As a pass-through entity, the income (or loss) from a partnership (Form 1065) is treated on the tax return of its owner(s) as Qualified Business Income (or Loss) under the Section 199A deduction. This deduction is commonly referred to as the Qualified Business Income Deduction (QBID) and it was enacted as part of the Tax Cuts and Jobs Act (TCJA). The QBID allows owners of pass-through businesses to deduct up to 20 percent of the qualified business income from their taxable income.
There are special rules which only apply to Publicly Traded Partnerships (PTP) and the income (loss) from a PTP is not treated the same as income (loss) from partnerships that are not considered a PTP. See Qualified Business Income Deduction (Section 199A) when the pass-through business income (loss) comes from a Publicly Traded Partnership.
QBID is generally available to most taxpayers with pass-through business income whose 2018 taxable income is at or below $315,000 for joint returns and $157,500 for other filers. For 2019 the taxable income thresholds will $321,400 for married filing jointly, $160,725 for married filing separate and $160,700 for all other filing statuses. Taxpayers with incomes above these levels may still be eligible for the deduction but the deduction will be subject to limitations based on the type of trade or business, the amount of W-2 wages paid by the trade or business, and the unadjusted basis immediately after acquisition of qualified property that was placed in service in the trade or business. See Qualified Business Income Deduction - Overview for additional information.
A partnership is required to report to its partners/owners on the Schedule K-1 (Form 1065) – Partner’s Share of Income, Deductions, Credits, etc., the information needed for the partner/owner to calculate any QBID. The partnership reports this information on the Schedule K-1 (Form 1065) in Box 20, Code Z. It is this information from Box 20 of the Schedule K-1 (Form 1065) that should be used by the partner to calculate any 199A Deduction on their individual return. The Box 20 information that is used in the QBID calculation is the following:
Section 199A income –the amount reported is generally defined as the income (or loss) that is related to the partnership’s business activities. It should not include investment income, or the guaranteed payments paid to the partner for services rendered to the partnership.
Section 199A W-2 Wages – the amount reported is generally the wages paid by the partnership that were reported to the Social Security Administration on a W-2, as well as any elective deferrals and deferred compensation. Rev. Proc. 2019-11 provides additional guidance on how to calculate W-2 wages for purpose of Section 199A.
Section 199A unadjusted basis – the amount reported is the unadjusted basis of qualified property held by the partnership. Qualified property is generally defined as (1) the original cost of assets that were placed in service by the partnership in the past ten years and still used by the partnership and (2) the original cost of assets still being depreciated by the partnership because the recovery period is greater than ten years.
Section 199A REIT dividends – the amount reported is the REIT dividends received by the partnership.
Section 199A PTP income – the amount reported is the income or loss received by the partnership issuing this Schedule K-1 (Form 1065) from a Publicly Traded Partnership.
Making the 199A entries in the 1065 Program
If the Form 1065 – U.S. Return of Partnership Income is being done in the Business Program, the total 199A amounts that will flow to the individual partner’s Schedule K-1’s will first need to be entered on the Schedule K – Distributive Share Items > Other Menu > Other Items & Amounts Reported Separately to Partners and are not made directly on the Schedule K-1 (Form 1065). At the Other Items & Amounts Reported Separately to Partners Menu, all of Section 199A information that will be distributed to the partners on their respective individual Schedule K-1 should be entered.
Specifically, on this Other Items & Amounts Reported Separately to Partners Menu the Qualified Business Income, the unadjusted basis of Qualified Property, and W-2 Wages paid by the partnership for the entity is entered. Also, any REIT dividends or Publicly Traded Partnership income (or loss) received by the partnership would be entered here.
The 199A income amount that is entered on Other Items & Amounts Reported Separately to Partners Menu is not automatically calculated by the 1065 tax program. Different entities may treat certain income items as being eligible for Qualified Business Income (or Loss) since Section 199A treatment is based on whether the income is related to the business activities of the partnership.
The 199A W-2 Wages that is entered on Other Items & Amounts Reported Separately to Partners Menu is also not automatically calculated by the 1065 tax program. Different entities may report the W-2 wages on the Form 1065 differently. W-2 wages could be part of the Direct Labor that is reported as part of Cost of Goods Sold and/or Salaries and Wages.
The 199A Unadjusted Basis of Qualified Property is (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.
Once the 199A amounts are entered on the Schedule K – Distributive Share Items > Other Menu > Other Items & Amounts Reported Separately to Partners Menu, if the default setting for Automatically Distribute Schedule K Information is set to YES, the program will automatically distribute the items entered for 199A amounts to Box 20 with the appropriate Code on each partner’s Schedule K-1 based on their percentage of ownership.
Making the 199A entries from a Partnership in the Individual (Form 1040) Tax Program
If the Form 1065 – U.S. Return of Partnership Income was prepared in the Business Program, the Schedule K-1 (Form 1065) can be pulled into the 1040 for the partner’s tax return and does not have to re-entered. To pull a Schedule K-1 from the Business Program to an individual’s tax return, from the Main Menu of the partner’s Individual Tax Return (Form 1040) select:
- Income Menu
- Rents, Royalties, Entities (Sch E, K-1, 4835, 8582)
- K-1 Input - Select Pull and double-click on Business Package. The program will then pull the K-1 (Form 1065) associated with that individual’s social security number into the K-1 1065 Edit Screen for your review.
If the Form 1065 – U.S. Return of Partnership Income was NOT prepared in the Business Program, then to enter the amounts being reported on the Schedule K-1 (Form 1065), from the Main Menu of the partner’s Individual Tax Return (Form 1040) select:
- Income Menu
- Rents, Royalties, Entities (Sch E, K-1, 4835, 8582)
- K-1 Input - Select New and double-click on Form 1065 K-1 Partnership, which will take you to the K-1 Heading Information Entry Menu which should be entirely completed.
After completing all the information required on the K-1 Heading Information screen, select OK and enter ALL the information found on the Schedule K-1 (Form 1065) on the Schedule K-1 Edit Menu in the entry field that corresponds to the Box and Code found on the Schedule K-1 (Form 1065).
If the Schedule K-1 (Form 1065) is from a pass-through business that is considered a Specified Service Business when calculating the QBID, select YES to Question L – “Is Section 199A Income from a Specified Service Business?”
If no information is entered in Box 20, Codes Z, no QBID will be calculated by the program for this pass-through business.
Items that can affect the Qualified Business Income coming from a Partnership
If the taxpayer receives a Schedule K-1 (Form 1065) with Section 199A Income in Box 20, Code Z, that income amount may be subject to certain deductions to determine the Qualified Business Income (QBI) from that business. Items that reduce QBI from a partnership are the following:
- Deductible part of self-employment tax – When the Schedule K-1 (Form 1065) contains in Box 14, Code A an amount for Net Earnings (Loss) the taxpayer may be subject to Self-Employment Tax on that income. When the taxpayer owes self-employment tax, a portion of the self-employment tax owed is deductible from their adjusted gross income and QBI.
- Self-employed SEP, Simple, and qualified plans – Any deduction taken by the taxpayer for contributions to retirement savings plans that is based on their self-employed earnings from the partnership will reduce the QBI from the partnership.
- Self-employed health insurance deduction - When the partnership pays for health insurance for a partner, it is reported in Box 13, Code M, and that amount can be entered on the partner/taxpayer’s tax return as an itemized deduction or as an adjustment to income as the Self-employment health insurance deduction. The partner/taxpayer can also purchase health insurance outside of the partnership and still claim the self-employment health insurance deduction. Any deduction taken by the taxpayer for contributions to a health insurance plan that is based on the self-employed earnings from the partnership will reduce the QBI from the partnership.
- Section 179 Deduction - A Section 179 Deduction is subject to limitations at the partner level and not at the partnership level. The partner's share of the deduction that can be claimed by the partnership is found in Schedule K-1 (Form 1065), Box 12. The following warning is provided when making an entry on the K-1 Entry Menu, Line 12:
The limitations for the Section 179 deduction are not calculated by the system and you should enter ONLY the Section 179 Deduction that is within the limitations. See Publication 946.
Any Section 179 Deduction that is allowed can also affect the 199A Income (Loss) for this business. The 199A Income (Loss) on Line 20, Code Z can be adjusted if necessary, to reflect the allowed amount of Qualified Business Income (Loss).
- Charitable Contributions - Any contributions reported in Box 13, Codes A through G may affect the QBI coming from the partnership. If the taxpayer has Itemized Deductions on Schedule A, the entire amount of the Charitable Gifts claimed on the Schedule A that were from the partnership, will reduce the QBI coming from that partnership. The Charitable contributions are entered in the tax program on the K-1 Entry Menu by selecting Line 13, Codes A through G. Any allowed contribution on Schedule A then will automatically reduce the QBI from that partnership.
- Unreimbursed partner expenses - Any unreimbursed partner expenses that reduce the self-employment income of the taxpayer will also reduce QBI from the partnership. Unreimbursed partner expenses are entered in the tax program on the K-1 Entry Menu by selecting Line 14 – Net Earnings (Loss) from Self-Employment.
NOTE: This is a guide on entering the Qualified Business Income Deduction into the TaxSlayer program when the pass-through business is a partnership. This is not intended as tax advice.
Publication 535 - Business Expenses
Section 199A - Final Regulations