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 businessesBelow 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.
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 excluded.
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 subsequent years.
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.