Friday 09:00 - 15:00
Mon - Thu 09:00-17:00
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.
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.
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.
(980) email@example.comMon - Thu 09:00-17:00Good Riddance, 2020Estimated Reading Time: 2 minutes 45 seconds Dear Client... Thankfully 2020 is almost history and the roaring 20s are about to start. We have decided to take a far more optimistic...
(980) firstname.lastname@example.orgMon - Thu 09:00-17:00The Employee Retention Credit (ERC)Estimated Reading Time: 3 minutes 35 seconds The Employee Retention Credit in 2021 The Employee Retention Credit (“ERC”) has had some upgrades and retrofits to some of the...
Congress extended some of the tax breaks retroactively to January 1, 2018. They now expire on December 31, 2020. Learn more about tax breaks that have been extended.
Take control back from the big box payroll companies and work with someone who can guide you to a better payroll process. GP CPA + GUSTO is the modern way payroll runs and the partnership that moves your business forward.
GP CPA offers a wide range of business advisory services that are tailored to the needs of business owners. For those small businesses who need someone to keep the books, we can do that.