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Understanding Sec. 199A Edward L. Perkins, JD, LLM (Tax) CPA
Understanding Sec. 199A Created and Presented by
EDWARD L. PERKINS, BA, JD, LLM(Tax), CPA Partner - Gibson & Perkins, PC Adjunct Professor Villanova University School of Law Graduate Tax Program Author AICPA’s – Taxation of Trusts and Estates Drafting Wills That Work in Pennsylvania AICPA’s – Fundamentals of Trusts PBI – Special Needs Trusts in Pennsylvania The Pennsylvania Trust Handbook
Founder - YourOnlineProfessor.net
Understanding Sec. 199A This program will provide a comprehensive overview of the § 199A Deduction. •
The program was prepared by Edward L. Perkins, JD, LLM (Tax), CPA 5/30/2019
•
The program was reviewed by Stephen Loester, JD, LLM (Tax) 6/3/2019
• Among the topics examined in this program are: •
Why Congress adopted new § 199A of the Internal Revenue Code
•
Basic concepts in determining the § 199A deduction
•
The Components of the § 199A deduction formula
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How the § 199A deduction is calculated
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How the § 199A deduction impacts service businesses
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How the § 199A is determined for trusts and estates
Understanding Sec. 199A Course Learning Objectives •
After course completion you will :
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Learn how to calculate the W-2 Wage/Basis Limitation
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Understand the application of Taxable Income limitation
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The definition and relevance of: •
The “threshold amount”
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The “phase in range”
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The “applicable percentage”
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The “excess amount” and more specifically
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How the § 199A deduction is calculated
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Define what constitutes a “specified service trade or business” for purposes of §199A
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Understand the tax effect of being a “specified service trade or business” for purposes of §199A
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Learn how the calculate the of §199A when the SSTB is below and above the threshold amount
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Understand when trades or businesses can be aggregated in determining a taxpayer’s §199A deduction
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Learn the tax effect of a net QBI loss in terms of netting and carryovers
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Understand how trusts and estates calculate and pass through the §199A deduction
Understanding Sec. 199A Course Learning Objectives (Continued) • Understand why Congress adopted new §199A of the Internal Revenue Code • Gain an overview the how the §199A deduction is calculated • Gain an understanding of the basic concepts in determining the §199A deduction • Define and understand the relevance of the components of the §199A deduction formula including: •
The “QBI Component”
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“Combined Qualified Business Income Amount”
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“Qualified Items”
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“Qualified REIT dividends” and
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“Qualified Publicly Traded Partnership income”
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Learn what constitutes a “Qualified Trade or Business”
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Understand the limitations on the §199A deduction
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Learn how to calculate the W-2 Wage/Basis Limitation
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Understanding Sec. 199A Edward L. Perkins, JD, LLM (Tax) CPA
Unit One - Introduction
After completing this Unit, you will be able to: › Understand why Congress adopted new §199A of the Internal Revenue Code › Gain an overview the how the §199A deduction is calculated
Background
PASS-THROUGH BUSINESS INCOME OF INDIVIDUALS ▪ On December 20, 2017, Congress passed was is colloquially known as the “Tax Cuts and Jobs Act” ▪ In the legislative history of the 2017 tax act, Congress noted that the reduction in the corporate tax rate did not mitigate the high rates of tax imposed on businesses conducted by noncorporate taxpayers in passthrough form or through sole proprietorships ▪ In order to lower rates, Congress introduced new § 199A of the Internal Revenue Code, which provides an income tax benefit to the owners of non-corporate businesses, i.e., sole proprietorships, partnerships, and S corporations ▪ The deduction under § 199A is generally available to individual taxpayers, trusts, and estates that have income from what is termed a “qualified businesses”
The New Law SEC. 199A DEDUCTION -
The New Law allows individual taxpayers and trusts and estates to deduct 20% of “Qualified Business Income” (“QBI”) from a partnership, S corporation, or sole proprietorship
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Certain limitations apply
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The Sec, 199A deduction reduces taxable income and is not allowed in computing adjusted gross income
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The Sec. 199A deduction is available to both itemizers and non-itemizers, and also for purposes of AMT
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The deduction is only available on a limited basis to specified service trades or businesses
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199A applies only to taxable years beginning after December 31, 2017, and on or before December 31, 2025
▪ Proposed Regulations. On August 8, 2018, the IRS issued proposed regulations and a Notice providing guidance on §199A ▪ Final Regulations, etc. On January 18, 2019, the IRS issued final regulations (the “Regulations”), a Revenue Procedure, and a Notice providing additional guidance ▪ The final regulations generally apply to taxable years ending after February 8, 2019, the date on which they were published in the Federal Register, but taxpayers may rely on either the proposed regulations in their entirety or the final regulations in their entirety for taxable years ending in 2018
▪ The IRS also published answers to frequently asked questions on its website
The Deduction
The Sec 199 Deduction § 199A provides a deduction equal to the lesser of (i) the taxpayer's “combined qualified business income amount”, and (ii) 20% of the taxpayer's taxable income, calculated without regard to net capital gain and to the § 199A deduction. ▪ This income may result from operating a qualified business as a sole proprietorship, but also can result from ownership of an interest in a pass-through entity such as a partnership, S corporation, or limited liability company (referred to as “Relevant Pass Through Entities” or “RPE”)
Relevant Passthrough Entities Overview ― The regulations create the term “relevant passthrough entity” (“RPE”) to include partnerships (except for PTPs which are treated separately) and S corporations that are directly or indirectly owned by at least one individual, trust, or estate ― A trust or estate is also an RPE to the extent that it passes through QBI, W-2 wages, UBIA of qualified property, qualified REIT dividends, or qualified PTP income to a beneficiary or beneficiaries ― A taxpayer calculates the § 199A deduction with regard to relevant items that the taxpayer receives directly and the taxpayer's allocable share of items from RPEs ― In the case of a partnership or S corporation, the § 199A deduction is determined at the partner or shareholder level
The Sec 199 Deduction ▪ The deduction is only available to owners of service type businesses on a limited basis § 199A contains a labyrinth of additional limitations and operating rules which make the final determination of the deduction a tax professional’s nightmare. In this program will discuss and hope to make sense out of that labyrinth.
Interactive Exercise Which of the following is a correct statement? ▪ A.This is not not apply a test to - but rather is included TheInteractive New AuditExercise Rules do Partnerships with less tothan help100 youpartners. reinforce some of the important concepts in the lastRules section B.covered The New Audit cannot apply to any Partnership Return filedfun before January 2018. ▪ Have and see if you1,can pick the correct answer on your C.first ThetryNew Audit Rules effectively replaced the three existing audit regimes applicable to partnerships (the TEFRA regime, ▪ If you are taking this program for CPE Credit note the correct the ELP regime and the small partnership regime outside of answer eachtwo Interactive Exercise. You will be asked to TEFRA)towith new procedures provide that answer in order to obtain your CPE credit
Interactive Exercise 1 Before limitations are applied, § 199A provides a deduction equal to: A. The sum of (i) the taxpayer's “combined qualified business income amount”, and (ii) 20% of the taxpayer's taxable income, calculated without regard to net capital gain and to the § 199A deduction B. The taxpayer's “combined qualified business income amount” C. 20% of the taxpayer's taxable income, calculated without regard to net capital gain and to the § 199A deduction
Interactive Exercise A is Correct – the 199A deduction is limited however by the W-2 Wage/Basis Limitation and the Taxable income Limitation
Interactive Exercise B is Incorrect – the determination of the § 199 A deduction also includes 20% of the taxpayer's taxable income, calculated without regard to net capital gain and to the § 199A deduction.
Interactive Exercise C is incorrect – This represent the taxable income limitation.
Interactive Exercise 2 Which of the following entities does not qualify to take the ยง 199A deduction: A. C Corporations B. Estates C. Individuals
Interactive Exercise A is Correct – the § 199A deduction is only available to pass through entities, trusts and estates and individuals
Interactive Exercise B is Incorrect – the § 199A deduction is available to trusts and estates, as well as pass through entities and individuals
Interactive Exercise C is Incorrect - the § 199A deduction is not available to C corporations – the deduction is only available to individuals, estates and trusts, and pass through entities
Unit Two – The Basics
After completing this Unit, you will be able to: ›
Gain an understanding of the basic concepts in determining the § 199A deduction
›
Define and understand the relevance of the components of the § 199A deduction formula including: The “QBI Component” “Combined Qualified Business Income Amount”
“Qualified Items” “Qualified REIT dividends” and “Qualified Publicly Traded Partnership Income” ›
You will also learn what constitutes a “Qualified Trade or Business”
Overview
The § 199A deduction is allowed to individuals and some trusts and estates (but not corporations)
The calculation of the § 199A deduction begins with a determination of the taxpayer’s “combined qualified business income”
Overview
The deduction is limited to 20% of that income but may also limited by the taxpayer’s share of the W-2 wages paid by that business, and the level of qualified property owned by that business
Finally, there is an overall limitation based on 20% of the taxpayer’s taxable income in excess of the net capital gain of the taxpayer
The §199A deduction is not allowed in calculating adjusted gross income (“AGI”), which means that the deduction will not affect calculations tied to AGI A taxpayer who is subject to the alternative minimum tax (“AMT”) under §55 may take the §199A deduction in computing alternative minimum taxable income
The Deduction Formula
The following formula represents the basic calculation of the § 199A deduction: The § 199A deduction is equal to the lesser of: § 199A Deduction
[A] 20% of the “Qualified Business Income” for each of “Qualified Trade or Business” of the Taxpayer + 20% of the sum of Qualified REIT dividends and Qualified Publicly Traded Partnership income for the taxable year; or [B] The greater of:
W-2/Basis Limitation Taxable Income Limitation
(i) 50% of W-2 wages with respect to that trade or business, or (ii) the sum of 25% of W-2 wages with respect to that trade or business plus 2.5% of the Unadjusted Basis of Qualified Property with respect to that trade or business [C] But not greater than 20% of the excess of the taxable income of the taxpayer over the taxpayer’s net capital gain for the taxable year.
Combined Qualified Business Income Amount
An eligible taxpayer is able to deduct 20% of the “combined qualified business income amount” subject to an certain limitations. The “combined qualified business income amount” is defined as the sum of three separate amounts:
“Combined Qualified Business Income Amount”
1. 20% of the taxpayer’s “Qualified Business Income” (QBI) from each “Qualified Trade or Business” (QTB) (as limited by the “W2 wage/basis limitation,” defined below), 2. 20% of the taxpayer's aggregate “Qualified REIT dividends,” and 3. 20% of the taxpayer's aggregate “qualified publicly traded partnership income.”
In order to better understand the term “combined qualified business income” we have to first define the following terms: ▪ “Qualified Business Income”
“Combined
▪ “Qualified Items”
Qualified Business Income Amount”
▪ “Qualified Trade or Business”
▪ “Qualified REIT Dividend” ▪ “Qualified Publicly Traded Partnership Income”
Qualified Business Income
“Qualified Business Income”
The taxpayer’s net amount of “qualified items of income, gain, deduction, and loss.”
“Qualified Items” In General — The term means items of income, gain, deduction, and loss to the extent such Items are: ‡ Effectively connected with the conduct of a trade or business within the United States; and
‡ Included or allowed in determining taxable income for the taxable year
“Qualified Items” Exclusions. The following items shall not be taken into account as a qualified item of income, gain, deduction, or loss:
✓ Any item of short-term capital gain, short-term capital loss, long-term capital gain, or long-term capital loss ✓ Any dividend, income equivalent to a dividend, or payment in lieu of dividends ✓ Any interest income other than interest income which is properly allocable to a trade or business ✓ Any amount received from an annuity which is not received in connection with the trade or business ✓ Any item of deduction or loss properly allocable to an amount described in any of the preceding clauses
Qualified Trade or Business
Qualified Trade of Business Definition. Under the Regulations (the “Regulations,”) a “qualified trade or business” is defined as any trade or business other than -
– A “specified service trade or business” or “SSTB,” or – The trade or business of performing services as an employee For purposes of the § 199A deduction, the Regulations define “trade or business” as a trade or business under § 162 (§ 162 trade or business) other than the trade or business of performing services as an employee.
SPECIFIED SERVICE TRADE OR BUSINESS
A specified service trade or business is defined as any trade or business involving the performance of services in the fields of: − Health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or
− Any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners, or − Which involves the performance of services that consist of investing and investment management, trading, or dealing in securities, partnership interests, or commodities
Qualified Trade of Business Trade or Business of Performing Services as an Employee ― The trade or business of performing services as an employee is not a trade or business for purposes of § 199A and the regulations thereunder
― Therefore, no items of income, gain, loss, or deduction from the trade or business of performing services as an employee constitute QBI
Qualified Trade of Business Trade or Business of Performing Services as an Employee
― No taxpayer may claim a § 199A deduction for wage income, regardless of the amount of taxable income. ― An individual whose employer formerly characterized the individual as an employee is presumed, for three years after the employer ceases to treat the individual as an employee to be in the trade or business of performing services as an employee
Notice 2019 07 – Rental Real Estate Safe Harbor Overview –
Notice 2019-07, released concurrently with the regulations, provides notice of a revenue procedure
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The revenue procedure would create a safe harbor under which a “rental real estate enterprise” may be treated as a trade or business solely for purposes of §199A.
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An enterprise that fails the safe harbor may still be treated as a trade or business for purposes of §199A if the enterprise rises to the level of a trade or business under §162.
Definition – Rental Real Estate Enterprise (“RPE”) ― The proposed revenue procedure defines “Rental Real Estate Enterprise” (“RPE”) as “an interest in real property [or multiple properties] held for the production of rents” ― An individual or RPE relying on the proposed revenue procedure must hold the interest in real property directly or through a disregarded entity ― Although the proposed revenue procedure generally permits taxpayers to treat each rental property as either a separate enterprise or as part of a single enterprise ― Commercial and Residential Properties may not be part of the same enterprise ― Therefore, there is no safe harbor for mixed-use buildings ― Additionally, taxpayers may not change the treatment of a property (i.e., as a separate enterprise or part of a single larger enterprise) unless there has been a significant change in facts and circumstances
Notice 2019 07 – Rental Real Estate Safe Harbor Requirements for Eligibility To be eligible for the safe harbor, the following requirements must be satisfied during the taxable year with respect to the rental real estate enterprise: 1- Separate Books and Records - Separate books and records must be maintained for each rental real estate enterprise reflecting income and expenses of the enterprise; 2 - Hours of “Rental Services”
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For taxable years beginning prior to January 1, 2023, at least 250 hours of “rental services” must be performed each year with respect to the enterprise
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For taxable years beginning after December 31, 2022, at least 250 hours of rental services must be performed with respect to the enterprise in three of five consecutive taxable years that end with the taxable year
Notice 2019 07 – Rental Real Estate Safe Harbor For purposes of the proposed revenue procedure, rental services may be performed by owners, employees, agents, independent contractors and include the following activities: ‡
Advertising to rent or lease the real estate;
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Negotiating and executing leases;
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Verifying information contained in prospective tenant applications;
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Collecting rent;
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Daily operation, maintenance, and repair of the property;
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Management of the real estate;
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Purchase of materials; and
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Supervision of employees and independent contractors
Notice 2019-07 – Rental Real Estate Safe Harbor However, rental services do not include : ‡
Financial or investment management activities, such as arranging financing; procuring property;
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Studying and reviewing financial statements or reports on operations;
‡
Planning,
‡
Managing,
‡
Constructing long-term capital improvements; or
‡
Hours spent traveling to and from the real estate
Notice 2019-07 – Rental Real Estate Safe Harbor Contemporaneous Records ✓ Taxpayers must keep contemporaneous records (i.e., time reports, logs, or similar documents) regarding the number of hours of all services performed for the enterprise, as well as a description of such services
✓ Including who the service was performed by and on what date such service was performed ✓ The records must be made available for inspection at the request of the IRS Attached Statement ✓ Taxpayers must include a statement attached to the return on which they claim the § 199A deduction that the requirements have been satisfied ✓ An RPE must include such statement on the return on which they pass through the § 199A deduction
Notice 2019-07 – Rental Real Estate Safe Harbor
Real Estate Not Eligible. Certain rental real estate arrangements are not eligible for the safe harbor, including:
― Real estate that is used by a taxpayer (or an owner or beneficiary of an RPE) as a residence for any part of the year under § 280A; and ― Real estate rented under a triple net lease (i.e., a lease agreement that requires the tenant or lessee to pay all or a portion of taxes, fees, and insurance, and to be responsible for maintenance activities
Qualified REIT Dividends and Qualified Publicly Traded Partnership Income
QUALIFIED REIT DIVIDENDS AND QUALIFIED PUBLICLY TRADED PARTNERSHIP INCOME The ยง 199A deduction is also allowed for 20% of a taxpayer's total amount of Qualified REIT Dividends and Qualified Publicly Traded Partnership Income. Qualified REIT Dividends are generally defined as any dividends received from a REIT other than any portion of a dividend received from a REIT that is a capital gain dividend or a qualified dividend.
Qualified Publicly Traded Partnership Income is generally defined as the sum of: (1) The net amount of the taxpayer's allocable share of each qualified item of income, gain, deduction, and loss from a publicly traded partnership not treated as a corporation, and (2) Gain recognized by the taxpayer on disposition of its interest in the publicly traded partnership that is treated as ordinary income
Relevant Pass Through Entity
Relevant Passthrough Entities In the case of a partnership or S corporation, the § 199A deduction is determined at the partner or shareholder level.
Partners in Partnerships –
Each partner takes into account the partner's allocable share of each of the partnership's qualified items of income, gain, deduction, and loss; is treated as having W-2 wages and UBIA of qualified property equal to the partner's allocable share of the partnership's W-2 wages and UBIA of qualified property
–
Each partner takes into account the partner's allocable share of the partnership's qualified REIT dividends and qualified PTP income
Shareholders of S Corporations
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Similarly, each S corporation shareholder takes into account the shareholder's pro rata share of each of the S corporation's qualified items of income, gain, deduction, and loss; is treated as having W-2 wages and UBIA of qualified property equal to the shareholder's pro rata share of the S corporation's W-2 wages and UBIA of qualified property;
–
Each shareholder takes into account the shareholder's pro rata share of the S corporation's qualified REIT dividends and qualified PTP income
Interactive Exercise 3 Which of the following is a “qualified trade of business� for purposes of § 199A: A. A specified service trade or business
B. A trade or business of performing services as an employee C. A trade or business under section 162 trade or business other than the trade or business of performing services as an employee
Interactive Exercise A is Incorrect – the definition of a “qualified trade of business” for purposes of § 199A specifically excludes specified service trade or businesses.
Interactive Exercise B is Incorrect - The definition of a “qualified trade of business” for purposes of § 199A specifically excludes A trade or business of performing services as an employee .
Interactive Exercise C is Correct – This is the definition of a “qualified trade of business” for purposes of § 199A
Interactive Exercise 4 Which of the following is a “qualified item” of purposes of the § 199A? A. Income, gain, deduction, and loss to the extent effectively connected with the conduct of a trade or business within the United States. B. Any item of short-term capital gain, short-term capital loss, long-term capital gain, or long-term capital loss. C. Any dividend, income equivalent to a dividend, or payment in lieu of dividends.
Interactive Exercise A is Correct - the definition of a “qualified item” for purposes of the § 199A, includes income, gain, deduction, and loss to the extent effectively connected with the conduct of a trade or business within the United States.
Interactive Exercise B is Incorrect - the definition of a “qualified item” for purposes of the § 199A, specifically excludes shortterm capital gain, short-term capital loss, long-term capital gain, or longterm capital loss.
Interactive Exercise C is Incorrect - the definition of a “qualified item” for purposes of the § 199A specifically excludes dividends, income equivalent to a dividends, or payment in lieu of dividends.
Unit Three - The Limitations
› After completing this Unit, you will be able to: › Understand the limitations on the § 199A deduction › Learn how to calculate the W-2 Wage/Basis Limitation › Understand the application of the Taxable Income limitation
Overview
O V E R V I E W
There are two significant limitations which apply in determining the § 199A deduction 1 - W-2 Wage/Basis Limitation – The § 199A deduction may be limited by the taxpayer’s share of the greater of the “W-2 Wage/Basis Limitation” which is the greater of (i) the amount determined under the “wages test” or (ii) the amount determined under the “wages plus basis test.” 2 - The Taxable Income Limitation – The § 199A deduction of a taxpayer cannot exceed an amount equal to 20 percent of the excess (if any) of the taxable income of the taxpayer for the taxable year, over the net capital gain of the taxpayer for such taxable year.
The Deduction Formula The § Sec 199A deduction equal the lesser of:
§ 199A Deduction
[A] 20 % of the “Qualified Business Income” for each of “Qualified Trade or Business” of the Taxpayer + 20% of the sum of Qualified REIT dividends and Qualified Publicly Traded Partnership income for the taxable year; or [B] The greater of:
W-2/Basis Limitation Taxable Income Limitation
(i)
The “Wages Test” equal to 50% of W-2 wages with respect to that trade or business or
(ii) The “Wages plus Basis Test” equal to the sum of 25% of W-2 wages with respect to that trade or business plus 2.5% of the Unadjusted Basis of Qualified Property with respect to that trade or business But not greater than 20% of the excess of the taxable income of the taxpayer over the taxpayer’s net capital gain for the taxable year.
The W-2/Basis Limitation
W-2 WAGE/BASIS LIMITATION – THE LIMITATION
> If Taxable Income exceeds a certain phaseout range then the deduction for each business will be limited to the greater of: (1) 50% of the W-2 wages with respect to the trade or business, or
(2) The sum of (a) 25% of the W-2 wages with respect to the trade or business, plus (b) 2.5% of the unadjusted basis (immediately after acquisition) of all qualified property. ➢
The W-2 wage limitation phases in for a taxpayer with taxable income in excess of the applicable threshold amount.
➢
> If the taxpayer's taxable income is below an applicable threshold amount, the W-2 wage limitation does not apply to limit the taxpayer's deduction.
W-2 WAGE/BASIS LIMITATION – THE LIMITATION
> If Taxable Income exceeds a certain phaseout range then the deduction for each business will be limited to the greater of: (1) 50% of the W-2 wages with respect to the trade or business, or
(2) The sum of (a) 25% of the W-2 wages with respect to the trade or business, plus (b) 2.5% of the unadjusted basis (immediately after acquisition) of all qualified property. ➢
The W-2 wage limitation phases in for a taxpayer with taxable income in excess of the applicable threshold amount.
➢
> If the taxpayer's taxable income is below an applicable threshold amount, the W-2 wage limitation does not apply to limit the taxpayer's deduction.
“W-2 Wages” Defined
The total wages subject to wage withholding, elective deferrals, and deferred compensation paid by the qualified trade or business with respect to employment of its employees during the calendar year ending during the tax year of the taxpayer “W-2 wages” do not include: -
Any amount that is not properly allocable to the QBI as a qualified item of deduction, and
-
Any amount that was not properly included in a return filed with the Social Security Administration on or before the 60th day after the due date (including extensions) for filing such return
The UBIA of Qualified Property Component • The basis component of the W-2 Wage/Basis Limitation is an amount equal to 2.5% of the “unadjusted basis immediately after acquisition of qualified property” • “Unadjusted basis immediately after acquisition” - (“UBIA”) means the basis on the placed in service date
QUALIFIED PROPERTY Tangible property of a character subject to depreciation:
┤ That is held by, and available for use in, the qualified trade or business at the end of the tax year, ┤ That is used in the production of QBI, and ┤ For which the depreciable period has not ended before the end of the tax year
Improvements to Qualified Property Any addition to, or improvement of qualified property that has already been placed in service is treated as separate qualified property ‌
‌first placed in service on the date such addition or improvement is placed in service
Adjustments Under Sections 734(b) and 743(b) Excess section 743(b) basis adjustments as defined in that section are treated as qualified property. That excess is the excess of the transferee partner's proportionate share of the adjusted basis of the partnership property over the basis of his interest in the partnership. Otherwise, basis adjustments under sections 734(b) and 743(b) are not treated as qualified property.
Property Acquired at End of Year Property is not qualified property if the property is acquired within 60 days of the end of the taxable year and disposed of within 120 days of acquisition without having been used in a trade
or business for at least 45 days prior to disposition… …unless the taxpayer demonstrates that the principal purpose of the acquisition and disposition was a purpose other than increasing the § 199A deduction
Depreciable Period With respect to qualified property of a trade or business, the period beginning on the date the property was first placed in service by the individual or RPE and ending on the later of: (1)
The date that is 10 years after such date; or
(2)
The last day of the last full year in the applicable recovery period that would apply to the property under section 168(c)
Partners of Partnerships and Shareholders of S Corporation. –
A partner's allocable share of UBIA is determined in
accordance with how the partnership would allocate depreciation for book purposes under Reg. § 1.704-
PARTNERSHIP
1(b)(2)(iv)(g) on the last day of the taxable year –
In the case of qualified property held by an S corporation, each shareholder's share of UBIA is equal to his or her pro rata share of the S corporation's UBIA
Trusts and Estates. –
–
In the case of trusts and estates that own qualified property, the statute provides that rules similar to those in former § 199 will apply for the apportionment of UBIA of qualified property between the trust or estate and its beneficiaries
However, there are no express rules in former § 199 (or the regulations thereunder) regarding the allocation of basis
TRUSTS&ESTATES
The Taxable Income Limitation
The Taxable Income Limitation ▪ The § 199A provides a deduction equal to the lesser of (i) the taxpayer's “combined qualified business income amount “and (ii) 20% of the taxpayer's taxable income, calculated without regard to net capital gain or the § 199A deduction ▪ Net capital gain means net capital gain(excess of net long-term capital gain for the taxable year over the net short-term capital loss) plus any qualified dividend income for the taxable year
Interactive Exercise 5 Which of the following is not a possible limitation to the § 199A Deduction: A. The taxpayer’s taxable income. B. The taxpayer’s share of W-2 wages paid by the taxpayer’s trade or business. C. The limitation on itemized deductions.
Interactive Exercise A is Incorrect – under the Taxable income Limitation the § 199A deduction cannot exceed 20% of the excess of the taxable income net capital gain for the taxable year.
Interactive Exercise B is Incorrect – under the W-2 Wage/ Basis Limitation, the § 199A deduction cannot exceed the greater of: (i) 50 percent of W-2 wages with respect to that trade or business, or (ii) the sum of 25 percent of W-2 wages with respect to that trade or business plus 2.5 percent of the Unadjusted Basis of Qualified Property with respect to that trade or business
Interactive Exercise C is Correct – the § 199A Deduction is not a deduction for either adjusted gross income or an itemized deduction, but is a direct reduction in the taxpayer’s taxable income.
Unit Four - Computing the ยง 199A Deduction
After completing this Unit, you will learn: ›
The definition and relevance of: −
The “threshold amount”
− − −
The “phase in range”
The “applicable percentage”
The “excess amount,” and more specifically ›
How the § 199A deduction is calculated
Overview –
In order to compute § 199A deduction, it is first necessary to determine where the taxpayer stands in relation to the “threshold amount,” and the “phase in range”
–
The term “threshold amount” means, for any taxable year beginning before 2020, $157,500 (or $315,000 in the case of a taxpayer filing a joint return); adjusted by a cost-of-living adjustment on an annual basis.
–
The “phase-in range” is equal to the threshold amount + $50,000 (or $100,000 in the case of a joint return).
–
Also relevant is whether the trade or business a “specified service trade or business”
There are Four Sets of Rules Depending on the Level of Taxable Income of the Taxpayer
✓
✓
✓
If the taxpayer’s taxable income is Below the Threshold Amount (TI $315,000 JT, $157,000) ✓
The W-2/Basis Limitation does limitation does not apply
✓
SSTB s are treated the same as other trade or businesses
Within the Phase in Range (TI $315,000 - $415,000 JT, $157,000 -$225,000 Others) ✓
The W-2/Basis Limitation is Phased in
✓
The SSTB Exclusion and the W-2/Basis Limitation are Phased in
In Excess of the Phase in Range ✓
The W-2/Basis Limitation applies in full
✓
A Specified Service Trade or Business is not allowed a § 199A deduction
Below the Threshold Amount
THRESHOLD AMOUNTS AND PHASE-IN RANGE Neither the W-2 wage/basis limitation or the specified service trade or business exclusion applies to taxpayers with taxable incomes below the applicable threshold amounts. The threshold amounts are $315,000 for joint filers and $157,500 for all other taxpayers (indexed for inflation). Above these thresholds the W-2 wage/basis limitations is phased in.
The phase in range for other than joint filers is $157,500 $207,500. For joint return the phase in range is $315,000 - $415,000.
The Formula - Below the Threshold Amount
[.20 x QBI] + [.20 x [QREITd + PTPi]] > [.20 x [TI – NCG]
1.
Facts
a.
A is unmarried and owns and operates a computer repair shop as a sole proprietorship.
b. A has no capital gains or losses. c.
After allowable deductions not relating to the business, A's total taxable income for 2018 is $81,000.
d. The business's QBI is $100,000, the net amount of its qualified items of income, gain, deduction, and loss.
2. § 199A Deduction a. QBI Component - 20% of A's QBI from the business ($100,000 x 20% = $20,000)
b. The W-2 Wage/Basis Limitation – Does not apply. c.
Taxable Income Limitation - 20% of A's total taxable income for the taxable year ($81,000 x 20% = $16,200).
d. The § 199 A Deduction - A's § 199A deduction is equal to $16,200, the lesser of the QBI Component and the TI Limitation
EXAMPLE 1
1.
Facts
Assume the same facts as in Example 1 a. A is unmarried and owns and operates a computer repair shop as a sole proprietorship. b.
A has no capital gains or losses.
c. The business's QBI is $100,000, the net amount of its qualified items of income, gain, deduction, and loss. e. Except that A also earns $1,000 in qualified REIT dividends and $500 in qualified PTP income in 2018, increasing taxable income to $82,500. 2.
Calculations
A’s § 199A deduction is equal to $16,500, the lesser of : a. QBI Component - 20% of A's QBI from the business ($100,000 x 20% = $20,000) or $20,000 + 20% of A's combined qualified REIT dividends and qualified PTP income ($1500 x 20% = $300) or $300 = $20,000 + $300 = $20,300 b. Taxable Income Limitation - $82,500 x .20 = $16,500
EXAMPLE 2
Within the Phase in Range
There are Four Sets of Rules Depending on the Level of Taxable Income of the Taxpayer
✓ Within the Phase in Range (TI $315,000 - $415,000 JT, $157,000 - $225,000 Others) ✓ The W-2/Basis Limitation is Phased in ✓ The SSTB Exclusion and the W-2/Basis Limitation are Phased in
The “W-2 Wage/Basis Limitation” The “W-2 Wage/Basis Limitation” is generally the greater of: – 50 percent of the W-2 wages with respect to that trade or business, or – 25 percent of the W-2 wages with respect to that trade or business plus 2.5 percent of the Unadjusted Basis of Qualified Property with respect to that trade or business (the “W-2 Wage/Basis Limitation”). For taxpayers with taxable income within the Phase Range the W-2 Wage/Basis Limitation is actually phased in. That is - as the level of the taxpayer’s taxable income increases, a greater percentage of the W-2 Wage/Basis Limitation is taken into account. The “phase in” is determined by a calculation of the “Reduction Amount.”
The “W-2 Wage/Basis Limitation”
– The W-2 Wage/Basis Limitation is phased in for both nonSSTBs and SSTBs, – But for SSTB an additional limitation must be taken into account – For SSTB’s only the “Applicable Percentage” of QBI, W-2 wages, and UBIA of qualified property for each SSTBs is taken into account for purposes of determining the individual’s § 199A deduction
The “W-2 Wage/Basis Limitation” The actual phase of the W-2 Wage/Basis Limitation will depend upon whether
the W-2 Wage/Basis Limitation as otherwise calculated is greater or less than 20% of the taxpayer’s QBI
▪ If the amount of the W-2 Wage/Basis Limitation is less 20% of QBI, the QBI component (i.e., 20% of QBI) is reduced by the “Reduction Amount” ▪ If the amount of the W-2 Wage/Basis Limitation is greater than 20% of QBI, the Reduction Amount does not apply. Again - the greater the amount by which the taxpayer’s Taxable Income exceeds the Threshold Amount the more the W-2 Wage/Basis Limitation will be taken into account
The Formula – Within the Phase In Range If the amount of the W-2 Wage/Basis Limitation is less 20% of QBI
[.20 x QBI] + [.20 x [QREITd + PTPi]] – “Reduction Amount” > [.20 x [TI – NCG]
The Formula – Within the Phase In Range If the amount of the W-2 Wage/Basis Limitation is greater than 20% of QBI the “Reduction Amount” is not taken into account
[.20 x QBI] + [.20 x [QREITd + PTPi]] – “Reduction Amount” > [.20 x [TI – NCG]
When Taxable Income is within the phase range, first determine if W-2 Wage/Basis Limitation Greater or Less Than 20% of QBI Step 1. First, calculate the amount equal to .20 x QBI for that trade of business (the “QBI Component”).
Step 2. Second, determine the “W-2 Wage/Basis” Limitation, by calculating the amount equal to the greater of: (i) 50 percent of the W-2 wages with respect to that trade or business, or
(ii) 25 percent of the W-2 wages with respect to that trade or business plus 2.5 percent of the Unadjusted Basis of Qualified Property with respect to that trade or business.
The “W-2 Wage/Basis Limitation”
If the amount of the W-2 Wage/Basis Limitation is less than 20% of QBI, the QBI component (i.e., 20% of QBI) is reduced by the “Reduction Amount” QBI Component = .20 x (QBI – Reduction Amount)
If the amount of the W-2 Wage/Basis Limitation is greater than 20% of QBI, the QBI component (i.e., 20% of QBI) is not reduced by the “Reduction Amount” QBI Component = .20 x QBI
Step 3. If the Amount of the W-2 Wage/Basis Limitation is Less than 20% of QBI – Next calculate the “Reduction Amount.” [Taxable Income –Threshold Amount]
The “Reduction Amount”= The “Excess Amount” x
$50,000/$100,000*
*$100,000 on a joint return
The “Excess Amount” = The excess of .20 of QBI over the W-2 Wage/Basis Limitation** **[the greater of: (i) 50 percent of the W-2 wages or (ii) 25 percent of the W-2 wages + 2.5 percent of the Unadjusted Basis of Qualified Property]
1.
Facts
a.
C operates a non-service business as a sole proprietor
b.
C is married and files a joint tax return with husband H.
c.
The joint of Taxable Income of C and H is $375,000
d.
The Threshold Amount of C and H is $315,000
e.
C ‘s QBI = $300,000
f.
W-2 = $40,000 UBIA = $0
2.
Calculations
Step 1 Calculate the QBI Component: .20 x QBI = .20 x $300,000 = $60,000 Step 2 Calculate the W2/Basis Limitation: The greater of: (1) .50 W2 = .50 x $40,000 = $20,000, or
(2) .25 W2 + .025 UBIA = (.25 x 40,000) + (.025 x 0) = (12,500 + 0) = $10,000 W-2 Wage/Basis Limitation = $20,000, which is less than .20 of QBI ($60,000)
EXAMPLE 3
Step 3 Calculate the Reduction Amount (1) “Excess Amount” = .20 QBI – W-2Wage/Basis Limitation = $60,000 - $20,000 = $40,000 (2) “Reduction Amount” = “Excess Amount” x [TI In –Threshold This illustrates the Phase Effect Amount/$100,000 ] = $40,000 x [$375,000 – 315,000] / 100,000] =$40,000 x .60 = $24,000
IfStep the 4taxpayer’s taxable income was $315,000, Reduction Amount Calculate the QBI Component Reduced by the the Reduction Amount would be zero In order to calculate the QBI Component take 20% of the QBI for the trade or business $40,000 x [$315,000 – 315,000] / 100,000] = and subtract the Reduction Amount. $40,000 x -0- = -0$60,000 - $24,000 = $36,000 IfStep the 5taxpayer’s incomeLimitation was $415,000, the Reduction Amount – Apply thetaxable Taxable Income would be the without full $40,000 20% of the C’s taxable income, calculated net capital gain and the Sec. 199A deduction (.20 x $375,000 = $75,000)
$40,000 x [$415,000 – 315,000] / 100,000] = Step 6 – The Sec. 199A Deduction $40,000 x 1.00 = $ 40,000 The Sec. 199A Deduction is equal to the lesser (i) the QBI Component ($36,000), or (ii) 20% of the C’s taxable income, calculated without net capital gain and the Sec, 199A deduction (.20 x $375,000 = $75,000) The Sec 199A Deduction is $36,000
EXAMPLE 3
Step 3 Calculate the Reduction Amount (1) “Excess Amount” = .20 QBI – W-2Wage/Basis Limitation = $60,000 - $20,000 = $40,000 (2) “Reduction Amount” = “Excess Amount” x [TI –Threshold Amount/$100,000 ] = $40,000 x [$375,000 – 315,000] / 100,000] =$40,000 x .60 = $24,000 Step 4 Calculate the QBI Component Reduced by the Reduction Amount In order to calculate the QBI Component, take 20% of the QBI for the trade or business and subtract the Reduction Amount. $60,000 - $24,000 = $36,000 Step 5 – Apply the Taxable Income Limitation 20% of the C’s taxable income, calculated without net capital gain and the Sec. 199A deduction (.20 x $375,000 = $75,000) Step 6 – The Sec. 199A Deduction The Sec. 199A Deduction is equal to the lesser (i) the QBI Component ($36,000), or (ii) 20% of the C’s taxable income, calculated without net capital gain and the Sec, 199A deduction (.20 x $375,000 = $75,000) The § 199A Deduction is $36,000
EXAMPLE 3
Above the Phase in Range
If the taxable income of the taxpayer is above the Threshold Amount plus the Phase in Range, the formula is
The lesser of— (1) 20 percent of the QBI; or (2) The greater of (the “W-2 Wage/Basis Limitation”): (i) 50 percent of W-2 wages or (ii) The sum of 25 percent of W-2 wages + 2.5 percent of the UBIA.
If the taxable income of the taxpayer is above the Threshold Amount plus the Phase in Range
In other words, the full “W-2 Wage/Basis Limitation” is taken into account. In addition, at this level of taxable income, SSTB’s do not qualify to take the § 199A Deduction.
1. Facts a. D is an unmarried individual who operates a non-service business as a sole proprietorship. b.
QBI is $1,000,000 in 2018.
c.
W-2 Wages = $100,000, UBIA = 0
d. After allowable deductions unrelated to the business, D's total taxable income for 2018 is $980,000. 2.
Calculations:
Step 1. Calculate the QBI Component: .20 x QBI = .20 x $1,000,000 = $200,000 Step 2. Calculate the W2/Basis Limitation The greater of: (1) .50 W2 = .50 x $100,000 = $50,000 (2) .25 W2 + .025 UBIA = (.25 x 100,000) + (.025 x 0) = ($25,000 + 0) = $25,000 W-2 Wage/Basis Limitation = $50,000
EXAMPLE 4
Step 3. Determine the Preliminary § 199A Deduction The § 199A Deduction is the lesser of the (i) QBI Component ($200,000), and (ii) the W-2 Wage/Basis Limitation ($50,000), or $50,000. Step 4. Apply the Taxable Income Limitation The § 199A Deduction is equal to the lesser (i) the Preliminary § 199A Deduction ($50,000), or (ii) 20% of the C’s taxable income, calculated without net capital gain and the Sec. 199A deduction (.20 x $980,000 = $196,000) Step 5. The § 199A Deduction Amount The § 199 Deduction is $50,000
EXAMPLE 4
Interactive Exercise 6 The threshold amount for single taxpayers in 2019 is: A. $157,500 B. $315,000 C. $207,500
Interactive Exercise A is Correct - this is the threshold amount for taxpayers other than married filing jointly taxpayers.
Interactive Exercise B is Incorrect - this is the threshold amount for married filing jointly taxpayers
Interactive Exercise C is Incorrect - this is the top of the phase in range for taxpayers other than married filing jointly taxpayers.
Unit Five - Specified Service Trade or Business
After completing this Unit, you will be able to:
›
Define what constitutes a “specified service trade or business” for purposes of § 199A
›
Understand the tax effect of being a “specified service trade or business”
for purposes of § 199A ›
Learn how the calculate the of § 199A when the SSTB is below and above the threshold amount
SPECIFIED SERVICE TRADE OR BUSINESS EXCLUSION
› Generally, a specified service trade or business is excluded from the definition of qualified trade or business. › Therefore, no deduction is generally allowed with respect to the income of a specified service trade or business. › However, if a taxpayer's taxable income is below an applicable threshold amount, the exclusion does not apply and the taxpayer is allowed a deduction with respect to the income of a specified service trade or business. › The specified service trade or business exclusion phases in for a taxpayer with taxable income within the Phase In Range.
› If taxable income exceeds the Phase In Range – No Deduction
Specified Service Trade or Business or SSTB. The term “specified service trade or business� is defined as any trade or business which is any of the following fields: -
Health
-
Law
-
Accounting
-
Actuarial science
-
Performing Arts
-
Consulting
-
Athletics
-
Financial Services
-
Brokerage Services
-
Investing and Investment Management
-
Trading / Dealing in Securities, or
-
Any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners
Meaning of “trade or business” where the principal asset of such trade or business is the reputation or skill of one or more employees or owners.
The term any “trade or business” where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners means any trade or business that consists of any of the following (or any combination thereof): ―
A trade or business in which a person receives fees, compensation, or other
―
A trade or business in which a person licenses or receives fees,
income for endorsing products or services,
compensation or other income for the use of an individual's image, likeness, name, signature, voice, trademark, or any other symbols associated with the individual's identity,
―
Receiving fees, compensation, or other income for appearing at an event or on radio, television, or another media format
Meaning of “trade or business” where the principal asset of such trade or business is the reputation or skill of one or more employees or owners.
The term any “trade or business” where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners means any trade or business that consists of any of the following (or any combination thereof): ―
A trade or business in which a person receives fees, compensation, or other income for endorsing products or services,
―
A trade or business in which a person licenses or receives fees,
compensation or other income for the use of an individual's image, likeness, name, signature, voice, trademark, or any other symbols associated with the individual's identity,
―
Receiving fees, compensation, or other income for appearing at an event or on radio, television, or another media format
“Specified Service Trade or Business” or “SSTB”
An SSTB also includes any trade or business: > That provides 80 percent or more of its property or services to an SSTB and > There is 50 percent or more common ownership of the trades or businesses
49% 51%
49%
80%
“Specified Service Trade or Business” or “SSTB”
If a trade or business provides less than 80 percent of its property or services to an SSTB within the meaning of this section but .. > …there is still 50 percent or more common ownership of the trades or businesses, > That portion of the trade or business of providing property or services to the 50 percent or more commonly-owned SSTB is treated as a part of the SSTB
49% 51%
49%
60% 80%
SSTB Exclusion ▪ If the individual's taxable income is below the phase-in range - then the individual's share of QBI, W-2 wages, or UBIA of qualified property attributable to an SSTB do not apply ▪ If the individual's taxable income is within the phase-in range - then only the Applicable Percentage of QBI, W-2 wages, and UBIA of qualified property for each SSTB is taken into account for purposes of determining the individual's section 199A deduction ▪ If the individual's taxable income exceeds the phase-in range - then none of the individual's share of QBI, W-2 wages, or UBIA of qualified property attributable to an SSTB may be taken into account for purposes of determining the individual's § 199A deduction
Below the Threshold Amount
THRESHOLD AMOUNTS AND PHASE-IN Specified Service Business Phaseout fully phased in: ― Joint filers if taxable income is in excess of $315,000 plus $100,000. ― Other taxpayers if taxable income is in excess of $157,500 plus $50,000. Married Jointly Filer
Taxable Income
Specified Service Business Phaseout
$315,000
None – 20% of QBI
In between
Pro rata share of reduction of 20%
$415,000
Fully Phased in No Deduction
1. Facts. a. M is engaged in an SSTB. B and W are married and file a joint individual income tax return. B is a shareholder in M, an entity taxed as an S corporation. b.
B's share of the M's QBI is $120,000 in 2018.
c. B's share of the W-2 wages from M in 2018 is $40,000; M holds no qualified property. d.
B and W’s joint taxable income for 2018 is $300,000.
2.
Calculations
Step 1. QBI Component - Thus, the QBI component of B’s section 199A deduction is equal to $24,000 ( 20% of B's share M's QBI of $24,000). Step 2. The W-2 Wage/Basis Limitation: Does not apply Step 3. The Taxable Income Limitation - .20 x TI = .20 x $300,000 = $60,000
Step 4. § 199A Deduction - B and W's section 199A deduction is equal to the lesser of 20% of the QBI from the business ($24,000) or 20% of B's and C's taxable income ($60,000). Therefore, B and W's § 199A deduction is $24,000.
EXAMPLE 5
Within the Phase in Range
Within the Phase In Range If the individual's taxable income is within the phase-in range – the determination of the § 199A deduction is much the same as for other taxpayers (i.e., the W-2 Wage/Basis Limitation is phased in by calculation of the Reduction Amount) However only the “Applicable Percentage” of QBI, W-2 wages, and UBIA of qualified property for each SSTB is taken into account for purposes of determining the individual's § 199A deduction “Applicable Percentage” = 1.00 - [(Taxable Income – Threshold Amount)/$50,000*] (*$100,000 in the case of a joint return).
1. Facts. a. M is engaged in an SSTB. B and C are married and file a joint individual income tax return. B is a shareholder in M, an entity taxed as an S corporation. b.
M holds no qualified property. B's share of the M's QBI is $300,000 in 2018.
c.
B's share of the W-2 wages from M in 2018 is $40,000, there is no UBIA.
d.
B and C's taxable income for 2018 is $375,000.
2.
Calculations
Step 1. One Additional Step - Application of the Applicable Percentage. Applicable Percentage = 100% - [[TI – TH]/100,000] Applicable Percentage = 1.00 – [$375,000 - $315,000]/100,000 =1.00 - .60 = .40 or 40% The Applicable Percentage of B's QBI is $120,000 ($300,000 x 40% = $120,000) The Applicable Percentage of B's share of W-2 wages is $16,000 ($40,000 x 40% = $16,000).
EXAMPLE 6
Step 2. Calculate the QBI Component The Applicable Percentage of B's QBI is $120,000 ($300,000 x 40% = $120,000)
20% of B's share of M's QBI of $120,000, as adjusted is $24,000. Step 3. Calculate the W-2 Wage/Basis Limitation. Next, B and C must determine 50% of B's share of M's W-2 wages as limited by the Applicable Percentage, as calculated previously - $16,000. 50% of B's share of M's W-2 wages of $16,000 is $8,000. Because 50% of B's share of M's W-2 wages ($8,000) is less than 20% of B's share of M's QBI ($24,000), B and C's must determine the QBI component of their section 199A deduction by reducing 20% of B's share of M's QBI by the Reduction Amount.
EXAMPLE 6
Step 4. Calculate the Reduction Amount B and C are in the phase-in range ([$375,000-$315,000]/100,000) that is, their taxable income exceeds the threshold amount by $60,000 and their phase-in range is $100,000). First calculate the Excess Amount, which is the excess of 20% of B's share of M's QBI, as adjusted, or $24,000, over 50% of B's share of M's W-2 wages, as adjusted, of this example, or $8,000. Thus, the Excess Amount is $16,000 ($24,000 - $8,000 = $16,000). Next calculate the Reduction Amount, which is equal to ([$375,000$315,000]/100,000) x the Excess Amount) or (.60 x 16,000) = $9,600.
Step 5.
Calculate the QBI Component
The QBI component is equal to $14,400, B's share M's QBI of $24,000, as adjusted reduced by the Reduction Amount ($9,600). Step 6 Taxable Income Limitation. B and C's ยง 199A deduction is equal to the lesser of 20% of the QBI from the business as limited ($14,400) or 20% of B's and C's taxable income ($375,000 x 20% = $75,000). Therefore, B and C's ยง 199A deduction is $14,400 for 2018.
EXAMPLE 6
Above the Phase in Range
Unit Six - Special Rules
After completing this Unit, you will be able to: ›
Understand when trades or businesses can be aggregated in determining a taxpayer’s § 199A deduction ›
Learn the tax effect of a net QBI loss in terms of netting and carryovers › Understand how trusts and estates calculate an pass through the § 199A deduction
Netting and Carryovers
Multiple QBs
‡ If an individual's QBI from at least one trade or business is less than zero, the individual must offset the QBI attributable to each trade or business that produced net positive QBI with the QBI from each trade or business that produced net negative QBI in proportion to the relative amounts of net QBI in the trades or businesses with positive QBI ‡ The adjusted QBI is then used in calculating the QBI component ‡ The W-2 wages and UBIA of qualified property from the trades or businesses which produced net negative QBI are not taken into account for purposes of the W2/Basis Limitation and are not carried over to the subsequent year
Activity
QBI
Allocation of Negative QBI
QBI After Negative QBI Allocation
1
$250,000
($62,500)
$187,500
2
$150,000
($37,500)
$112,500
3
($100,000)
Net QBI
$300,000
$300,000
Carryover of Negative Total QBI amount ‡ If an individual's QBI from all trades or businesses combined is less than zero, the QBI component is zero for the taxable year ‡ This negative amount is treated as negative QBI from a separate trade or business in the succeeding taxable year of the individual for purposes of § 199A and this section ‡ This carryover rule does not affect the deductibility of the loss for purposes of other provisions of the Code ‡ The W-2 wages and UBIA of qualified property from the trades or businesses which produced net negative QBI are not carried over to the subsequent year
Carry Over Rules
Carryover of Losses Assume a taxpayer generates a $1,000 loss from a qualified trade or business during the year ended December 31, 2018. During the year ended December 31, 2019, the taxpayer generates $1,500 of qualified business income. Under the carryover loss rule, and ignoring other limitations, the taxpayer would calculate a QBI Deduction of $100 as follows: QBI Deduction
Amount
Deduction Percentage
Allowable Deduction
Qualified Business Income
$1,500
20%
$300
($1,000)
20%
( $200)
Carryover Loss Amount Total ยง 199A Deduction
$100
Negative combined qualified REIT dividends/qualified PTP income
‡ If the combined amount of REIT dividends and qualified PTP income is less than zero, the portion of the individual's § 199A deduction related to qualified REIT dividends and qualified PTP income is zero for the taxable year ‡ The negative combined amount must be carried forward and used to offset the combined amount of REIT dividends and qualified PTP income in the succeeding taxable years of the individual for purposes of § 199A and this section ‡ This carryover rule does not affect the deductibility of the loss for purposes of other provisions of the Code
Aggregated Trade or Business
Overview If an individual chooses to aggregate trades or businesses under the rules of ยง 1.199A-4, the individual must combine the QBI, W-2 wages, and UBIA of qualified property of each trade or business within an aggregated trade or business prior to applying the W-2 wages and UBIA of qualified property limitations.
– An individual or “Relevant Passthrough Entity” (“RPE”) may be engaged in more than one trade or business
Scope and Purpose
–
Except when aggregated - each trade or business is a separate trade or business for purposes of applying the § 199A limitations
–
In this section, we will discuss the rules to allow individuals to aggregate trades or businesses, treating the aggregate as a single trade or business for purposes of applying the § 199A limitations
– Trades or businesses may be aggregated only to the extent provided in the Regulations, but aggregation by taxpayers is not required
Aggregation Rules General rule. Trades or businesses may be aggregated only if an individual can demonstrate that: ― The same person or group of persons, directly or indirectly, owns 50 percent or more of each trade or business to be aggregated ― The ownership described exists for a majority of the taxable year in which the items attributable to each trade or business to be aggregated are included in income ― All of the items attributable to each trade or business to be aggregated are reported on returns with the same taxable year, not taking into account short taxable years
51%
Aggregation Rules ― None of the trades or businesses to be aggregated is a SSTB; and ― The trades or businesses to be aggregated satisfy at least two of the following factors (based on all of the facts and circumstances): ― The trades or businesses provide products and services that are the same or customarily offered together ― The trades or businesses share facilities or share significant centralized business elements, such as personnel, accounting, legal, manufacturing, purchasing, human resources, or information technology resources ― The trades or businesses are operated in coordination with, or reliance upon, one or more of the businesses in the aggregated group (for example, supply chain interdependencies)
Aggregation Rules Operating rules - Individuals ― An individual may aggregate trades or businesses operated directly and the individual's share of QBI, W-2 wages, and UBIA of qualified property from trades or businesses operated through RPEs
― For those trades or businesses directly operated by the individual, the individual computes QBI, W-2 wages, and UBIA of qualified property for each trade or business before applying these aggregation rules ― If an individual aggregates multiple trades or businesses, the individual must combine the QBI, W2 wages, and UBIA of qualified property for all aggregated trades or businesses for purposes of applying the W-2 wage and UBIA of qualified property limitations ― Multiple owners of an RPE need not aggregate in the same manner
Aggregation Rules Operating Rules - RPEs
An RPE may aggregate trades or businesses operated directly or through a lower-tier RPE to the extent an aggregation is not inconsistent with the aggregation of a lower-tier RPE. ― If an RPE itself does not aggregate, multiple owners of an RPE need not aggregate in the same manner ― If an RPE aggregates multiple trades or businesses, the RPE must compute and report QBI, W-2 wages, and UBIA of qualified property for the aggregated trade or business ― An RPE may not subtract from the trades or businesses aggregated by a lower-tier RPE but may aggregate additional trades or businesses with a lower-tier RPE's aggregation if the rules of this section are otherwise satisfied
Application to Trust and Estates
In General ✓ A trust or estate computes its § 199A deduction based on the QBI, W-2 wages, UBIA of qualified property, qualified REIT dividends, and qualified PTP income that are allocated to the trust or estate ✓ An individual beneficiary of a trust or estate takes into account any QBI, W-2 wages, UBIA of qualified property, qualified REIT dividends, and qualified PTP income allocated from a trust or estate in calculating the beneficiary's § 199A deduction, in the same manner as though the items had been allocated from an RPE ✓ A trust or estate is treated as an RPE to the extent it allocates QBI and other items to its beneficiaries and is treated as an individual to the extent it retains the QBI and other items
Grantor Trusts
To the extent that the grantor or another person is treated as owning all or part of a trust under sections 671 through 679, such person computes its ยง 199A deduction as if that person directly conducted the activities of the trust with respect to the portion of the trust treated as owned by the grantor or other person
Non-Grantor Trusts and Estates Calculation at Entity Level
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A trust or estate must calculate its QBI, W-2 wages, UBIA of qualified property, qualified REIT dividends, and qualified PTP income
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The QBI of a trust or estate must be computed by allocating qualified items of deduction described in § 199A(c)(3) in accordance with the classification of those deductions which are directly attributable to one class of income and deductions not directly attributable are allocated in a manner consistent with those rules
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Any depletion and depreciation deductions and any amortization deductions that otherwise are properly included in the computation of QBI are included in the computation of QBI of the trust or estate, regardless of how those deductions may otherwise be allocated between the trust or estate and its beneficiaries for other purposes of the Code
Allocation Among Trust or Estate and Beneficiaries –
The QBI, W-2 wages, UBIA of qualified property, qualified REIT dividends, and qualified PTP income of a trust or estate are allocated to each beneficiary and to the trust or estate based on the relative proportion of the trust's or estate's distributable net income (DNI)
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For this purpose, the trust's or estate's DNI is determined but without regard to § 199A
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If the trust or estate has no DNI for the taxable year, any QBI, W-2 wages, UBIA of qualified property, qualified REIT dividends, and qualified PTP income are allocated entirely to the trust or estate
QBI, W2 Wages UBIA REIT d, PTP
DNI
Threshold Amount –
The Threshold Amount applicable to a trust or estate is $157,500 for any taxable year beginning before 2019
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For purposes of determining whether a trust or estate has taxable income in excess of the threshold amount, the taxable income of the trust or estate is determined after taking into account any distribution deduction
Electing Small Business Trusts –
An “Electing Small Business Trust” (“ESBT”) is entitled to the deduction under § 199A
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The S portion of the ESBT must take into account the QBI and other items from any S corporation owned by the ESBT
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The grantor portion of the ESBT must take into account the QBI and other items from any assets treated as owned by a grantor, and
– The non S portion of the ESBT must take into account any QBI and other items from any other entities or assets owned by the ESBT –
For purposes of determining whether the taxable income of an ESBT exceeds the threshold amount, the S portion and the non-S portion of an ESBT are treated as a single trust
Anti-Abuse Rule for Creation of a Trust to Avoid Exceeding the Threshold Amount A trust formed or funded with a principal purpose of avoiding, or of using more than one, threshold amount for purposes of calculating the deduction under ยง 199A will not be respected as a separate trust entity for purposes of determining the threshold amount for purposes of ยง 199A
Quizzer 1. What is the definition of “rental real estate enterprises”? a. b. c. d.
An interest in real property or multiple properties held for the production of rents. A residential real estate property A commercial real estate property A mixed use real estate property
2. Which of the following is not a requirement needing to be satisfied during the taxable year with respect to the rental real estate enterprise?
a. b. c.
d.
At least 250 hours of “rental services” must be performed each year with respect to the enterprise, beginning prior to January 1, 2023. Separate books and records must be maintained for each real estate enterprise reflecting income and expenses of the enterprise. Taxpayers must keep contemporaneous records (i.e., time reports, logs, or similar documents) regarding the number of hours of all services performed for the enterprise, as well as a description of such services, including who the service was performed by and on what date such service was performed. The value of the real estate property must be less than $10,000,000.
3. What is the definition of “Qualified Business Income?” a. b. c. d.
The net amount of “qualified items” of income, gain, or deduction, and loss with respect to any qualified trade or business of the taxpayer. To the extent provided in regulations, any payment described in section 707(a) to a partner for services rendered with respect to the trade or business. Reasonable compensation paid to the taxpayer by any qualified trade or business of the taxpayer for services rendered with respect to the trade or business. Any guaranteed payment described in section 707(c) paid to a partner for services rendered with respect to the trade or business.
4. Which of the following is not an exclusion as a qualified item of income, gain, deduction, or loss: a. b. c. d.
Any item of short-term capital gain, short-term capital loss, long-term capital gain, or long-term capital loss. Any real property acquired for the purpose of acquiring rent. Any interest income other than interest income which is properly allocable to a trade or business. Any item of gain or loss described in subparagraph (C) or (D) of Section 954(c)(1) (applied by substituting “qualified trade or business” for “controlled foreign corporation”).
5. What is the definition of “qualified REIT dividend?” a.
b.
c. d.
The sum of (1) the net amount of such taxpayer’s allocable share of income, gain, deduction, and loss from a publicly traded partnership plus (2) any gain or loss attributable to assets of the publicly traded partnership giving rise to ordinary income that is considered attributable to the trades or businesses conducted by the partnership. Items of income, gain, deduction, and loss to the extent such items are (1) effectively connected with the conduct of a trade or business within the United States; and (2) included or allowed in determining taxable income for the taxable year. Any dividend from a REIT received during the taxable year which: (1) is not a capital gain dividend, and (2) is not qualified dividend income. For any taxable year, the net amount of “qualified items” of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer.
6. What is the definition of “qualified publicly traded partnership income?” a. The sum of (1) the net amount of such taxpayer’s allocable share of income, gain, deduction, and loss from a publicly traded partnership plus (2) any gain or loss attributable to assets of the publicly traded partnership giving rise to ordinary income that is considered attributable to the trades or businesses conducted by the partnership. b. Items of income, gain, deduction, and loss to the extent such items are (1) effectively connected with the conduct of a trade or business within the United States; and (2) included or allowed in determining taxable income for the taxable year. c. Any dividend from a REIT received during the taxable year which: (1) is not a capital gain dividend, and (2) is not qualified dividend income. d. For any taxable year, the net amount of “qualified items” of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer.
7. What is the threshold amount applicable to a trust or estate for taxable years beginning after 2018? a. $150,500 b. $157,500 c. $175,500 d. $215,500 8. What is the definition of “unadjusted basis immediately after acquisition?” a. b. c. d.
The adjusted tax basis of the property. The net book value of the property. 110% of the cost of the property. The basis of qualified property on the date the property is placed in-service date.
9. When computing the § 199A deduction, what is considered to be the “excess amount?” a. 30% QBI over the W-2 Wage/Basis Limitation as otherwise calculated. b. 10% QBI over the W-2 Wage/Basis Limitation as otherwise calculated. c. 20% QBI over the W-2 Wage/Basis Limitation as otherwise calculated. d. 27% QBI over the W-2 Wage/Basis Limitation as otherwise calculated. 10. Which of the following is not part of the three-step process to determine the W-2 wage component of the § 199A deduction calculation the taxpayer must properly allocate to QBI? a. Determine the total amount of W-2 wages treated as paid by the taxpayer for the taxable year. b. Allocate the W-2 wages between or among one or more trades or businesses. c. Determine the amount of such wages with respect to each trade or business, which are allocable to the QBI of the trade or business (or aggregate trade or business). d. Determine the “QBI” of the taxpayer.