What Is the QBI Tax Deduction and Who Can Claim It?

What Is the QBI Tax Deduction and Who Can Claim It?

However, patrons that are individuals and certain trusts and estates may qualify for the deduction. Specified Cooperatives include cooperatives that are considered nonexempt or exempt. Exempt cooperatives are those farmers’ cooperatives that are qualified under section 521. A farmer can have a qualified trade or business that generates a QBID and could be passed through a section 199A(g) deduction from the Specified Cooperative of which the farmer is a patron. Regardless of whether the section 199A(g) deduction was passed through, the farmer would have to determine whether their QBID is subject to the patron reduction under section 199A(b)(7). The farmer may take any section 199A(g) deduction passed through to the extent of their taxable income determined after their QBID.

This means that a partner or shareholder may be unable to claim a QBID on the entity’s income if the entity fails to report the information. It is recommended that taxpayer follow-up with a pass-through entity if it does not provide the necessary information. S corporations and partnerships are generally not taxable and cannot take the deduction themselves. Notably, though, traditional banking services (e.g., taking deposits or making loans) were excluded from this definition. These individuals advise clients on wealth management and corporate business transactions (Prop. Regs. Sec. 1.199A-5(b)(2)(ix)). The definition of brokerage services is very narrow; it includes only stockbrokers and similar professionals.

The Specific Service Trade or Business (SSTB) exclusion

Section 199A(c)(1) defines qualified business income as the net amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer. Proposed regulation section 1.199A-1(b)(4) followed this definition, providing that QBI is the net amount of qualified items of income, gain, deduction, and loss with respect to any trade or business as determined under the rules of section 1.199A-3(b). In addition to SSTBs and qualified trades or businesses, taxpayers can deduct qualified REIT dividends qbid and qualified publicly-traded partnership income. The IRS defines qualified REIT dividend income neither as a capital gain dividend nor a qualified dividend income. Due to these extensive limitations, many tax professionals are waiting for further guidance from the IRS to determine how a REIT dividend could practically be considered a qualified REIT dividend. If the total QBI from all trades or businesses is less than zero, the taxpayer’s QBI Component will be zero and any negative amount is carried forward to the next taxable year.

Taxpayers may want to do this is if one business has a higher payroll than others and the they wish to spread or share the higher payroll of one business among other businesses with lower payrolls when calculating the QBID. This can effectively increase the QBID in some instances. Additionally, note that W-2 wages and unadjusted basis immediately after acquisition do not carry over to future years; only the QBL carries over. Any portions not rented to the commonly owned SSTB, as well as any interests held by an unrelated party, would not be a SSTB. The QBID has no effect on an S corporation shareholder’s adjusted basis in its S corporation stock or a partner’s adjusted basis in its partnership interest.

Missed Sec. 83(b) elections: Partnership and LLC special issues

In other words, only 30% of any limitation computed will apply. Therefore, Fran’s tentative QBID is $20,000 ($100,000 × 20%). However, under the wage and property limitation, her deduction would be limited to $15,000, a limitation (decrease) of $5,000. However, because Fran is in the phase-in range, only 30% of this limitation will apply. Thus, Fran’s QBID is $18,500 [$20,000 – ($5,000 × 30%)]. In other words, at best, a taxpayer will be able to ultimately deduct 20% of QBI.