The Qualified Business Income Deduction (QBID), also known as Section 199A deduction, was enacted as part of the Tax Cuts and Jobs Act (TCJA) of 2017. QBID allows individual taxpayers with pass-through income to deduct up to 20 percent of the Qualified Business Income (QBI) from their AGI within certain limitations. It is available for pass-through income from Sole-proprietorships, Partnerships, Publicly Traded Partnerships (PTP), S Corporations, and Trusts and Estates.
As with individuals, trusts and estates can have income from a trade or business and can claim QBID at the entity level, rather than passing it through to the beneficiaries.
When does the trust or estate claim QBID?
Generally, a non-grantor trust or estate may either claim the QBID or provide the Section 199A information to their beneficiaries. If the estate or trust has no Distributable Net Income (DNI) for the tax year, Section 199A items are allocated entirely to the estate or trust. Estates and trusts may compute their own QBI deduction to the extent section 199A items are allocable to the estate or trust. Section 199A items allocated to beneficiaries are not included in the QBID computation for the Estate or Trust. For more information, see the instructions for Form 1041, U.S. Income Tax Return for Estates and Trusts.
Grantor Trusts, or trusts in which another person is treated as owning all or part of the trust or estate, compute the QBID for the portion owned as if section 199A items had been received directly by the grantor/owner.
Are there specific rules applicable to trusts?
Income limitations for trusts are similar to single taxpayers. For 2020, income must be under $163,300 and for 2021, income must be under $164,900. An estate's or trust’s QBI includes income, gain, deduction, and loss in connection with a trade or business that is included in the calculation of taxable income for the tax year. QBI also includes the estate's or trust's share of items of income, gain, deduction, and loss from trades or business conducted by partnerships (other than PTPs), S corporations, and other estates or trusts.
Income is any regular and continuing activity in which the trust or estate engages for the purpose of making a profit. This includes Section 162 trades or businesses with the exception of Specified Service Trades or Businesses (SSTBs). (For a list of SSTBs, refer to the TaxSlayer Pro knowledgebase article Frequently Asked Questions on QBID, though it would be highly unusual for an estate or trust to be an owner or partner in a SSTB.)
QBID is limited to either 20% of QBI or 20% of taxable income minus capital gains. It is important to note that capital gains are usually a major component of a trust or estate's taxable income.
What are the navigation steps?
There are two ways an estate or trust can handle the QBID: to claim it on the estate or trust return or to pass it through to beneficiaries.
To claim QBID for a trust or estate, from the Main Menu of the tax return (Form 1041) select:
- Qualified Business Income Deduction
REIT Dividends - these lines show the amount of income entered in the return for each of these items. No adjustments should be needed, but if an amount needs adjusting on this form, select the line and enter the +/- adjustment.
- Pass-through businesses - The items listed here are for information only and show the Sec 199A section of each Schedule K-1 entered in the tax return. Only information entered in the Sec 199A section of the Schedule K-1 will pull to the QBI calculation.
Aggregation of Business Operations - For the purposes of the QBID calculation, each trade or business is treated separately, however aggregating the businesses is allowable in certain situations and may be advantageous, e.g., if one business has a higher payroll than the others. The taxpayer may elect to aggregate businesses for the purpose of calculating QBID if all of the following are true:
- All the trades or businesses use the same tax year end;
- Each trade or business is at least 50% owned by the taxpayer, individually or in a group, directly or indirectly, for a majority of the tax year, including the last day of the tax year;
- None of the trades or businesses are a Specified Service Trade or Business (SSTB); and
- The trades or businesses meet at least two of three factors:
- Their products, property, or services are the same or are usually offered together;
- They share facilities or share business resources such as accounting, HR, IT, legal, manufacturing, purchasing, and personnel.
- They coordinate with or rely on one or more of the businesses in the aggregated group.
The election to aggregate is an important decision that is made by the taxpayer, rather than the preparer, taking into account all the facts and circumstances in the present as well as potentially in the future. Additionally, the election to aggregate is non-revocable and must be continued in future years unless doing so is no longer justifiable due to a significant change in facts and circumstances.
To aggregate businesses, in the Aggregation of Business Operations menu, select:
- Description - Enter a brief descriptive name for the aggregation.
- Explanation - Enter an explanation for why they are aggregating (pursuant to IRC Sec 1.199A-4). There is a maximum of about 156 characters across two lines.
- Changed from Prior Year - Explain any changes to the aggregation from the previous year due to, e.g., a trade or business being formed, acquired, disposed of, or ended.
- Allocate Business to Aggregation - In the list, check the box next to each business being included in the aggregation.
If Form 8995-A is being filed with the return, the aggregation information will be on a separate Schedule B for that form. If Form 8995 is being filed with the return, the aggregation information will be on a separate attachment to Form 8995.
Prior Year Qualified Business Loss Carryforward - Enter any losses or deductions disallowed for use in calculating taxable income in a prior year that can be included in the current year. Depending on the form being produced, this amount will carry to Form 8995 Line 3 or to Form 8995-A Line 2, allocated proportionately across all the businesses. (Whether or not you include a minus sign, the amount will transfer to the form as a minus.)
Prior Year REIT/PTP Loss Carryforward - As above, enter any REIT or PTP losses or deductions disallowed in a prior year that can be included in the current year. Depending on the form being produced, this amount will carry to Form 8995 Line 7 or to Form 8995-A Line 29. (Whether or not you include a minus sign, the amount will transfer to the form as a minus.)
- If the estate or trust is a member of an agricultural cooperative, enter the Domestic Production Agricultural Deduction claimed.
TaxSlayer Pro will calculate the QBID on Form 8995 or 8995-A as appropriate.
To report QBID items to the estate or trust beneficiary(ies) on Schedule K-1, from the Main Menu of the tax return (Form 1041) select:
- Schedule K-1
- Schedule K-1 Input
- Select NEW and enter the beneficiary information if not already entered, or select a beneficiary
- Allocable Share items
- Other Information
- Qualified business income, section 199A
New - for each business activity, enter the beneficiary's share of Section 199A income, W-2 wages, UBIA, REIT dividends, and PTP income.
Note: UBIA (unadjusted basis immediately after acquisition) refers to the actual cost of all assets placed in service in the last 10 years, unreduced by depreciation, Section 179 deduction, or bonus depreciation.
One the beneficiary Schedule K-1, Sec 199A income will show in Box 14 with code I with an asterisk, indicating the QBID information the beneficiary needs for their individual tax return is included on a statement that prints with the Schedule K-1.
What form will be used for claiming QBID?
There are two forms used to claim QBID:
- Form 8995 - Qualified Business Income Deduction Simplified Computation, or
- Form 8995-A - Qualified Business Income Deduction.
Form 8995 will be included in the return if all of the following are true of the estate or trust:
- It has qualified business income (loss), REIT dividends, or PTP income (loss),
- Its taxable income before QBID is less than or equal to the income limitation
- It isn’t a patron in a specified agricultural or horticultural cooperative.
If the estate's or trust's taxable income before QBID is greater than the income limitation, or if it is a patron in a specified agricultural or horticultural cooperative, Form 8995-A will be used.
Note: This is a guide on the Qualified Business Income Deduction in the estate or trust tax return. This is not intended as tax advice.