As a pass-through entity, the income (or loss) from a Subchapter S-Corporation (Form 1120S) 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.
QBID is generally available to most taxpayers with pass-through business income whose 2019 taxable income is at or below $321,400 for married filing jointly, $160,725 for married filing separately and $160,700 for all other fliers. (In 2018 the taxable income thresholds were 315,000 for joint returns and $157,500 for other filers). 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.
An S-Corporation is required to report to its Shareholder(s) on the Schedule K-1 (Form 1120S) - Shareholder’s Share of Income, Deductions, Credits, etc., the information needed for the shareholder/owner to calculate any QBID. The S-Corporation reports this information on the Schedule K-1 (Form 1120S) in Box 17, Code V through Z. It is this information from Box 17 of the Schedule K-1 (Form 1120S) that should be used by the Shareholder to calculate any 199A Deduction on their individual return. The Box 17 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 corporation's business activities. It should not include investment income, or the reasonable compensation paid to the shareholders for services rendered to the corporation.
Section 199A W-2 Wages – the amount reported is generally the wages paid by the corporation 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 corporation. Qualified property is generally defined as (1) the original cost of assets that were placed in service by the corporation in the past ten years and still used by the corporation and (2) the original cost of assets still being depreciated by the corporation because the recovery period is greater than ten years.
Section 199A REIT dividends – the amount reported is the REIT dividends received by the corporation.
Section 199A PTP income – the amount reported is the Publicly Traded Partnership income reported by the corporation.
Making the 199A entries in the Business (Form 1120S) Tax Program
If the Form 1120S – U.S. Income Tax Return for an S Corporation is being entered in the Business Program, the total 199A amounts that will flow to the individual shareholder’s Schedule K-1’s are first entered on the Schedule K – Distributive Share Items > Other Menu and are NOT made directly on the Schedule K-1 (Form 1120S).
At the Schedule K – Distributive Share Items > Other Menu, all of Section 199A information that will be distributed to the shareholders on their respective individual Schedule K-1 would be entered. Specifically, on the Schedule K – Distributive Share Items > Other Menu, the Qualified Business Income, the unadjusted basis of any Qualified Property, and the W-2 Wages paid by the corporation for the entity is entered. Also, any REIT dividends or Publicly Traded Partnership income (or loss) received by the corporation would be entered here.
The 199A income amount that is entered on Schedule K – Distributive Share Items > Other Menu > 199A Income is not automatically calculated by the 1120S tax program. Different entities may treat certain income items as being eligible for Qualified Business Income (or Loss) treatment based on whether the income is related to the business activities. As a result, it is incumbent on the user to calculate the income amount that the entity considers to be Qualified Business Income.
The 199A W-2 Wages that is entered on Schedule K – Distributive Share Items > Other Menu > 199A W-2 wages is also not automatically calculated by the 1120S tax program. Different entities may report the W-2 wages on the Form 1120S differently. W-2 wages could be part of the Direct Labor that is reported as part of Cost of Goods Sold, Compensation of Officers, 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 > Other 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 17 with the appropriate Code on each shareholder’s Schedule K-1 based on their percentage of ownership.
Making the 199A entries from an S-Corporation for the Shareholder in the 1040 Tax Program
If the Form 1120S – U.S. Income Tax Return for an S Corporation was prepared in the Business Program, the Schedule K-1 (Form 1120S) can be pulled into the 1040 for the Shareholder 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 Shareholder’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 1120S) associated with that individual’s social security number into the K-1 1120S Edit Screen for your review.
If the Form 1120S – U.S. Income Tax Return for an S Corporation was NOT prepared in the Business Program, then to enter the amounts being reported on the Schedule K-1 (Form 1120S), from the Main Menu of the Shareholder’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 1120S K-1 S Corporation, 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 1120S) 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 1120S).
If the Schedule K-1 (Form 1120S) 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 17, Codes V, no QBID will be calculated by the program for this pass-through business.
Items that can affect the Qualified Business Income coming from a S Corporation
If the taxpayer receives a Schedule K-1 (Form 1120S) with Section 199A Income in Box 17, Code V 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 S Corporation are the following:
- 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 S Corporation will reduce the QBI from the pass-through entity.
- Self-employed 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 S Corporation will reduce the QBI from the pass-through entity.
- Section 179 Deduction - A Section 179 Deduction is subject to limitations at the shareholder level and not at the corporation level. The shareholder's share of the deduction that is eligible to be claimed by the shareholder is found in Schedule K-1 (Form 1120S), Box 11. The following warning is provided when making an entry on the K-1 Entry Menu, Line 11:
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 17, Code V can be adjusted if necessary, to reflect the allowed amount of Qualified Business Income (Loss).
- Charitable Contributions - Any contributions reported in Box 12, Codes A through G may affect the QBI coming from the S Corporation. 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 S Corporation, will reduce the QBI coming from that S Corporation. 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 S Corporation.
NOTE: This is a guide on entering the Qualified Business Income Deduction into the tax program when the pass-through business is an S Corporation. This is not intended as tax advice.