2018 National Income Tax Workbook™ - Ohio State UniversitySpecified service Tor B limit (based on taxable inc.) Allowed for AMT calculation, not for SE tax Deduction after AGI May

Business IssuesChapter 10 pp. 329-3802018 National Income

Tax Workbook™

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

§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

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

§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

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


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.)


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)

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

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

p. 509Calculating Deduction – Below Threshold

20% QBI + 20% REIT + 20% PTP Limited to 20% taxable income (less net

capital gain)

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

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


p. 510

LESSOR OF 20% OF: $13,400

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


p. 510

LESSOR OF 20% OF: $20,000

§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

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

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

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

SSTB Lawp. 529

Lawyers, paralegals, legal arbitrators, mediators, and similar professionals Not printers, delivery services,

stenographers

SSTB – Accountingp. 529

Accountants, enrolled agents, return preparers, financial auditors, bookkeeping and similar professionals Not payment processing, billing

analysis

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

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

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

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

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

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

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

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

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

De Minimis Rule p. 533

Not an SSTB if less than 10% gross receipts is from SSTB (5% if gross receipts more than 25M)

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

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

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

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

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

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

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

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

Anti-Avoidance pp. 536-537

Can’t form multiple trusts to each claim threshold

Substantially same grantors and beneficiaries – treated as one trust

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

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

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)

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

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.)

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



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

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)]



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

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


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

§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)

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

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 %

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


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


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.)

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

Ex. 13.18 p. 521

2012 Adrienne purchase warehouse 1M 2018 adjusted basis is 821,550 UBIA is 1M

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


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


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

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)]


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)]


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)]


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)]


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


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


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

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


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)


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)

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

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)

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

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

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

Aggregation Consistencyp. 524

Consistently report Add to group if meet requirements Remove from group if no longer

meet requirements

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

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

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.

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

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)

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)

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

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)

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

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

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

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)

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)

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

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

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

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

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

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

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

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

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

Draft Schedule K-1

Schedule K-1 (1065) Box 20 Schedule K-1 (1120S) Box 20

Questions?

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Documents

2018 National Income Tax Workbook™ - Ohio State UniversitySpecified service Tor B limit (based on taxable inc.) Allowed for AMT calculation, not for SE tax Deduction after AGI May