The IRS has provided the following FAQs in relation to the Section 199A Deduction for Qualified Business Income.
Basic questions and answers on new 20-percent deduction for pass-through businesses
Below are answers to some basic questions about the new 20-percent
deduction for pass-through businesses. Also known as the section 199A
deduction or the deduction for qualified business income, the deduction
was created by the 2017 Tax Cuts and Jobs Act.
Q1. What is the Deduction for Qualified Business Income?
A1. Section 199A of the Internal Revenue Code provides many taxpayers
a deduction for qualified business income from a qualified trade or
business operated directly or through a pass-through entity. The
deduction has two components.
Eligible taxpayers may be entitled to a deduction of up to 20
percent of qualified business income (QBI) from a domestic business
operated as a sole proprietorship or through a partnership, S
corporation, trust or estate. For taxpayers with taxable income that
exceeds $315,000 for a married couple filing a joint return, or $157,500
for all other taxpayers, the deduction is subject to limitations such
as the type of trade or business, the taxpayer’s taxable income, the
amount of W-2 wages paid by the qualified trade or business and the
unadjusted basis immediately after acquisition (UBIA) of qualified
property held by the trade or business. Income earned through a C
corporation or by providing services as an employee is not eligible for
Eligible taxpayers may also be entitled to a deduction of up to 20
percent of their combined qualified real estate investment trust (REIT)
dividends and qualified publicly traded partnership (PTP) income. This
component of the section 199A deduction is not limited by W-2 wages or
the UBIA of qualified property.
The sum of these two amounts is referred to as the combined
qualified business income amount. Generally, this deduction is the
lesser of the combined qualified business income amount and an amount
equal to 20 percent of the taxable income minus the taxpayer’s net
capital gain. For details on figuring the deduction, see Q&A 6 and
7. The deduction is available for taxable years beginning after Dec. 31,
2017. Most eligible taxpayers will be able to claim it for the first
time when they file their 2018 federal income tax return in 2019. The
deduction is available, regardless of whether an individual itemizes
their deductions on Schedule A or takes the standard deduction.
Q2. Who may take the section 199A deduction?
A2. Individuals, trusts and estates with qualified business income,
qualified REIT dividends or qualified PTP income may qualify for the
deduction. In some cases, patrons of horticultural or agricultural
cooperatives may be required to reduce their deduction. The IRS will be
issuing separate guidance for co-ops.
Q3. How do S corporations and partnerships handle the deduction?
A3. S corporations and partnerships are generally not taxpayers and
cannot take the deduction themselves. However, all S corporations and
partnerships report each shareholder’s or partner’s share of QBI, W-2
wages, UBIA of qualified property, qualified REIT dividends and
qualified PTP income on Schedule K-1 so the shareholders or partners may
determine their deduction.
Q4. What is qualified business income (QBI)?
A4. QBI is the net amount of qualified items of income, gain,
deduction and loss from any qualified trade or business. Only items
included in taxable income are counted. In addition, the items must be
effectively connected with a U.S. trade or business. Items such as
capital gains and losses, certain dividends and interest income are
Q5. What is a qualified trade or business?
A5. A qualified trade or business is any trade or business, with two exceptions:
Specified service trade or business (SSTB), which includes a
trade or business involving the performance of services in the fields of
health, law, accounting, actuarial science, performing arts,
consulting, athletics, financial services, investing and investment
management, trading, dealing in certain assets or any trade or business
where the principal asset is the reputation or skill of one or more of
its employees. This exception only applies if a taxpayer’s taxable
income exceeds $315,000 for a married couple filing a joint return, or
$157,500 for all other taxpayers
Performing services as an employee
Q6. How is the deduction for qualified business income computed?
A6. The SSTB limitation discussed in Q&A 5 does not apply if a
taxpayer’s taxable income is below $315,000 for a married couple filing a
joint return and $157,500 for all other taxpayers; the deduction is the
lesser of: A) 20 percent of the taxpayer’s QBI, plus 20 percent of the
taxpayer’s qualified real estate investment trust (REIT) dividends and
qualified publicly traded partnership (PTP) income
B) 20 percent of the taxpayer’s taxable income minus net capital gains. If the taxpayer’s taxable income is above the $315,000/$157,500
thresholds, the deduction may be limited based on whether the business
is an SSTB, the W-2 wages paid by the business and the unadjusted basis
of certain property used by the business. These limitations are phased
in for joint filers with taxable income between $315,000 and $415,000,
and all other taxpayers with taxable income between $157,500 and
$207,500. The threshold amounts and phase-in range are for tax-year 2018
and will be adjusted for inflation in subsequent years.
Q7. I have income from a specified service trade or business. How does that affect my deduction?
A7. The SSTB limitation does not apply to any taxpayer whose taxable
income is below the $315,000/$157,500 threshold amounts discussed in
Q&A #6. For taxpayers whose taxable income is within the phase-in
range discussed in Q&A #6, the taxpayer’s share of QBI, W-2 wages
and UBIA of qualified property related to the SSTB may be limited. If
the taxpayer’s taxable income exceeds the phase-in range, no deduction
is allowed with respect to any SSTB. The threshold amounts and phase-in
range are for tax year 2018 and will be adjusted for inflation in
Q8. In 2018, I will report taxable income under $315,000 and file
married filing jointly. Do I have to determine if I am in an SSTB in
order to take the deduction? Is there any limitation on my deduction?
A8. No, if your 2018 taxable income is below $315,000, if married
filing jointly, or $157,500 for all other filing statuses, it doesn’t
matter what type of business you are in. You will be able to deduct the
lesser of: a) Twenty percent (20%) of your QBI, plus 20 percent of your qualified REIT dividends and qualified PTP income, or b) Twenty percent (20%) of your taxable income minus your net capital gains.
Q9. In 2018, I will report taxable income between $157,500 and
$207,500 and file as single. I receive QBI. Does it matter if it is from
A9. Yes, because your taxable income is above the threshold amount,
your section 199A deduction with respect to any SSTB will be limited.
However, because you are within the phase-in range, you may be allowed
some section 199A deduction with respect to an SSTB. In addition, for
taxpayers above the threshold amount, the section 199A deduction with
respect to any trade or business, including an SSTB, may be limited by
the amount of W-2 wages paid by the trade or business and the UBIA of
qualified property held by the trade or business. The phase-in range is
$315,000 to $415,000 for joint filers and $157,500 to $207,500 for all
other filing statuses. Section 1.199A-1 of the proposed regulations provides additional information.
Q10. In 2018, I am single and will report taxable income over
$207,500. My only income is from an SSTB. Am I entitled to the deduction
with respect to the SSTB?
A10. No. The same is true for a married couple filing a joint return
whose taxable income exceeds $415,000. However, you may be entitled to a
deduction for QBI earned from another trade or business that is not an
SSTB or from qualified REIT dividends or qualified PTP income.
Q11. In 2018, I am single and will report taxable income over $207,500. I am NOT in an SSTB. Am I entitled to the deduction?
A11. Yes, if you have QBI, qualified REIT dividends or qualified PTP
income. For eligible taxpayers with total taxable income in 2018 over
$207,500 ($415,000 for married filing joint returns), the deduction for
QBI may be limited by the amount of W-2 wages paid by the qualified
trade or business and the UBIA of qualified property held by the trade
or business. The proposed rules provide additional information on these limitations. The IRS also issued a notice of proposed revenue procedure providing methods for determining W-2 wages for purposes of the limitation.
Q12. How do co-ops qualify for the 199A deduction?
A12. The IRS will be issuing separate guidance for co-ops.
Proposed regulations have been released on the new Section 199A
(qualified business deduction) as part of the Tax Cuts & Jobs Act.
This deduction will be available in the 2018 tax year for many sole
proprietors, partnerships, trusts and S Corps and will allow for a 20%
deduction on qualified business income. Learn more through the IRS
website or by contacting our office. _________________________________________________________________ IR-2018-162, Aug. 8, 2018 WASHINGTON — The Internal Revenue Service issued proposed regulations
today for a new provision allowing many owners of sole proprietorships,
partnerships, trusts and S corporations to deduct 20 percent of their
qualified business income. The new deduction -- referred to as the Section 199A deduction or the
deduction for qualified business income -- was created by the Tax Cuts
and Jobs Act. The deduction is available for tax years beginning after
Dec. 31, 2017. Eligible taxpayers can claim it for the first time on the
2018 federal income tax return they file next year. The deduction is generally available to eligible taxpayers whose 2018
taxable incomes fall below $315,000 for joint returns and $157,500 for
other taxpayers. It’s generally equal to the lesser of 20 percent of
their qualified business income plus 20 percent of their qualified real
estate investment trust dividends and qualified publicly traded
partnership income or 20 percent of taxable income minus net capital
gains. Deductions for taxpayers above the $157,500/$315,000 taxable income
thresholds may be limited. Those limitations are fully described in the
proposed regulations. Qualified business income includes domestic income from a trade or
business. Employee wages, capital gain, interest and dividend income are
excluded. In addition, Notice 2018-64,
also issued today, provides methods for calculating Form W-2 wages for
purposes of the limitations on this deduction. More information in the
form of FAQs on Section 199A can be found on IRS.gov. Taxpayers may rely on the rules in these proposed regulations until final regulations are published in the Federal Register.
Written or electronic comments and requests for a public hearing on
this proposed regulation must be received within 45 days of publication
in the Federal Register
The tax extension deadlines are approaching more quickly than you might realize! It's time to start thinking about getting your information together and to help avoid the stress of the last minute rush, we're sharing this interesting article from Psychology Today about how and why to avoid procrastination.
Recent research suggests procrastination is linked to difficulty managing distress. Specifically, it seems that task aversion is to blame — that is, when people view a task in an unpleasant manner, they are more likely to put it off.
We know most people hate to think about taxes, it's distressing. But ultimately it ends up being more stressful the longer you wait. We're here to help, so give us a call if you need answers to get you kick-started.
As you're preparing your creations for the Powder River County fair, don't forget about our Local Artist's Forum! Gardner & Billing CPAs are proud to support and showcase the work of the many artists in our community. We have revolving displays in our front office and up currently are works by Wally Badgett, Lana Kay Smith, Ronda Gatlin and Gaylene Fortner.
We welcome the participation of all amateur and professional artists in all mediums, from watercolor, to photography, to pottery! The pieces are strictly on loan during exhibition, so consider dropping in with your display-ready creation to share with us.
For more information, please contact our office at 406-436-2583.
Many of you are aware that the local Cancer Fund is a cause very near to the hearts of Dave and Pat Gardner, and for years the Scramble 4 a Cure has been a a great fundraiser for this charity. This weekend marks the 14th annual golf tournament benefiting our Broadus Cancer Fund.
The raised and donated funds from this charity all go to people in our area that have been affected by cancer. The money often helps cover medical and travel costs incurred during treatment and so often people who at one time receive funds, end up becoming donors themselves in later years. Since its inception, over $220,000 has been given back to touch the lives of our neighbors and loved ones! Last year alone, 20 different families each received $1,200. The volunteers and recipients of the Cancer Fund are continually overwhelmed by the incredible support shown in our small community. The Scramble 4 a Cure is surly one of the premier events held each year at the Rolling Hills Golf Course and, like always, the 36 tee box sponsors this year have shown amazing support. The tournament takes place this Friday and Saturday, August 3rd and 4th. Each day will be played as an individual tournament with 18 teams on Friday and 20 on Saturday. Lunch and snacks are provided each day by Tracy Vail and Saturday morning rolls by Tammy Schoenbeck. The Rolling Hills greenskeepers and clubhouse staff go to great lengths to ensure the course is in tip top shape and that everyone involved has an incredible weekend. We hope to see you there!