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It’s my annual Taxes from A to Z series! This time, it’s Tax Cuts and Jobs Act (TCJA) style. If you’re wondering whether you can claim home office expenses or whether to deduct a capital loss under the new law, you won’t want to miss a single letter.
Q is for Qualified Business Income.
Remember when I said that it’s likely that no other provision under the TCJA made news more than the pass-through deduction? It’s true - and it’s making another appearance in Taxes A to Z this year. This time, the focus is a specific term used to calculate the deduction: qualified business income, or QBI.
The pass-through deduction, called the Section 199A deduction, typically applies to sole proprietors and business owners with pass-through businesses, as well as certain trusts and estates. The calculation for figuring the deduction can be tricky but generally, if your taxable income is below the threshold amount ($315,000 for joint returns and $157,500 for other taxpayers in 2018), you can deduct up to 20% of your qualified business income (QBI) for each business.
If, however, your taxable income is above the threshold amount, you are subject to limitations and exceptions which are determined by your occupation and a wage and capital limit. To figure the wage and capital limit, calculate 20% of your QBI (a) and compare that to an additional formula (b): the greater of 50% of W-2 wages with respect to your trade or business or the sum of 25% of W-2 wages + 2.5% of the unadjusted basis, immediately after acquisition, of all qualified property.
Some restrictions - like those for specified service trade or businesses (SSTB) apply. (For more about the pass-through deduction, click here and for examples using the formulas, click here.)
No matter where you fall on the income spectrum, and no matter what your occupation might be, you can’t even begin to calculate the deduction without understanding QBI. QBI includes items of income, gain, deduction, and loss from your trades or business, but only those effectively connected with the conduct of a trade or business within the United States.
QBI includes:
- Income from partnerships (other than publicly traded partnerships), S corporations, sole proprietorships, and some trusts
- Deductible tax on self-employment income, self-employed health insurance, and contributions to qualified retirement plans
QBI doesn’t include:
- Items that aren’t properly included in income (clearly)
- Capital gains or losses
- Dividends (including qualified REIT dividends)
- Interest income not properly allocable to a trade or business
- W-2 income (some exceptions apply)
- Commodities transactions or foreign currency gains or losses
- Income, loss, or deductions from notional principal contracts
- Annuity payments (unless connected with your trade or business)
- Reasonable compensation for owners/employees of an S corporation
- Guaranteed payments
- Payments received by a partner for services (other than as a partner)
- Losses or deductions disallowed under basis, at-risk, passive loss or section 461(l) excess business loss limitations
When determining QBI, keep in mind that the idea is to allow deductions against “working” income. In other words, income attributable to services or production are typically included in QBI, but income attributable to investments are typically excluded. A quick and dirty rule is that active income is QBI while passive income is not. (And yes, exceptions apply.)
Finally, QBI is determined on a per business, not a per taxpayer, basis. For example, if you have more than one business and you use the “simplified worksheet” (feel free to guffaw), you’ll enter each as a separate line item:
KPE/IRS
As I noted before, there’s a lot of nuance under Section 199A . If you have questions, check with your tax professional.
For more Taxes From A To ZTM 2019, check out the rest of the series:
- A is for Alimony
- B is for Bracket Creep
- C is for Credit For The Elderly Or The Disabled
- D is for Due Dates
- E is for Earned Income Tax Credit (EITC)
- F is for Fair Debt Collection Practices Act (FDCPA)
- G is for Gross Estate
- H is for Home Office Deduction
- I is for Innocent Spouse
- J is for Jackpot
- K is for Kiddie Tax
- L is for Long-Term Capital Gains or Losses
- M is for Medical Expenses
- N is for Notice
- O is for Opportunity Zone
- P is for Pass-through Deduction
