
(ii) The UBIA of qualified property limitation amount is zero because M does not hold qualified property. B and C must apply the W‐2 wage limitation by first determining 20% of B’s share of M’s QBI. Twenty percent of B’s share of M’s QBI of $300,000 is $60,000. Next, B and C must determine 50% of B’s share of M’s W‐
2 wages. Fifty percent of B’s share of M’s W‐2 wages of $40,000 is $20,000.
Because 50% of B’s share of M’s W‐2 wages ($20,000) is less than 20% of B’s share of M’s QBI ($60,000), B and C must determine the QBI component of their section 199A deduction by reducing 20% of B’s share of M’s QBI by the reduction amount.
(iii) B and C are 60% through the phase‐in range (that is, their taxable income exceeds the threshold amount by $60,000 and their phase‐in range is $100,000).
B and C must determine the excess amount, which is the excess of 20% of B’s share of M’s QBI, or $60,000, over 50% of B’s share of M’s W‐2 wages, or $20,000.
Thus, the excess amount is $40,000. The reduction amount is equal to 60% of the excess amount, or $24,000. Thus, the QBI component of B and C’s section 199A deduction is equal to $36,000, 20% of B’s $300,000 share M’s QBI (that is,
$60,000), reduced by $24,000. B and C’s section 199A deduction is equal to the lesser of (i) 20% of the QBI from the business as limited ($36,000) or (ii) 20% of B and C’s taxable income ($375,000 x 20% = $75,000). Therefore, B and C’s section 199A deduction is $36,000 for 2018.
**********
On the next page we will take a closer look at the new calculations that must take place in the Phase-In Range. For now, though, keep in mind that the example above is for a taxpayer with a QTB, not a SSTB.
You will notice that we now have to take into account the reduction amount. The reduction amount is the amount by which their taxable income exceeds the threshold amount, compared to the entire phase-in range.
Reduction Amount
So, for married filing jointly the phase-in range is $100,000 (the range starts at
$315,000 and ends at $415,000). So, the taxable income (before the QBI) deduction, LESS the Initial Threshold ($315,000) / $100,000.
In this example: $375,000 - 315,000 = $60,000. $60,000/ $100,000 = 60%
For all other tax filing status the phase-in range is $50,000 (the range starts at
$157,500 and ends at $207,500). So, the taxable income (before the QBI) deduction, LESS the Initial Threshold ($157,500) / $50,000.
Once we know the Reduction Amount, we must calculate the Excess Amount.
Excess Amount
We must calculate the excess amount. The excess amount is the excess of 20% of the QBI that is over the Wage & Property Limitations.
In this example; 20% of QBI is $60,000. ($300,000 X 20%) The Wage and Property Limitations is $ 20,000 ($40,000 X 50%) The Excess amount is $ $40,000 ($60,000 - $20,000)
Now we must multiply the Excess amount by our Reduction Amount percentage.
In this example; Take the Excess Amount of $40,000 X 60% (Reduction Amount) to arrive at $24,000. The $24,000 is the amount by which we reduce the limitation. So, instead of the $40,000 of excess being disallowed, only $24,000 of it is disallowed. This reflects how far their taxable income is through the phase-in range.
So, 20% of QBI ($60,000) less $24,000 = $36,000.
This is their QBI deduction for 2018.
The IRS draft instructions for Form 1040 do not provide any Worksheets for taxpayers within, or exceeding, the threshold range. Instead, they refer you to Publication 535 (which has not yet been released as of this writing).
On the next page I have provided a temporary worksheet for this calculation.
As you can see, Steps 1 through 8 should be repeated for each QTB if the Taxpayer has Multiple QTBs. Steps 9 & 10 complete the calculation.
Also, keep in mind that the thresholds shown at the top are for 2018. These are indexed to inflation for later years.
If Qualified PTP/REIT income, add their 20% into line 8. See page 19.
This next example (from the Proposed Regulations) takes into account the unique calculations that are necessary for a SSTB within the Phase-In Range.
Example 6.
(i) Assume the same facts as in Example 5, except that M was engaged in an SSTB.
Because B and C are within the phase‐in range, B must reduce the QBI and W‐2 wages allocable to B from M to the applicable percentage of those items. B and C’s applicable percentage is 100% reduced by the percentage equal to the ratio that their taxable income for the taxable year ($375,000) exceeds their threshold amount ($315,000), or
$60,000, bears to $100,000. Their applicable percentage is 40%. The applicable percentage of B’s QBI is ($300,000 x 40% =) $120,000, and the applicable percentage of B’s share of W‐2 wages is ($40,000 x 40% =) $16,000. These reduced numbers must then be used to determine how B’s section 199A deduction is limited.
(ii) B and C must apply the W‐2 wage limitation by first determining 20% of B’s share of M’s QBI as limited by paragraph (i) of this example. Twenty percent of B’s share of M’s QBI of $120,000 is $24,000. Next, B and C must determine 50% of B’s share of M’s W‐2 wages. Fifty percent of B’s share of M’s W‐2 wages of $16,000 is $8,000. Because 50% of B’s share of M’s W‐2 wages ($8,000) is less than 20% of B’s share of M’s QBI ($24,000), B and C’s must determine the QBI component of their section 199A deduction by reducing 20% of B’s share of M’s QBI by the reduction amount.
(iii) B and C are 60% through the phase‐in range (that is, their taxable income exceeds the threshold amount by $60,000 and their phase‐in range is $100,000). B and C must determine the excess amount, which is the excess of 20% of B’s share of M’s QBI, as adjusted in paragraph (i) of this example or $24,000, over 50% of B’s share of M’s W‐2 wages, as adjusted in paragraph (i) of this example, or $8,000. Thus, the excess amount is $16,000. The reduction amount is equal to 60% of the excess amount or $9,600. Thus, the QBI component of B and C’s section 199A deduction is equal to $14,400, 20% of B’s share M’s QBI of $24,000, reduced by $9,600. B and C’s section 199A deduction is equal to the lesser of (i) 20% of the QBI from the business as limited ($14,400) or 20% of B’s and C’s taxable income ($375,000 x 20% = $75,000). Therefore, B and C’s section 199A deduction is $14,400 for 2018.
**********
As you can see, another layer has been added to our calculations.
So, let’s take this step by step.
First we have to calculate the ‘applicable percentage’ of the various items. The
‘applicable percentage’ is just the opposite of the Reduction Percentage that we calculated in the last example. You basically take 100% and reduce it by the Reduction Percentage.
The Reduction percentage was 60% ($60,000 / $100,000).
So, the ‘applicable percentage’ is 40% (100% - 60%).
We are going to apply that ‘applicable percentage’ to the various pieces of our calculation.
QBI of $ 300,000. X 40% = $ 120,000.
W-2 Wages of $40,000. X 40%= $ 16,000.
(The same would apply to property)
THEN we apply the normal percentages to THOSE figures.
QBI of $ 120,000. X 20% = $ 24,000.
W-2 Wages of $ 16,000. X 50% = $ 8,000.
NOW, we have to calculate the SSTB Excess Amount. This calculation is similar to the way we calculated the Excess amount in the last example. The difference is that we are using the reduced SSTB figures.
The Excess Amount is the amount by which the 20% of SSTB QBI exceeds the SSTB Wage & Property Limitations. So, $24,000 - $8,000 = $16,000.
The Reduction Amount is equal to 60% of the Excess.
The Reduction Amount is $9,600. ($16,000 X 60%).
Thus the SSTB QBI component is $14,400 ($24,000 - $9,600)
Again, IRS draft worksheets, and instructions, have not yet been released for this calculation, as of this writing. Please see my temporary worksheet on the next page.
If Qualified PTP/REIT income, add their 20% into line 8. See next page.
Other Comments and Facts about the QBI Deduction
Another note is that the sum of all the QBI Components from each QTB and each SSTB, plus the 20% of PTP income and REIT Dividends, cannot exceed the 20%
of taxable income before the QBI deduction. Thus, on the first page of your worksheets, when you add all the QTB and SSTB amounts on line 8, you should also add the 20% of PTP income and REIT Dividends. The taxable income limitation applies to the SUM of all these amounts.
PTP income and REIT Dividends do not include amounts that are subject to Capital Gains tax rates. (This includes Qualified Dividends.) The reason for this exclusion is to prevent a deduction of income that is already receiving preferential tax rates. (Also please see discussion of interest income, later.)
Loss Carryforwards.
As shown in the Worksheet provided in the Proposed Regulations (page 7) losses from Qualified Business Income in prior years is carried forward, and reduces the QBI deduction in the current year. HOWEVER, since 2018 is the first year of the QBI Deduction, there are no carryforwards from 2017 into 2018. For this reason I do not have a loss carryforward line on the Temporary Worksheets that I have provided in this class material. Please keep in mind that in later years this will not be the situation.
The following excerpts (in different font) are from the Proposed Regulations (Some words have been made bold by me, for purposes of this class.)
2. Carryover loss rules for negative total QBI amounts
If an individual has multiple trades or businesses, the individual must calculate the QBI from each trade or business and then net the amounts. Section 199A(c)(2) provides that, for purposes of section 199A, if the net QBI with respect to qualified trades or businesses of the taxpayer for any taxable year is less than zero, such amount shall be treated as a loss from a qualified trade or business in the succeeding taxable year.
Proposed §1.199A‐1(c)(2)(i) repeats this rule and provides that the section 199A carryover rules do not affect the deductibility of the losses for purposes of other provisions of the Code. (Page 11)(Page # in Proposed Regulations; here and elsewhere.)
So, what they are saying here is that you will NOT have a negative NET QBI.
Instead the negative net amount must be carried forward – for QBI purposes.
However, for Regular tax purposes, you apply the regular tax rules. A carryforward for QBI purposes does not, in itself, require a carryforward for Regular tax purposes.
3. Carryover loss rules if combined qualified REIT dividends and qualified PTP income is less than zero
One commenter stated it was not clear whether, if a taxpayer has an overall loss from combined qualified REIT dividends and qualified PTP income (because a loss from a PTP exceeds REIT dividends and PTP income), the negative amount should be netted against any net positive QBI (regardless of source), or whether the negative amount should be segregated and subject to its own loss carryforward rule distinct from but analogous to the QBI loss carryforward rule. Section 199A contemplates that qualified REIT dividends and qualified PTP income are computed and taken into account separately from QBI and should not affect QBI. If overall losses attributable to qualified REIT dividends and qualified PTP income were netted against QBI, these losses would affect QBI. Therefore, a separate loss carryforward rule is needed to segregate an overall loss attributable to qualified REIT dividends and qualified PTP income from QBI.
Additionally, commenters have expressed concern that losses in excess of income could create a negative section 199A deduction, a result incompatible with the statute.
Accordingly, proposed §1.199A‐1(c)(2)(ii) provides that if an individual has an overall loss after qualified REIT dividends and qualified PTP income are combined, the portion of the individual’s section 199A deduction related to qualified REIT dividends and qualified PTP income is zero for the taxable year. In addition, the overall loss does not affect the amount of the taxpayer’s QBI. Instead, such overall loss is carried forward and must be used to offset combined qualified REIT dividends and qualified PTP income in the succeeding taxable year or years for purposes of section 199A. (Pages 11‐12)
It is interesting, that while the Proposed Regulations separate the PTP/REIT losses from the other QTB income/losses, it does not appear to separate PTPs & REITs from one another. If so, this would be different than what we see with PTP passive losses.
Another rather involved discussion, in the Proposed Regulations, centers on a possible tax situation where the taxpayer has income above the threshold amounts, and has at least one QTB with a loss.
A relevant portion of the discussion is included on the next page.
One commenter noted that, if combined QBI from all of an individual’s trades or businesses is greater than zero, but the individual’s QBI from one or more trades or businesses is less than zero, the mechanics of how the loss should be offset against the QBI income for purposes of calculating the section 199A deduction are unclear. How such a loss is allocated matters in situations in which an individual has taxable income above the threshold amount and more than one trade or business with positive QBI. The commenter suggested that a “netting” approach best reflects Congress’s intent, and that the absence of a netting approach would lead to inconsistent and counterintuitive results that Congress did not intend. The Treasury Department and the IRS agree that a netting approach is contemplated by the carryforward rule of section 199A(c)(2) and is necessary to ensure results consistent with the intent of section 199A. Accordingly, proposed §1.199A‐1(d)(iii) provides that, if an individual has QBI of less than zero from one trade or business, but has overall QBI greater than zero when all of the individual’s trades or businesses are taken together, then the individual must offset the net income in each trade or business that produced net income with the net loss from each trade or business that produced net loss before the individual applies the limitations based on W‐2 wages and UBIA of qualified property. The individual must apportion the net loss among the trades or businesses with positive QBI in proportion to the relative amounts of QBI in such trades or businesses. Then, for purposes of applying the limitation based on W‐2 wages and UBIA of qualified property, the net gain or income with respect to each trade or business (as offset by the apportioned losses) is the taxpayer’s QBI with respect to that trade or business. The W‐2 wages and UBIA of qualified property from the trades or businesses which produced negative QBI are not taken into account for purposes of proposed §1.199A‐1(d) and are not carried over into the subsequent year. The Treasury Department and the IRS request comments on the approach described above. (Page 14 – 15)
No example of this method was given in the Proposed Regulations, but it would seem to indicate an allocation as follows:
QBI Wages UBIA Business 1 $ 100,000. $ 20,000. $ 0.
Business 2 $ 400,000. $ 80,000. $ 125,000.
Business 3 ($ 50,000.) $ 15,000. $ 50,000.
The total (positive) QBI is $500,000.($100,000 + $400,000).
$100,000 is 20% of $500,000, so we allocate 20% of the loss to Business 1.
$400,000 is 80% of $500,000, so we allocate 80% of the loss to Business 2.
Loss of $50,000 X 20% = $10,000. Amount allocated to Business 1.
Loss of $50,000 X 80% = $40,000. Amount allocated to Business 2.
Thus, the result would be as follows:
Business 1 would now have a QBI of $ 90,000 ($100,000 - $10,000) Business 2 would now have a QBI of $360,000 ($400,000 - $40,000)
The Wages & UBIA for Business 3 would be lost. No carryforward either.
QBI Wages UBIA Business 1 $ 90,000. $ 20,000. $ 0.
Business 2 $ 360,000. $ 80,000. $ 125,000.
Business 3 ($ 50,000.) $ 15,000. $ 50,000.
The Calculations would then be based upon these revised figures. In this scenario, it would not affect the net for Business 1 or Business 2. However, IF 20% of the QBI was the lesser figure, reducing it even more by the loss would reduce the QBI component for that business.
Partners & Shareholders
As mentioned earlier, the QBI deduction is applied at the Partner & Shareholder level. The Proposed Regulations eliminate a possible question that could arise by stating “the section 199A deduction has no effect on the adjusted basis of the partner’s interest in the partnership.” And “the section 199A deduction has no effect on the adjusted basis of a shareholder’s stock in an S corporation or the S corporation’s accumulated adjustments account.”
Self Employment (SE) Tax & Net Investment Income Tax (NIIT)
The proposed regulations provide that the deduction under section 199A does not reduce net earnings from self‐employment under section 1402 or net investment income under section 1411. Therefore, both sections 1402 and 1411 are calculated as though there is no section 199A deduction. (Page 15)
2. Partnership special basis adjustments
After the enactment of the TCJA, the Treasury Department and the IRS received comments requesting guidance as to whether partnership special basis adjustments under sections 734(b) or 743(b) constitute qualified property for purposes of section 199A. Treating partnership special basis adjustments as qualified property could result in inappropriate duplication of UBIA of qualified property (if, for example, the fair market value of the property has not increased and its depreciable period has not ended). Accordingly, proposed §1.199A‐2(c)(1)(iii) provides that partnership special basis adjustments are not treated as separate qualified property. (Page 23‐24)
b. Interest Income.
Section 199A(c)(4)(C) provides that QBI does not include any interest income other than interest income that is properly allocable to a trade or business. The Treasury Department and the IRS believe that interest income received on working capital, reserves, and similar accounts is not properly allocable to a trade or business, and therefore should not be included in QBI, because such interest income, although held by a trade or business, is simply income from assets held for investment. Accordingly, proposed §1.199A‐3(b)(2)(ii)(C) provides that interest income received on working capital, reserves, and similar accounts is not properly allocable to a trade or business. In contrast, interest income received on accounts or notes receivable for services or goods provided by the trade or business is not income from assets held for investment, but income received on assets acquired in the ordinary course of trade or business.
(Page 38)
This is similar to rules we see in other parts of tax law where interest income properly allocable to a trade or business is subject to self-employment tax (for a self-employed business owner), but interest on the business bank accounts is not.
c. Reasonable compensation
Section 199A(c)(4)(A) provides that QBI does not include “reasonable compensation paid to the taxpayer by any qualified trade or business of the taxpayer for services rendered with respect to the trade or business.” (Page 39)
After much discussion about the purpose/meaning of this statement in Code 199A, the Propose Regulations summarize by saying:
The rule for reasonable compensation is merely a clarification that, even if an S corporation fails to pay a reasonable wage to its shareholder‐employees, the shareholder‐employees are nonetheless prevented from including an amount equal to reasonable compensation in QBI. (Page 40)
So, this is another area of the code where paying unreasonable wages to a Shareholder-Employee can result in audit adjustments. One article I read on this subject indicated that the new concern might be that wages are too high – rather than the historical concern that they are too low – in certain cases. This would be especially applicable in situations where the wage deduction was needed for the 50% (or 25% & UBIA 2.5%) calculations. However, I have not read anything from IRS sources stating they expect this problem. The key – in either situation – is the word ‘reasonable’. Can the taxpayer prove the wages are ‘reasonable’ for the work being performed?
d. Guaranteed payments
Section 199A(c)(4)(B) provides that QBI does not include any guaranteed payment described in section 707(c) paid by a partnership to a partner for services rendered with respect to the trade or business. Proposed §1.199A‐3(b)(2)(ii)(I) restates this statutory rule and clarifies that the partnership’s deduction for such guaranteed payment is an item of QBI if it is properly allocable to the partnership’s trade or business and is otherwise deductible for Federal income tax purposes. It may be unclear whether a guaranteed payment to an upper‐tier partnership for services performed for a lower‐
tier partnership is QBI for the individual partners of the upper‐tier partnership if the upper‐tier partnership does not itself make a guaranteed payment to its partners.
Section 199A(c)(4)(B) does not limit the term “partner” to an individual. Consequently, for purposes of the guaranteed payment rule, a partner may be an RPE. Accordingly, proposed §1.199A‐3(b)(2)(ii)(I) clarifies that QBI does not include any guaranteed payment described in section 707(c) paid to a partner for services rendered with respect to the trade or business, regardless of whether the partner is an individual or an RPE.
Therefore, for the purposes of this rule, a guaranteed payment paid by a lower‐tier partnership to an upper‐tier partnership retains its character as a guaranteed payment and is not included in QBI of a partner of the upper‐tier partnership regardless of whether it is guaranteed to the ultimate recipient. (Pages 40 & 41)
So, for purposes of calculating the net business income of a partnership, the Guaranteed payments, described above, are subtracted. However, the recipient of that Guaranteed payment cannot include that as QBI in their calculations. This applies whether the recipient is an individual, or another partnership. So, you may have a situation where a partnership receives a Schedule K-1 from another partnership. That K-1 may show Guaranteed payments as part of the income.
Those payments are not included in QBI for the recipient partnership. The Proposed Regulations applied this same concept to Section 707(a) Guaranteed payments, but ended the discussion by stating:
Accordingly, proposed §1.199A‐3(b)(2)(ii)(J) provides that QBI does not include any payment described in section 707(a) to a partner for services rendered with respect to the trade or business, regardless of whether the partner is an individual or an RPE. The Treasury Department and the IRS request comments on whether there are situations in which it is appropriate to include section 707(a) payments in QBI. (Page 41)
The proposed Regs say ‘section 707(a) addresses arrangements in which a partner engages with the partnership other than in its capacity as a partner.’
Additional reporting needed by Pass-Through Entities.
As we have already discussed in this class, wages paid and unadjusted basis immediately after acquisition, are 2 important factors in properly calculating the QBI component for each business – where the threshold is involved. This will necessitate additional reporting by these PTEs to provide the relevant information to the Schedule K-1 recipients. This is very important. If you are handling these returns, please make sure you have this information calculated, and reported, where provided. (This applies to PTP’s as well.) Please note the following statements from the Proposed Regulations:
The determination of W‐2 wages must be made for each trade or business by the individual or RPE that directly conducts the trade or business before applying the aggregation rules of §1.199A‐48.In the case of W‐2 wages paid by an RPE, the RPE must determine and report W‐2 wages for each trade or business conducted by the RPE. W‐2 wages are presumed to be zero if not determined and reported for each trade or business. (Page 128)
The UBIA of qualified property is presumed to be zero if not determined and reported for each trade or business. (Page 129)
The Proposed Regs also speak to the timeliness of W2 filings. Basically the wages must have been filed on Forms W3/W2 within 60 days of the due date. If a correction was made within the 60 days, you use the corrected figures. If a correction was made after 60 days, you use the original figures, UNLESS the corrected figures are lower. If the original forms were filed after the 60 days, you use 0 for your wage figure in the QBI deduction calculation.
The allocation of wages among shareholders, or partners, must be ‘according to code’. So, you cannot allocate according to QBI ‘need’, but must allocate according to the normal rules.
The discussion of wages, allocation, and timeliness of W2 filing can be read in the Proposed Regulations on pages 128-136. Please refer to these pages also for information relating to Short Tax Years.
8 My footnote: We will discuss aggregation a little later in this handout.
Allocation of UBIA (property) In the case of qualified property held by an RPE, each partner’s or shareholder’s share of the UBIA of qualified property is an amount which bears the same proportion to the total UBIA of qualified property as the partner’s or shareholder’s share of tax depreciation bears to the RPE’s total tax depreciation with respect to the property for the year. In the case of qualified property held by a partnership which does not produce tax depreciation during the year (for example, property that has been held for less than 10 years but whose recovery period has ended), each partner’s share of the UBIA of qualified property is based on how gain would be allocated to the partners pursuant to sections 704(b) and 704(c) if the qualified property were sold in a hypothetical transaction for cash equal to the fair market value of the qualified property. In the case of qualified property held by an S corporation which does not produce tax depreciation during the year, each shareholder’s share of the UBIA of qualified property is a share of the unadjusted basis proportionate to the ratio of shares in the S corporation held by the shareholder over the total shares of the S corporation. (Page 128‐129)
Aggregation of Businesses
Code Section 199A allows Aggregation of Business. The next 2 pages cite the Proposed Regulations for these aggregations. The General principles are:
GENERAL RULES:
1) Common Control (at least 50% owned by same person, or group) 2) Majority of the taxable year (common control over half the year)
3) Businesses have the same taxable year (can’t mix fiscal & calendar, etc.) 4) Not SSTB businesses.
5) Satisfy at least 2 of the following factors:
A) Provide products & services that are the same, or customarily together B) Share facilities OR share significant elements (personnel, accounting, legal,
manufacturing, purchasing, HR, or information technology resources) C) Operated in coordination with, or reliance upon, one or more of the
businesses in the group (example, supply chain interdependencies).
OPERATING RULES:
1) An individual may aggregate directly operated businesses with RPEs.
2) Multiple owners of RPEs can aggregate differently from one another.
3) Directly operated businesses compute their QBI, W2 wages & UBIA before applying aggregation rules. Then must combine QBI, W2 wages & UBIA for all aggregated businesses.
FAMILY ATTRIBUTION RULES
REPORTING CONSISTENCY& DISCLOSURE RULES, see page 28 of this handout (quoting from the Proposed Regulations).
Par. 6. Section 1.199A‐4 is added to read as follows:
§1.199A‐4 Aggregation.
(a) Scope and purpose. An individual or Relevant Pass‐through Entity (RPE) may be engaged in more than one trade or business. Except as provided in this section, each trade or business is a separate trade or business for purposes of applying the limitations described in §1.199A‐1(d)(2)(iv). This section sets forth rules to allow individuals to aggregate trades or businesses, treating the aggregate as a single trade or business for purposes of applying the limitations described in §1.199A‐1(d)(2)(iv). Trades or businesses may be aggregated only to the extent provided in this section, but aggregation by taxpayers is not required.
(b) Aggregation rules—
(1) General rule. Except as provided in paragraph (b)(3) of this section, trades or businesses may be aggregated only if an individual can demonstrate that‐‐
(i) The same person or group of persons, directly or indirectly, owns 50 percent or more of each trade or business to be aggregated, meaning in the case of such trades or businesses owned by an S corporation, 50 percent or more of the issued and outstanding shares of the corporation, or, in the case of such trades or businesses owned by a partnership, 50 percent or more of the capital or profits in the partnership;
(ii) The ownership described in paragraph (b)(1)(i) of this section exists for a majority of the taxable year in which the items attributable to each trade or business to be aggregated are included in income;
(iii) All of the items attributable to each trade or business to be aggregated are reported on returns with the same taxable year, not taking into account short taxable years;
(iv) None of the trades or businesses to be aggregated is a specified service trade or business (SSTB) as defined in §1.199A‐5; and
(v) The trades or businesses to be aggregated satisfy at least two of the following factors (based on all of the facts and circumstances):
(A) The trades or businesses provide products and services that are the same or customarily offered together.
B) The trades or businesses share facilities or share significant centralized business elements, such as personnel, accounting, legal, manufacturing, purchasing, human resources, or information technology resources.
(C) The trades or businesses are operated in coordination with, or reliance upon, one or more of the businesses in the aggregated group (for example, supply chain interdependencies).
(2) Operating rules. An individual may aggregate trades or businesses operated directly and the individual’s share of QBI, W‐2 wages, and UBIA of qualified property from trades or businesses operated through RPEs. Multiple owners of an RPE need not aggregate in
the same manner. For those trades or businesses directly operated by the individual, the individual computes QBI, W‐2 wages, and UBIA of qualified property for each trade or business before applying these aggregation rules. If an individual aggregates multiple trades or businesses under paragraph (b)(1) of this section, the individual must combine the QBI, W‐2 wages, and UBIA of qualified property for all aggregated trades or businesses for purposes of applying the W‐2 wage and UBIA of qualified property limitations described in §1.199A‐1(d)(2)(iv).
(3) Family attribution. For purposes of determining ownership under paragraph (b)(1)(i) of this section an individual is considered as owning the interest in each trade or business owned, directly or indirectly, by or for‐‐
(i) The individual’s spouse (other than a spouse who is legally separated from the individual under a decree of divorce or separate maintenance), and
(ii) The individual’s children, grandchildren, and parents.
(c) Reporting and consistency‐‐(1) In general. Once an individual chooses to aggregate two or more trades or businesses, the individual must consistently report the aggregated trades or businesses in all subsequent taxable years. However, an individual may add a newly created or newly acquired (including through non‐
recognition transfers) trade or business to an existing aggregated trade or business if the requirements of paragraph (b)(1) of this section are satisfied. In a subsequent year, if there is a change in facts and circumstances such that an individual’s prior aggregation of trades or businesses no longer qualifies for aggregation under the rules of this section, then the trades or businesses will no longer be aggregated within the meaning of this section, and the individual must reapply the rules in paragraph (b)(1) of this section to determine a new permissible aggregation (if any).
(2) Individual disclosure‐‐(i) Required annual disclosure. For each taxable year, individuals must attach a statement to their returns identifying each trade or business aggregated under paragraph (b)(1) of this section. The statement must contain ‐‐
(A) A description of each trade or business;
(B) The name and EIN of each entity in which a trade or business is operated;
(C) Information identifying any trade or business that was formed, ceased operations, was acquired, or was disposed of during the taxable year; and
(D) Such other information as the Commissioner may require in forms, instructions, or other published guidance.
(ii) Failure to disclose. If an individual fails to attach the statement required in paragraph (c)(2)(i) of this section, the Commissioner may disaggregate the individual’s trades or businesses. (Pages 148‐152)
(d) Examples. (not reproduced in this handout. Please see Proposed Regs, page 152)
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Rental.
(13) Trade or business means a section 162 trade or business other than the trade or business of performing services as an employee. In addition, rental or licensing of tangible or intangible property (rental activity) that does not rise to the level of a section 162 trade or business is nevertheless treated as a trade or business for purposes of section 199A, if the property is rented or licensed to a trade or business which is commonly controlled under §1.199A‐4(b)(1)(i) (regardless of whether the rental activity and the trade or business are otherwise eligible to be aggregated under §1.199A‐
4(b)(1)). (Page 113)
Thus, while rental activity alone does not constitute a QTB, rental (or licensing) to a trade or business which is commonly controlled does constitute a QTB.
However, if it does not meet the Aggregate test (discussed earlier), the Rental activity will have to use its own QBI, W2 Wages and UBIA separately from the QBI, W2 Wages and UBIA of the connected trade or business.
Cooperative Income of Patrons
(6) Reduction for income received from cooperatives. In the case of any trade or business of a patron of a specified agricultural or horticultural cooperative, as defined in section 199A(g)(4), the amount of section 199A deduction determined under paragraphs (c) or (d) of this section with respect to such trade or business must be reduced by the lesser of:
(i) Nine percent of the QBI with respect to such trade or business as is properly allocable to qualified payments received from such cooperative, or
(ii) 50 percent of the W‐2 wages with respect to such trade or business as are so allocable as determined under §1.199A‐2. (Page 127)
So, for patrons of cooperative income, they must reduce their QBI deduction to no more than 11% (may be less) of their share of the cooperative QBI, instead of the normal 20%. This is due to the fact that the cooperative is allowed a 9%
deduction. This applies whether or not the cooperative passes the 9% deduction through to the patrons.
