2018 national income tax workbook™ - ohio state universityspecified service tor b limit (based on...
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Business IssuesChapter 10 pp. 329-3802018 National Income
Tax Workbook™
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Qualified Business Income DeductionOverview p. 331
Lesser of 20% of QBI or 20% of taxable income▪ Tax Inc w/o QBI deduction▪ Tax Inc w/o net cap gain (LTCG, collectibles
unrecaptured §1250, §1202, qualified div.) W-2 wage limit (based on taxable income)
Specified service Tor B limit (based on taxable inc.)
Allowed for AMT calculation, not for SE tax Deduction after AGI May not be allowed for state income tax
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§199A – Qualified Business Income Ded.p. 44
Deduction does not reduce AGI Deduction only for income tax purposes▪ Does NOT reduce SE tax
For AMT, computed without AMT adjustments
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Qualified Business Income DeductionQBI Definition p. 331
Qualified income, gain, deduction, & loss with respect to a qualified T or B▪ Not qualified REIT dividends or PTP income
Not wages, salaries, guaranteed payments Other exclusions: List p. 331 Must be effectively connected w/US Section 1231 gains/losses if ordinary
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§199A – Qualified Business Income Ded.Qualified Trade or Business p. 43
Qualified Tor B = any Tor B other than SSTB (Specified Service Trade or Business) or T or B as an employee
SSTB = Tor B in §1202(e)(3)(A) other than engineering & architecture▪ Health, law, accounting, actuarial science,
performing arts, consulting, athletics, financial services, brokerage services, if principal asset = employee skill
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Qualified Business Income DeductionUS Trade or Business p. 332
§864(c), Treas. Reg. 1.864-6(b)(1) Income is effectively connected w/US trade or business if:1. Business has office/fixed place in US;2. Office/fixed place is material factor in the
realization of income, gain; or loss, and3. Activities at office/fixed place substantially
contribute to realization of income, gain, loss Puerto Rico business = US trade or business if
taxable in US
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§199A – Qualified Business Income Ded.p. 47
TP can claim deduction for 20% of aggregate $ of qualified REIT dividends▪ Without capital gain div. or qualified div.
TP can claim deduction for 20% of qualified publicly traded PS income▪ Allocated $ + ordinary gain (sale of PTP int.)
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§199A – Qualified Business Income Ded.p. 45
Partnerships and S Corporations Deduction at the PN and SH level Based on allocations of qualified business
income/loss items, W-2 wages, qualified property Deduction w/o regard to participation
Trusts and Estates Eligible for QBI deduction Rules to allocate wages & QP similar to those of
§199(d)(1)(B)(i) (DPAD rules)
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Qualified Business Income DeductionPenalties p. 344
Substantial understatement penalty of 20% for TP claiming QBID:▪ Understatement exceeds the greater of
$5,000 or 10% of corrected tax replaced with
▪ Understatement exceeds the greater of $5,000 or 5% of corrected tax
Adjustments need not be QBI adjustments
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Qualified Business Income DeductionLimitations pp. 331-332
Phase-in range for limitations – Figure 10.1▪ MFJ: Tax. Inc. $315,000 to $415,000▪ Others: Tax. Inc. $157,500 to $207,500
Below the phase-in▪ No W-2 limitation and SSTB income = QBI
Above the phase-in▪ W-2 limitation applies in full, SSTB ≠ QBI
Within phase-in range: Both limits partially apply
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p. 509Calculating Deduction – Below Threshold
20% QBI + 20% REIT + 20% PTP Limited to 20% taxable income (less net
capital gain)
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Example 13.1
WAGESSCH C,E,F 100KSCH DSCH E PG. 1 & 2
SE TAXAGI
AGI STD/ITEMIZE TAXABLE INCOME 81KQBID
FRONT 1040 BACK 1040
p. 510
LESSOR OF 20% OF: $16,200 QBID
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Example 13.2
WAGESSCH C,E,F 100KSCH D 7KSCH E PG. 1 & 2
SE TAXAGI
AGI STD/ITEMIZE TAXABLE 74K INCOME - 7KNET TAX INC 67KQBID
FRONT 1040 BACK 1040
p. 510
LESSOR OF 20% OF: $13,400
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Example 13.3
WAGES 650KSCH C,E,F SCH D SCH E PG. 1 & 2 100K
SE TAXAGI
AGI STD/ITEMIZE TAXABLE 270K INCOME NET TAX INC 270KQBID
FRONT 1040 BACK 1040
p. 510
LESSOR OF 20% OF: $20,000
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§199A – Qualified Business Income Ded.Specified Service Business p. 44
If taxable income < threshold SSTB = qualified
If taxable income in phasein range:▪ Use % x QBI & wages from SSTB▪ % = 100% less ratio of TI > threshold
divided by phasein (50,000 or 100,000)Range: 157,500→207,500 MFJ 315,000→415,000
If taxable income > 207,500 (415,000): QBI does not include SSTB
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Qualified Business Income DeductionSSTB p. 332
Health, law, accounting, actuarial science, performing arts, consulting, athletics, financial/brokerage services, Tor B where principal asset is skill/reputation of ≥ 1 employee
Investing & investment management., trading, dealing in securities, PS interests, commodities
But NOT engineering and architecture
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Reputation or Skill p. 531
SSTB is any business principal asset is reputation/skill of employee or owner
1. Product/service endorsement2. Use of image, name, etc.3. Appearance at event
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SSTB - Health pp. 528-529
Medical services by physicians, pharmacists, nurses, dentists, veterinarians, physical therapists, psychologists, and other similar HC pros Not health clubs, health spas,
pharmaceutical/medical device research, manufacturing, sales
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SSTB Lawp. 529
Lawyers, paralegals, legal arbitrators, mediators, and similar professionals Not printers, delivery services,
stenographers
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SSTB – Accountingp. 529
Accountants, enrolled agents, return preparers, financial auditors, bookkeeping and similar professionals Not payment processing, billing
analysis
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SSTB – Actuarial Sciencep. 529
Services by actuaries Not economists, mathematicians,
and statisticians not engaged in analyzing or assessing the financial costs of risk or uncertainty of events
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SSTB – Performing Artsp. 529
Creation of performing arts, such as actors, singers, musicians, entertainers, directors, and similar Not maintenance and operation of
equipment or facilities or broadcast or disseminate video or audio of performing arts
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SSTB – Consultingp. 529
Professional advice and counsel to clients Includes lobbying Not sales, training, education courses Not ancillary consulting if no separate $ Ex. 13.36 (p. 530) Microcomputers sells
computers, consult w/customers re setup, etc. Ancillary to sales and not in field of consulting
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SSTB – Athletics p. 530
Participate in athletic competition such as athletes, coaches, and team managers Not maintenance/operation of
equipment and facilities or radio/video broadcast
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SSTB – Financial Servicesp. 530
Managing wealth; advising clients re finances; retirement and wealth transition plans; valuations, mergers or other restructuring, raising capital Not taking deposits, loans
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SSTBs pp. 530-531
Brokerage services – sale of securities Investing – investment management Trading -
▪ Securities – buying and selling securities▪ Commodities – buying and selling commodities▪ Partnership interests – buying and selling
partnership interests
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Examples p. 531
Ex. 13.37 Aaron recorded a song and gets royalties when streamed/played – SSTB performing arts
Ex. 13.38 Betty is partner in partnership that owns sports team – SSTB athletics
Ex. 13.39 Chris makes recommendations about personnel structure – SSTB consulting
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Examples p. 532
Ex. 13.40 Denice licenses software, advises about product needs – not SSTB
Ex. 13.41 Erika helps w/ financial planning – SSTB financial services
Ex. 13.42 Frank trades securities and commodities –SSTB brokerage services
Ex. 13.43 George owns bicycle sale/repair shop, success based on George’s skill/reputation – not SSTB
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Examples pp. 532-533
Ex. 13.44 Hilary is well known chef, endorsement fee for name on cookware – restaurant not SSTB but endorsement is
Ex. 13.45 Jeffrey is well known actor, likeness and name to shoe company in exchange for partnership interest -SSTB
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De Minimis Rule p. 533
Not an SSTB if less than 10% gross receipts is from SSTB (5% if gross receipts more than 25M)
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Segregation Rule p. 533
Prop. Treas. Reg. 1.199A-5SSTB includes trade or business that provides 80% or more property or services to SSTB if 50% or more common ownership
Less than 80% include portion
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Examples p. 533
Ex. 13.46 RML is law partnership Divides into law, leasing, staffing SSTBs b/c same owners, provide
substantially all property and services
Ex. 13.47 Dentist owns dental practice and office building. Building rental to dental practice is SSTB
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Incidental Business p. 533
Trade or business 50% or more common ownership w/ SSTB, and shared expenses, trade or business is part of SSTB if gross receipts not more than 5% of combined receipts
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Ex. 13.48 p. 534
Andrew is dermatologist, provides medical services and sells skin care products Same employees/office Product sales do not exceed 5%
and are incidental to SSTB
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Services as Employee p. 534
Performing services as employee not a trade or business for 199A Presumption that former EE is EE if:1. Properly treated as EE for fed. tax2. Later treats as nonemployee3. Performs substantially same services
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RPEs pp. 535-536
Relevant pass-through entities (RPEs) must:1. Determine if more than one T or B and if
any are SSTBs2. Determine QBI for each T or B3. Determine W-2 wages and UBIA of QP for
each T or B4. Determine REIT dividends and PTP
income
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RPE Reportingp. 536
Identify and report on K-1 for each T or B: Owner’s share of QBI, wages, UBIA
(unadjusted basis immediately after acquisition) of QP
Whether any T or B is a SSTB Share of REIT div. and PTP income Failure to separately identify and report = 0
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Trusts and Estates p. 536
Trust or estate treated as RPE if allocates QBI items Trust or estate treated as individual if
retains QBI items Grantor trust – beneficiary calculates Nongrantor trust – trust calculates then
allocates based on share of DNI
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Anti-Avoidance pp. 536-537
Can’t form multiple trusts to each claim threshold
Substantially same grantors and beneficiaries – treated as one trust
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Qualified Business Income DeductionSSTB, Tax. Inc. < Threshold p. 333
Ex. 10.1 SMLLC (Sch C) – Acctg. $125,000 Wages on Sched C = $200,000 TI = $134,169 (Figure 10.2) < $157,500 Sched C income = QBI, no wage limitation Deduction = $25,000 = Lesser of
▪ 25,000 (20% x 125,000) or 26,834 (20% x 134,169)
NOTE: Net cap gains in TI for phase-in threshold test but not for 20% of taxable income limitation
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SINGLE TAXPAYER – SCH C – TAX PREPARER OFFICE(let’s do SE for those of you that NEED to see it!)
FRONT PAGE 1040W-2 WAGESSCH C $ 125KSCH D1099-R ANNUITY $ 30KSCH ESE tax $ 8,831AGI $146,169
BACK PAGE 1040
AGI $ 146,169STD DED/ITEMIZE $ 12KNET TAXABLE INC $ 134,169QBI DEDUCTION $ 25KTAXABLE INCOME $ 109,169
$125K X 20% = $25K$134,169 X 20% = $26,834
QBI = LESSER OF: $25K
P.333
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Qualified Business Income DeductionSSTB, Tax. Inc. < Threshold pp. 333-4
Ex. 10.2 Same facts but $12,000 qualified dividends &
$18,000 annuity income Tax Inc: $134,169 (Figure 10.4) < $157,500 Acctg income = QBI and no wage limitation Tax Inc for 20% comp: $122,169 (w/o qual. div.) Deduction = $24,434 = lesser of:
▪ 25,000 (20% x 125,000) or 24,434 (20% x 122,169)
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SINGLE TAXPAYER – SCH C – TAX PREPARER OFFICE
FRONT PAGE 1040W-2 WAGESSCH C $ 125KSCH B $ 12K1099-R ANNUITY $ 18KSCH ESE tax $ 8,831AGI $146,169
BACK PAGE 1040
AGI $ 146,169STD DED/ITEMIZE $ 12KNET TAXABLE INC $ 134,169QBI DEDUCTION $ 25KTAXABLE INCOME $ 109,169
$125K X 20% = $25K ($134,169 - $12K)X 20% = $24,434
QBI = LESSER OF: $24,434
P.333
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Qualified Business Income DeductionSSTB, TI In Phasein Range p. 335
In phasein range → % of SSTB = QBI MFJ: $315,001 to $415,000
▪ QBI% = [1 – (tax inc - 315,000)/100,000] Others: $157,501 to $207,500
▪ QBI% = [1 – (tax inc – 157,500)/50,000]
Same % applied in wage limit (& qualified prop.)
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Qualified Business Income DeductionSSTB, Tax. Inc. > Phasein pp. 334-5
Ex. 10.3 Same as Ex 10.2 but Sch C = $205,000 Tax Inc: $212,294 (Figure 10.6) > $207,500 Accounting income ≠ QBI No QBI deduction
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SINGLE TAXPAYER – SCH C – TAX PREPARER OFFICE
FRONT PAGE 1040W-2 WAGESSCH C $ 205KSCH B $ 12K1099-R ANNUITY $ 18KSCH ESE tax $ 10,706AGI $224,294
BACK PAGE 1040
AGI $ 224,294STD DED/ITEMIZE $ 12KNET TAXABLE INC $ 212,294QBI DEDUCTION $ -0-TAXABLE INCOME $ 212,294
$205K EXCEEDS SSTB
QBI = -0- TAXABLE INC EXCEEDS THE $207,500 PHASE-IN RANGE
P.334
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Qualified Business Income DeductionSSTB, TI In Phasein Range p. 335
Ex. 10.4 Ex. 10.3 but Sch C: $180,000 TI $187,629 (Fig. 10.7) (157,500-207,500) 40% of Sch C = QBI = $72,000▪ [1 – (187,629 – 157,500)/50,000] = 40%
(Wages also reduced 60% for limit - to 40%) QBI Ded = $14,400
▪ Lesser of 14,400 or 35,126( 20% x 72,000) or [20% x (187,629-12,000)]
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SINGLE TAXPAYER – SCH C – TAX PREPARER OFFICE
FRONT PAGE 1040W-2 WAGESSCH C $ 180KSCH B $ 12K1099-R ANNUITY $ 18KSCH ESE tax $ 10,371AGI $199,629
BACK PAGE 1040
AGI $ 199,629STD DED/ITEMIZE $ 12KNET TAXABLE INC $ 187,629QBI DEDUCTION $ 14,400TAXABLE INCOME $ 173,229
QBI =$14,400; LESS THAN 20% OF TAXABLE INC
P.335
40% x $180K = $72K X 20%=$14,400
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Qualified Business Income DeductionW-2 Wage Limitation p. 336
No wage limitation if tax inc ≤ threshold Applies if taxable income > threshold $▪ $157,500 ($315,000 if MFJ)▪ Limit phase-in threshold plus $50,000
($100,000 MFJ) Wage Limit (applies to each separate T or B
(may group) = Greater of:▪ 50% x W-2 wages from QB or▪ 25% x W-2 wages from QB + 2.5% x
unadjusted basis of all qualified property
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Qualified Business Income DeductionW-2 Wage Limitation p. 336
W-2 Wages Wages, elective deferrals, deferred comp $ on return filed w/SSA w/in 60 days of due NOT guaranteed payments to PNs Special rules in prop regs for corrected W-2sQualified Property (basic definition) Held by/available for use in qualified Tor B at
close of the year, and Used in the production of QBI
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§199A – Qualified Business Income Ded.W-2 Wage Limit pp. 40-42
Wages = total subject to wage withholding paid by the qualified T or B▪ Includes elective deferrals §402(g)(3)▪ Includes deferred compensation
Wages do not include:▪ $ not properly allocated to QBI▪ $ not properly included on W-2 filed w/SSA
on/before 60th day after W-2 due date (+ext)
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Notice 2018-64 pp. 537-538
Calculating W-2 wages for 199A▪ Unmodified box method▪ Modified box 1 method▪ Tracking wages method
See text for details
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UBIA Definition p. 521
Basis on placed in service date Purchase property generally cost Partnership 723 basis S corporation 362 basis (in 351 transaction) Inherited property FMV on date of death No adjustments for 179, but adjusted for
business %
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Qualified Business Income DeductionW-2 Wage Limitation pp. 337-338
Qualified Property Tangible & depreciable, held at year end
▪ Not: land, intangibles, or sold prior to yearend
Depreciable period not ended by year end▪ MACRS < 10 yrs, use 10 years from purchase
(NOTE: may need old depreciation schedules)▪ MACRS > 10 yrs, period ends on last full day
of last full year of MACRS recovery period
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Qualified Business Income DeductionW-2 Wage Limitation pp. 336-337
Ex. 10.5 2 = owners of LLC, tax inc > phasein range No employees, just independent contractors Rents all equipment used No QBID: Wage limit applies and = 0
▪ Could pay speakers as employees▪ Become S corp - pay owners W-2 wages▪ Could purchase equipment used
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Qualified Business Income DeductionW-2 Wage Limitation pp. 338-339
Joint return & multiple businesses1. Compute tentative QBI deduction for
each – applying wage limit if applicable2. Combine tentative QBI deductions3. Deduct lesser of #2 or 20% x taxable
income (w/o cap gains, qual. div.)
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UBIA Qualified Propertypp. 519-520
Improvements treated as separate qualified property
Ex. 13.7 Milly bought machine in 2018 and made capital improvements in 2020 – two different qualified properties
Partnership 734 and 743 not separate qualified property
Acquired w/in 60 days of end of year, not used 45 days and disposed of w/in 120 days presumed not qualified
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Ex. 13.18 p. 521
2012 Adrienne purchase warehouse 1M 2018 adjusted basis is 821,550 UBIA is 1M
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RPE Allocation of QBIAp. 518
UBIA for partner or shareholder determined same as depreciation If no depreciation
▪ Partnership allocates based on share of gain on hypothetical sale
▪ S corp. allocates based on ratio of shares to total shares
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Qualified Business Income DeductionW-2 Wage Limitation pp. 338-339
W/in phasein, limit applies proportionately Disallowance %
▪ MFJ: (tax inc – 315,000) / 100,000▪ Others: (tax inc – 157,500) / 50,000
% applied to difference between▪ Deduction without wage limitation and▪ Deduction with wage limitation
Result reduces potential QBI deduction
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Qualified Business Income DeductionW-2 Wage Limitation p. 338
Ex. 10.6 2 businesses, no SSTB, no qual. prop. H: $260,000 net, $24,000 W-2 wages W: $310,000 net, $1,500,000 W-2 wages Taxable Income: $814,000 (Figure 10.9)▪ > $415,000, limit applies in full▪ Must compute QBI deduct. separately
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Qualified Business Income DeductionW-2 Wage Limitation p. 338-339
Ex. 10.6 H: $12,000 QBI deduction = lesser of:▪ $52,000 (20% x 260,000 QBI) or▪ $12,000 (50% x 24,000 W-2 wages)
W: $62,000 QBI deduction = lesser of:▪ $62,000 (20% x 310,000 QBI) or▪ $750,000 (50% x 1.5M W-2 wages)
QBID = $74,000 [< 20% x (814,000 – 10,000)]
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Qualified Business Income DeductionW-2 Wage Limitation p. 339
Ex. 10.7 10.6 + Qual. Prop. H: $600,000, W: $1M
H: $21,000 QBI deduction = lesser of:▪ $52,000 (20% x $260,000 QBI) or▪ $21,000 which is the greater of: $12,000 (50% x 24,000 W-2 wages) or $21,000 [(25% x 24,000) + (2.5% x 600,000)]
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Qualified Business Income DeductionW-2 Wage Limitation p. 339
Ex. 10.7 Qual. Prop. H: $600,000, W: $1M
W: $62,000 QBI deduction = lesser of:▪ $62,000 (20% x $310,000 QBI) or▪ $750,000 which is the greater of: $750,000 (50% x 1.5M wages) or $400,000 [(25% x 1.5M) + (2.5% x 1M)]
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Qualified Business Income DeductionW-2 Wage Limitation p. 339
Ex. 10.7 QBI Deduction is $83,000 = lesser of:
▪ $83,000 - Combined QBI Deduction (21,000 + 62,000) OR
▪ $160,800 (20% x taxable income) [20% x (814,000 – 10,000)]
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Qualified Business Income DeductionW-2 Wage Limitation p. 339
Ex. 10.8 Ex 10.7 + ($425,000) Jamaican resort Business not in US, no effect on QBI Taxable income: $389,000 (Figure 10.12)▪ W/in phasein range (315,000-415,000)
Disallowance % = 74% (389,000-315,000)/100,000
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Qualified Business Income DeductionW-2 Wage Limitation p. 340
Ex. 10.8 H: Reduction = $22,940▪ 74% x (52,000 - 21,000) = 22,940
52,000 = 20% x QBI 21,000 = 50% x wagesw/o wage limit with wage limit
H: QBID: $29,060 (52,000 – 22,940)
W: No affect to wage limit, no reduction
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Qualified Business Income DeductionW-2 Wage Limitation p. 340
Ex. 10.8 QBI deduction before TI limit: $ 91,060
(H 29,060 + W 62,000)
Taxable income limitation: $ 75,800[20% x (389,000 – 10,000)]
QBI deduction: $75,800
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Qualified Business Income DeductionW-2 Wage & SSBT Limitation p. 340
Ex. 10.9 Taxable income $395,000▪ W/in phasein (315,000 – 415,000)
H: $300,000 = QBI (LLC, not an SSTB)▪ W-2 wages $100,000
W: $325,000 = SSTB (Sole prop, Attorney)▪ W-2 wages $100,000
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Qualified Business Income DeductionW-2 Wage & SSBT Limitation p. 340
Ex. 10.9 H: Wage limitation phased in 20% x QBI = $60,000 (20% x 300,000)
50% x wages = $50,000 (50% x 100,000)
Reduction % = 80% [(395K - 315K)/100,000]
Reduction = $8,000 [80% x (60,000 – 50,000)][80% x (QBID w/o wages limit – QBID w/ wages limit)]
$52,000 = H’s QBID before TI limitation (60K-8K)
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Qualified Business Income DeductionW-2 Wage & SSBT Limitation p. 340
Ex 10.9 - W: Wage & SSBT limitations phased in SSBT % = 20% [1-(395,000-315,000)/100,000)]
▪ QBI = $65,000 (20% x 325,000)
20% x QBI = $13,000 (20% x 65,000)
50% x wages = $10,000 [50% x (100,000 x 20%)]
Reduction % = 80% (395,000-315,000)/100K
Reduction = $2,400 [80% x (13,000 – 10,000)]
$10,600 = W’s QBID before TI limit (13K-2,400)
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Qualified Business Income DeductionW-2 Wage & SSBT Limitation pp. 340-2
Ex.10.9 Combined QBID before TI limit: $62,600
(52,000 + 10,600) Taxable income limit: $79,000
(20% x 395,000) QBI deduction: $62,600
Figure 10.14 – Software QBI worksheet
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Qualified Business Income DeductionGrouping Activities p. 343
Computed separately for each business▪ Wages & qualified property kept separate
May want to separate or combine Tor B▪ Separate if one = SSTB, other is not▪ Combine if one has higher W-2 wages
or qualified property Proposed Regs. for §199A provide
grouping rules (Chapter 13)
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Aggregation pp. 523-524
5 Requirements:1. Same person owns 50% or more of
each business2. Majority ownership for majority of tax
year3. Items reported on same tax year4. None are SSTBs
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Aggregationpp. 523-524
5 requirements for aggregation:5. Meet 2 of the three:a. Products/services are the same or
customarily provided togetherb. Share facilities/centralized elementsc. Operated in coordination w/ or reliance on
each other See text for operating & reporting rules
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Aggregation Rules p. 524
Aggregate T or B direct or RPE RPE owners can aggregate diff. Compute QBI items for each T or B
before aggregate Combined QBI items used for W-2
wage test
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Aggregation Consistencyp. 524
Consistently report Add to group if meet requirements Remove from group if no longer
meet requirements
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Ex. 13.21 pp. 524-525
Anita has catering business and restaurant Share purchasing and accounting Anita can group the two Ex. 13.22 same result if two
partnerships owned by same 4 owners
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Ex. 13.23 p. 525
Wilma owns 75% in clothes business and 75% in pet business Same ownership but no similar
good/services, no centralized elements, not in coordination/reliance Can’t group
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Examplespp. 525-526
Ex. 13.24 Eric has 60% interest in 4 hardware stores, one with a loss. OK to group 3 w/profits
Ex. 13.25 Felicia owns 10% and Eric owns 50% of the 4 hardware stores. Felica can group.
Ex. 13.26 Donna owns 75% of 3 grocery stores. Operates one separately. Donna can group 2.
Ex. 13.27 Donna operates all 3 stores separately. She cannot group.
Ex. 13.28 Gerald 80% in 2 LLCs and S. OK to group. Ex. 13.29 Gerald’s son and mom own part. OK to
group.
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Example 13.30 pp. 526-527
Forest 75% and Geoffrey 5% in 5 restaurants Hedy has 10% in two restaurants Geoffrey is chef of all, and share
food/supplies Forest and Geoffrey can group all 5 Hedy can group 2
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Qualified Business Income DeductionQualified Business Loss p. 343
Ex. 10.10 $150,000 Golf course (wages: $40,000) $150,000 Restaurant (wages: $30,000) ($20,000) Boutique (wages: $20,000) Each reduced by $10,000 (20K x 150K/300K)
No qualified property in any business Taxable income = $418,000▪ Over phasein range (157,500-257,500)
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Qualified Business Income DeductionQualified Business Loss pp. 343-344
Ex. 10.10 Golf Course QBID = $20,000 = lesser of:▪ $28,000 [20% x (150,000 – 10,000)] or ▪ $20,000 (50% x 40,000)
Restaurant QBID = $15,000 = lesser of:▪ $28,000 [20% x (150,000 – 10,000)] or ▪ $15,000 (50% x 30,000)
QBID = $35,000 (< 20% x TI 418,000)
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Qualified Business Income DeductionQualified Business Loss p. 344
Overall QBI negative → c/o to offset in future
Ex.10.11: Ex 10.10 but boutique ($400,000) Net loss for all qualified Tor B ($100,000) No QBID for current year (2018) ($100,000) c/o – treated as separate Tor
B loss in 2019 for QBID purposes▪ Loss still deducted for TI on 2018 return
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QBID – Real Estate BusinessesQualified Business Income p. 367
Net income from qualified RE activities = QBI if activities give rise to §162 Tor B
Rental to related Tor B is treated as Tor B if commonly controlled (for §199A only)
Specific income exclusions (list p. 367)
§1231 gain if held < 1 yr and §1231 loss = QBI (NOT gain treated as capital gain)
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QBID – Real Estate Businesses§162 Trade or Business??? p. 368
Case Law Facts and circumstances determination Continuous and regular activity with
primary purpose for income/profit One property may rise to level of Tor B Long-term tenant, activities minimal →
not Tor B Activities of agent attributed to owner
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QBID – Real Estate BusinessesDeduction Limits pp. 369-370
20% of QBI limited by 20% x taxable income (w/o “net cap gain”)W-2 Wages and Capital Limitation Applies if TI > $157,500 ($315,000 MFJ)
▪ Phasein over $50,000 ($100,000 MFJ)▪ Full limit if > $207,500 ($415,000 MFJ) Greater of 50% x wages or 25% x wages
+ 2.5% x qualified property unadj. basis
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QBID – Real Estate BusinessesDeduction Limits p. 370-371
Wages for wage limitation Wages allocable to QBI fees paid to prop. mgmt. companies Unadjusted basis Cost basis immediately after acquisition Inherited: FMV at date of death Reduce by basis of personal use property Improvements to qualified property = separate
qualified property
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QBID – Real Estate BusinessesDeduction Limits p. 371
Ex. 10.20 Apartment rental, manage, cost $1M Joint return – taxable income $210,000 $50,000 net income each from rental QBID = $20,000 - lesser of:▪ $20,000 [20% x ($50,000 + $50,000)]▪ $42,000 (20% x $210,000)
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QBID – Real Estate BusinessesDeduction Limits p. 371
Ex. 10.21 Same but $250,000 rental income each Taxable income = $470,000▪ > $415,000→ wage/capital limit applies
QBID = $25, 000 which is the greater of:▪ $0 (50% x wages paid)▪ $25,000 [(25% x wages) + 2.5% x $1M]▪ (no limit from TI – 20% x 470,000 = 94,000)
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QBID – Real Estate BusinessesSpecified Service TorB pp. 371-372
SSTB = QBI if TI < thresholds Part of SSTB = QBI if TI in phasein range SSTB ≠ QBI if TI above phasein range Proposed regs clarify what ≠ SSTB
▪ RE agent/broker ≠ brokerage ▪ Directly managing real property ≠ investing &
investment managementEx. 10.22 - Broker income = QBI, limits apply
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QBID – Real Estate BusinessesREIT Dividends p. 372
Qualified REIT dividend may yield QBID▪ Qualified REIT dividend = REIT dividend that
is not a capital gain or qualified dividend QBID = 20% x qualified REIT dividends
received during the year QBID from REIT dividends + QBID of
qualified Tor B (after wage/capital limit) limited by 20% x TI
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Pass-Through Allocation of QBI Itemspp. 373-374
PN or SH claim QBID at individual level QBID available w/o regard to participation Use share of each item for each Tor B▪ Qualified business income▪ Form W-2 wages paid▪ Unadjusted basis of qualified property
Fiscal year entity: Treat all items as incurred within year entity tax year ends
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Pass-Through Allocation of QBI ItemsEntity Computational Steps p. 375
1. Determine if engaged in ≥ 1 Tor B Identify if any are SSTB
2. Determine QBI for each Tor B (direct)3. Determine W-2 wages & unadjusted
basis of qualified property for each Tor B4. Determine qualified REIT dividends &
qualified PTP income earned directly or through another
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Pass-Through Allocation of QBI Itemspp. 375-376
Allocations based on general rules▪ PS: PS agreement▪ S corp: Pro rata share
W-2 Wages▪ Includes S corp SH wages but does NOT
include PN’s guaranteed payment▪ PS: Allocate same as wage expense▪ S: Allocate on per share/per day basis
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Pass-Through Allocation of QBI ItemsW-2 Wages p. 376
Ex. 10.24 S corp – QBI $350,000 John 40% $100,000 salary from S Jennifer 60% $40,000 salary from S
John (40%): ▪ Wages: $56,000 (40% x $140,000)▪ QBI: $140,000 (40% x $350,000)
Jennifer (60%):▪ Wages: $84,000 ▪ QBI: $210,000
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Pass-Through Allocation of QBI ItemsUnadjusted Basis QBP pp. 376-377
General rule (prop. regs.):▪ Basis share = Share of dep. / total dep. Determined property by property
Basis share if no current dep. expense PS: Use % share of gain on sale at FMV S: Use % of total S shares owned
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Pass-Through Allocation of QBI ItemsSchedule K-1 p. 380
Figure 10.22 – QBI item Box 20 codes▪ Separate schedule needed if > 1 Tor B
No K-1 QBI item reporting → all = 0
1040 QBI does not include comp or guaranteed payment rec’d by SH or PN
SH comp = W-2 wages, PN GP ≠ wages
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Pass-Through Allocation of QBI ItemsSchedule K-1 p. 380
Ex. 10.28 2 50/50 PNs, $125,000 guaranteed payment (GP) to each PS QBI = $800,000 (1,050,000 – 250,000) QBID for each computed on $400,000
GP vs distribution▪ GP reduces QBI, distribution does not▪ GP not subject to reasonable standard
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Draft Schedule K-1
Schedule K-1 (1065) Box 20 Schedule K-1 (1120S) Box 20
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Questions?
101