July 29, 2019
The Qualified Business Income (QBI) Deduction (Section 199A deduction) allows non-corporate 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.
Individuals, including many owners of sole proprietorships, partnerships, and S corporations may qualify. Some trusts and estates may also be able to take the deduction. Income earned through a C corporation or by providing services as an employee is not eligible for the deduction.
The QBI deduction was created as part of the 2017 Tax Cuts and Jobs Act (TCJA). The IRS has published an informative
Frequently Asked Questions (FAQs) page
on its website (
www.IRS.gov
). The Service clarifies many points about who qualifies and when the deduction can be taken.
According to the IRS, QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business. Only items included in taxable income are counted. In addition, the items must be effectively connected with a U.S. trade or business. Items such as capital gains and losses, certain dividends, and interest income are excluded. W-2 income, amounts received as reasonable compensation from an S corporation, amounts received as guaranteed payments from a partnership, and payments received by a partner for services under section 707(a) are also not QBI.
The IRS makes it clear that the deduction is limited to the lesser of the QBI component plus the REIT/PTP component or 20 percent of the taxpayer’s taxable income minus the net capital gain. The deduction is available for taxable years beginning after December 31, 2017, and ending before December 31, 2025. Most eligible taxpayers will be able to claim it for the first time when they file their 2018 federal income tax return in 2019. The deduction is available, regardless of whether an individual itemizes their deductions on Schedule A or takes the standard deduction.
A qualified trade or business is any section 162 trade or business, with three exceptions:
- A trade or business conducted by a C corporation.
- Taxable income that exceeds the threshold amount, specified service trades or businesses (SSTBs).
- The trade or business of performing services as an employee.
Specified Service Trades or Businesses (SSTBs)
The IRS defines a SSTB as a trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners. The principal asset of a trade or business is the reputation or skill of its employees or owners if the trade or business consists of the receipt of income from endorsing products or services, the use of an individual’s image, likeness, voice, or other symbols associated with the individual’s identity, or appearances at events or on radio, television, or other media formats. The SSTB exception does not apply for taxpayers with taxable income below the threshold amount and is phased in for taxpayers with taxable income above the threshold amount. For 2018, the threshold amount is $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers. The threshold amounts will be adjusted for inflation in subsequent years.
Computing the QBI
The deduction is the lesser of:
- 20 percent of the taxpayer’s QBI, plus 20 percent of the taxpayer’s qualified REIT dividends and qualified PTP income, or
- 20 percent of the taxpayer’s taxable income minus net capital gain.
If the taxpayer’s taxable income (before the QBI deduction) is above the threshold amount, the deduction may be limited based on whether the business is an SSTB, the W-2 wages paid by the business, and the unadjusted basis immediately after acquisition of certain property used by the business. For 2018, these limitations are phased in for joint filers with taxable income above $315,000 but below $415,000, and all other taxpayers with taxable income above $157,500 but below $207,500. Income earned through a C corporation or by providing services as an employee is not eligible for the deduction regardless of the taxpayer’s taxable income. In some cases, patrons of horticultural or agricultural cooperatives are required to reduce their deduction under section 199A(b)(7) (patron reduction).
For taxable years beginning in 2019, the threshold amount under Section 199A(e)(2) is $321,400 for married filing joint returns, $160,725 for married filing separate returns, and $160,700 for single and head of household returns.
S corporations and Partnerships
S corporations and partnerships report each shareholder’s or partner’s share of QBI items, W-2 wages, UBIA of qualified property, qualified REIT dividends, and qualified PTP income items on a Schedule K-1. Shareholders or partners may qualify for the deduction on an individual basis. S corporations and partnerships are generally not taxable and cannot take the deduction themselves.
There are many rules on the QBI deduction. Please feel free to contact any member of our team with questions at 610-828-1900 (PA) or 732-341-3893 (NJ). You can contact Rich Higgins, CPA, managing principal – New Jersey office at Richard.Higgins@ MCC-CPAs.com, Monica DiPaola, manager at
[email protected]
or me at
[email protected]
. We are always here to answer your questions.
Martin C. McCarthy, CPA, CCIFP
Managing Partner
McCarthy & Company, PC
Disclaimer: This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, and cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).
