Qualified Business Income Deduction (Sec 199A) - HCLLP

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Qualified Business Income Deduction (Sec 199A)

• Presented by
• HARSHWAL COMPANY LLP
• Managing Partner Sanwar Harshwal,
• CPA, CIA, CISA, CFF, FCA, CRMA, CGMA, CCA
• Contact Info [phone] sanwar_at_harshwal.com
  

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INTRODUCTION

• The Tax Cuts and Job Act established new code
  Section199A, which provides potential deduction
  equal to 20 of Qualified Business Income (QBI)
  from sole proprietorships, S corporations,
  partnerships, and LLCs taxed as partnerships.
• The QBI deduction is claimed by individual
  taxpayers on their personal tax returns.
• The deduction is available for tax years
  beginning after December 31, 2017 and before
  January 1, 2026.
• 199A deduction cannot be higher than 20 of net
  taxable income excess of the capital gain before
  199A deduction.

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ELIGIBLE TAXPAYER

• The QBI deduction is available to the business
  owner of the pass-through entities, includes
• Pass-through entities
• Sole proprietorships
• Partnership
• S corporation
• LLC
• Trusts, Estates
• Rental properties REITs

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QUALIFIED BUSINESS INCOME

• Include
• Net income, gain, deduction and loss that are
  with respect to a qualified trade or business
• Only domestic trade or business qualify
• QBI include passive and active income both.
• Exclude
• Interest, Dividend, Capital gain and losses
• Commodity gain/loss
• Foreign currency net gain/losses, notional
  principal contracts and annuities unless directly
  related to business activates.

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QBI LIMITATIONS

• The qualified business income of S corporation
  must be reduced by reasonable compensation paid
  to S corporation Owners and Officers.
• The qualified business income of partnership must
  be reduced by guaranteed payment made to the
  partner.
• Net QBI losses will be carried forward to reduce
  next years QBI deduction.

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QUALIFIED TRADE OF BUSINESS

• The term Qualified Trade Business means any
  trade or business other than
• A specified service trade or business
• the trade of business of being as an employee
• This will be calculate separately for each
  qualified business of the taxpayer conduct in US.

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SPECIFIED SERVICE TRADE OF BUSINESS

• As specified service trade or business mean any
  trade or business involving the performance of
  service in the filed of

Heath Law
Accounting Consulting
Financial Services Brokerage services
Actuarial Services Athletics
Performing Art Investment Management
Any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners. Any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.
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COMPUTATION OF 199A DEDUCTION

• The deduction is equal to the sum of -
• The Lesser of
• the Combined Qualified Business Income of
  Taxpayer
• 20 of the excess of taxable income over the sum
  of any net capital gain plus the aggregate amount
  of qualified cooperative dividends
• The Lesser of
• 20 of qualified cooperative dividend, or
• Taxable income less net capital gain

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COMBINED QUALIFIED BUSINESS INCOME

• The CBQI is equal to the sum of -
• The Lesser of
• 20 of the taxpayers QBI, or
• The Greater of
• 50 of W-2 wages with respect to the business, or
• 25 of W-2 wages with respect to the business
  2.5 of the unadjusted basis of all Qualified
  Property.
• Plus
• 20 of qualified REIT dividends
• 20 of qualified Publicly Traded Partnership
  Income

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DEDUCTION IF TAXABLE INCOME IS
Specified Service Business Other Business
Taxable income less than 315,000 (Married) / 157,500 (Other) Deduction 20 of QBI Deduction 20 of QBI
Taxable income greater than 415,000 (Married) / 207,500 (Other) No Deduction Deduction limited to the greater of Wage Limit or Wage/Asset Basis Limit
Taxable income between 315,000 to 415,000 (Married) or 157,500 to 207,500 (Other) Deduction phased out ratably for income between 315,000 to 415,000 (Married) or 157,500 to 207,500 (Other) Wage Limit and Wage/Asset Basis Limit are phased in for income between 315,000 and 415,000 (Married) or 157,500 to 207,500 (other)
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CALCULATION OF 199A DEDUCTION
Is taxable income more than threshold amount?
Is the income from a specified service?
No
No
Result (B) Deduction QBI x 20
Yes
Yes
No
Is taxable income more than threshold amount?
Is taxable income more than threshold amount
phasein?
Result (C) Amount Result (B) reduced by
difference between (i) (ii) in Box D multiplied
by reduction ratio.
No
Yes
Yes
Is taxable income more than threshold amount
phase-in?

• Result (D)
• amount equal to lesser of
• QBI x 20 or
• The greater of
• W-2 wages x 50 and
• W-2 wages x 25 2.5 of unadjusted basis of
  depreciable property

Result (E) Same as the formula (C) but the QBI,
Wages and QP must be reduced by the reduction
ratio first.
No
Yes
Result (A)No QBI Deduction is allowed
Threshold Amount is 315,000 of taxable income
if filing jointly and 157,500 in all other
cases Phase-In is 100,000 of taxable income
if filing jointly and 50,000 in all other cases
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CALCULATION OF REDUCTION RATIO

• Lower Threshold - 315,000 of taxable income if
  filing jointly and 157,500 in all other cases
• Upper Threshold- 415,000 of taxable income if
  filing jointly and 207,500 in all other cases
• Reduction Ratio-

Taxable income above the lower income threshold
100,000(Married) 50,000(Other)
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Example for Result C

• A and B file a joint return on which they report
  taxable income of 330,000, of which 300,000 is
  ordinary income from A's interest in an
  S corporation. The S corporation is not a
  specified service trade or business. A's
  allocable share of the business's W-2 wages is
  80,000, and his share of the business's
  unadjusted basis in its qualified property is
  600,000.

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Solution

• Amount equal to lesser of
• a)QBI x 20 or
• b)The greater of
• W-2 wages x 50 or
• W-2 wages x 25 plus 2.5 of unadjusted basis of
  depreciable property
• Reduction Ratio
• Deduction Amount

• 300,00020 60,000
• 80,00050 40,000
• 80,00025 20,000
• 600,0002.5 15,000
• (330,000-315,000) /100,000 .15
• 60,000-(60,000-40,000).15
• 57,000

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Example for Result E

• A and B file a joint return on which they report
  taxable income of 330,000, of which 300,000 is
  ordinary income from A's interest in an
  S corporation. The S corporation is a specified
  service trade or business. A's allocable share of
  the business's W-2 wages is 80,000, and his
  share of the business's unadjusted basis in its
  qualified property is 600,000.

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Solution

• Amount equal to lesser of
• a)(1-RRQBI) x 20 or
• b)The greater of
• (1-RRW-2wages) x 50 or
• (1-RRW-2wages) x 25 plus2.5 (1-RR
  Unadjusted basis of depreciable property)
• Reduction Ratio
• Deduction Amount-

• 300,000(1-.15)20 51,000
• 80,000(1-.15)50 34,000
• 80,000(1-.15)25 17,000
• 600,000(1-.15)2.5 12,750
• (330,000-315,000) /100,000 .15
• 51,000-(51,000-34,000).15 48,450

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QUALIFIED BUSINESS INCOME CALCULATION FOR PARTNER
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W-2 Wages

• W-2 wages are the total wages subject to wage
  withholding under Code Sec. 3401(a), elective
  deferrals, and deferred compensation paid by the
  qualified trade or business with respect to
  employment of its employees during the calendar
  year ending during the tax year of the taxpayer.
• Practice Tip
• Total wages subject to wage withholding will
  generally correspond with the amount on Form W-2,
  Box 1. Elective deferrals and deferred
  compensation correspond with the amount in Box
  12.

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QUALIFIED PROPERTY

• The term qualified property is generally defined
  to mean, with respect to any qualified trade or
  business, tangible property of a character
  subject to depreciation under section 167 that is
• held by and available for use in the qualified
  trade or business at the close of the taxable
  year,
• which is used at any point during the taxable
  year in the production of QBI, and
• the depreciable period for which has not ended
  before the close of the taxable year.

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OTHER IMPORTANT FACTS

• This will be calculate separately for each
  qualified business of the taxpayer conduct in US.
• Taxpayer cannot save self-employment tax on the
  QBI deduction.
• C-corporation income receive from the pass
  through entity will not allowed for deduction.
• The Sec. 199A deduction cannot take in loss
  years. A net QBI loss is treated as a loss from a
  qualified trade or business in the succeeding
  taxable year

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SPECIAL CONSIDERATION- MULTIPLE BUSINESS

• If individual have multiple businesses, deduction
  will calculated separately for each qualified
  business of the taxpayer.
• If one or more trade or businesses have negative
  qualified business income, the loss will be
  allocated proportionately in the ratio of
  qualified business income to other trade or
  business.
• However, wages and property amounts from the
  business with the loss will not be allocated to
  the other trades or businesses.
• If overall qualified business income for the tax
  year is negative, Section 199A deduction will be
  zero for the year. In this situation, negative
  amount will be carry forward the to the next tax
  year.

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QUESTION ?