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Qualified Business Income (QBI) walkthrough for our clients

GP CPA justin prusiensky accountant cpa 1 » Certified Public Accountant using Xero, Avalara and Gusto to make your payroll and taxes easier, serving in North Carolina and South Carolina

Written by Justin Prusiensky

Feb 6, 2019

February 6, 2019

Estimated Reading Time: 4 minutes 25 seconds

Dear Client: Your ownership of a pass-through trade or business can generate a Section 199A tax deduction of up to 20 percent of your qualified business income (QBI).

The C corporation does not generate this deduction, but the proprietorship, partnership, S corporation, and certain trusts, estates, and rental properties do.

The tax code says QBI includes the net dollar amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer.

Sole Proprietorship QBI

The QBI for the sole proprietor begins with your net business profit as shown on your Schedule C. You then adjust that profit as follows:

  • Subtract the deduction for self-employed health insurance.
  • Subtract the deduction for one-half of the self-employment tax.
  • Subtract qualified retirement plan deductions.
  • Subtract net Section 1231 losses (ignore gains).

Example. John has $120,000 of net income on Schedule C. He also deducted $10,000 for self-employed health insurance, $8,478 for one-half of his self-employment taxes, and $10,000 for a SEP-IRA contribution. His QBI is $91,522 ($120,000 – $10,000 – $8,478 – $10,000).

Rental Property QBI

If you own rental property as an individual or through a single-member LLC for which you did not elect corporate taxation, you report your rental activity on Schedule E of your Form 1040. If you can claim the property is a trade or business, your QBI begins with the net income from your Schedule E.

Partner’s QBI from the Partnership

A partner may obtain income from the partnership in two ways: (1) as a payout of profits and/or (2) as a Section 707 payment (generally referred to as a guaranteed payment). The profits qualify as QBI, and the partnership profits are adjusted for the same items as for the sole proprietorship.

The Section 707 payments reduce the net income of the partnership. They do not count as QBI.

S Corporation Shareholder QBI

The shareholder in an S corporation ends with QBI calculated in the same manner as for the sole proprietor. For example, the shareholder reduces his or her QBI for the self-employed health insurance deduction.

Wages paid to the shareholder-employee reduce the net income of the S corporation but do not count as QBI.

Trusts and Estates

The rules above apply to trusts and estates. The tricky part is where to apply the rules—to the trust, to the estate, or to the beneficiary.

Takeaway

Clarity is worth a lot, and the IRS final regulations give us clarity on what makes up QBI.

If you would like to discuss your Section 199A deduction with me, please don’t hesitate to call me on my direct line at 980-237-1714.

 

Dear Client, I have good news!

Dear Client, I have good news!

Since we now have less than 90 days left in the year, kindly keep me apprised of when you expect the major revenue collections to be during the next few weeks and we can adjust accordingly.

Moving at the speed of business

Moving at the speed of business

GP CPA has relied on cloud-based accounting technology for many years now and devotes a significant amount of time toward testing and learning the latest and greatest systems out there.

Technology that GP CPA is currently using

Technology that GP CPA is currently using

We are approaching mid-year (for those of us on a calendar year…) and enough time has passed that we can reflect back on some of the technology that GP CPA has been using and is no longer using in 2019.

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