The Tax Cuts and Jobs Act created a deduction for certain pass-through business income which is known as the Qualified Business Income Deduction (QBID) or Section 199A Deduction. The actual calculation of the deduction was done in 2018 on one of two (2) worksheets depending on the income of the taxpayer. However, starting in 2019, this deduction will be calculated on tax forms that will become part of the tax return. In 2019, taxpayers will use Form 8995 - Qualified Business Income Deduction Simplified Computation or Form 8995-A Qualified Business Income Deduction to compute the deduction.
The specific worksheet or version of Form 8995 that is used to calculate the Section 199A Deduction is primarily dependent on the taxable income (without consideration of the QBID) of the taxpayer. There are limited situations, typically involving income from a specified agricultural or horticultural cooperatives, which may require a taxpayer with income below the income thresholds to file which for 2019 will be $321,400 for Married Filing Jointly, $160,725 for Married Filing Separate and $160,700 for all other filing statuses to not be able to use the Simplified Worksheet. In 2018 the income thresholds were $315,000 for Married Filing Jointly and $157,500 for all other filing statuses including MFS. For these taxpayers as well as taxpayers with income above the thresholds, the QBID calculation is done on a series of worksheets.
Qualified Business Income
Whichever worksheet is used to calculate the QBID, the underlying calculation starts with a separate determination of the "Qualified Business Income" (QBI) for each pass-through business that a taxpayer owns. Then the actual allowed deduction is made up of the qualified business income components of each pass-through business reported on the tax return.
Basically, the income or loss that qualifies for the Section 199A Deduction is generally defined as income or loss that relates to the conduct of a business and it does not include investment income, guaranteed payments to partners for services rendered to the partnership, or the "reasonable compensation" paid to an owner for services rendered to the entity.
For most individual taxpayers, the starting point for QBI will be the income or loss that is reported by a pass-through business, and the entries that will generate the Section 199A Deduction are typically done on the menus or schedules that are used to report those business activities. For pass-through businesses that generate certain self-employment deductions, such as the Deductible part of Self-employment tax, Self-employed SEP, SIMPLE, and qualified plans and/or Self-employed health insurance deduction, the QBI will also be reduced by the amount of these deductions. See the specific knowledgebase articles on QBID for each of the pass-through businesses (Schedule C, Schedule E, Schedule F, Schedule K-1 (Form 1065), Schedule K-1 (Form 1120S), and Schedule K-1 (Form 1041)) for additional information on how to enter the information on the Section 199A Deduction for that business.
For taxpayers that have income (or loss) from rental property, they will not be eligible for the QBID when they hold the property for investment purposes. However, a taxpayer that holds rental property as a real estate business and can either meet the standard of an active real estate business or can satisfy the requirement of the Safe Harbor Election under Section 3.03 of Notice 2019-07, they will also be eligible to claim the Section 199A Deduction.
Taxpayer Income Thresholds
When the taxpayer’s income, (including income that comes from a Specified Service Businesses) is below the income thresholds which are in 2019, $321,400 for Married Filing Jointly, $160,725 for Married Filing Separate and $160,700 for all other filing statuses, the QBID will be the lesser of (1) 20% of the net Qualified Business Income (or Loss) from all sources plus 20% of any qualified REIT dividends and Publicly Traded Partnerships (PTP) income (or loss) recognized on the tax return, or (2) 20% of the taxpayer’s taxable income minus the net capital gains and qualified dividends recognized on the return.
This second provision is known as the "Income Limitation" and it has the effect of restricting a taxpayer with significant capital gains and qualified dividend income from receiving the QBID on the portion of their income that has already been given the favorable tax treatment afforded capital gains. For taxpayers whose only income comes from pass-through businesses, the Income Limitation also has the effect of reducing the allowed QBID. This occurs because the taxpayer’s taxable income before consideration of the QBID will be lower than their income from the pass-through business because taxable income has been reduced by any adjustments to income, such as the deductible portion of self-employment taxes and the standard or itemized deduction.
Income Limitations on the Qualified Business Income Deduction
When the taxpayer's income is above $157,500 or $315,000 for Married Filing Jointly, the QBID is subject to further restrictions which are discussed below. For taxpayers with income above the threshold amounts that have income from a Specified Service Business, the QBID is phased out and eliminated once their taxable income reaches $207,500 or $415,000 for Married Filing Jointly.
For higher income taxpayers above the income threshold, the QBI used in determining the QBID is limited based on W-2 wages paid by the business and/or the qualified assets used by the business. Specifically, for taxpayers with income above the thresholds, the first aspect of determining the deduction is the Qualified Business Income Component of the QBID. This QBI Component is the lesser of the following:
- 20% of the Qualified Business Income from the trade or business. If there are multiple pass-through businesses reported on the return, the QBI Component is determined separately for each business. Any business with a loss will have that loss allocated proportionately among the taxpayer's other pass-through businesses and the QBI for those other pass-through businesses will be reduced by the amount of loss allocated. There is a separate schedule (Worksheet 12-A, Schedule C) required to allocate losses among the QBI component for other businesses on the tax return.
- 50% of the W-2 wages paid by that trade or business to generate the QBI, or if greater 25% of the W-2 wages paid by the trade or business plus 2.5% of the unadjusted basis of the qualified property used by the trade or business. For this calculation, the unadjusted basis of qualified property is generally defined as (a) the original cost of assets that were placed in service by the business in the past ten (10) years and still used by the business without regard to whether the asset has been fully depreciated or otherwise subjected to section 179 or bonus depreciation treatment and (b) the original cost of assets that are still being depreciated by the business because the depreciation recovery period is greater than ten (10) years.
For such higher income taxpayers, the Qualified Business Income Component will be determined based on the above criteria to obtain a total QBI Component of all the separate pass-through businesses on the return. This total QBI Component will then be added to 20% of any qualified REIT dividends and/or Publicly Traded Partnerships (PTP) income (or loss) recognized on the tax return to obtain the Qualified Business Income Deduction before the Income Limitation. Then the actual allowed QBID will be the lesser of (1) the Qualified Business Income Component of all separately calculated businesses plus 20% of any qualified REIT dividends and/or Publicly Traded Partnerships (PTP) income (or loss) or (2) the Income Limitation, which is 20% of the taxpayer’s taxable income minus the net capital gains and qualified dividends recognized on the return.
NOTE: This is a guide on entering the Qualified Business Income Deduction into the TaxSlayer Pro program. This is not intended as tax advice.