Page 7 - Tax Act First Look: The Complex New World Of The Qualified Business Deduction Rule

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for the taxable year. The determination of the deductible amount for each QBI is the lesser of (1) 20% of the taxpayer’s QBI as to each such qualified trade or business, or (2) the greater of 50% of the W-2 wages with respect to each QBI or the sum of 25% of W-2 wages with respect to each QBI plus 2.5% of the unadjusted basis immediately after the acquisition of all qualified property. If the taxpayer’s taxable income is below a specified threshold amount, the deductible amount for each qualified trade or business is generally equal to
Every partnership, S corporation, and sole proprietor- ship should immediately assess and project the various tax impacts of the TCJA on their federal and state tax liabilities.
n interest income other than interest income allocable to the trade or business n certain items of foreign base company income, i.e., certain net gains from com- modities transactions, foreign currency gains and income from notional principal contracts, as well as any item of deduc- tion or loss properly allocable to such excluded items; see IRC sections 954 (c)(1)(D), (E) and (F).
employee. A specified trade or business is one described in IRC section 1202(e)(3)(A), other than engineering or architecture—that is, any trade or busi- ness involving the performance of ser- vices in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial ser- vices, 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. A spec- ified service trade or business also includes services relating to investing and investment management, trading or deal- ing in securities [as per IRC section 475(c)(2)] and partnership interests or commodities [as defined in IRC section 475(e)(2)]. There is a limited exception provided to the specified service trade or business limitation if the taxable income of any taxpayer is less than $50,000 ($100,000 in case of a joint return; see IRC section 199A(d)(3).
In addition, QBI specifically does not include 1) reasonable compensation paid to the taxpayer by a QBI for ser- vices rendered with respect to the trade
20% of the QBI for each qualified trade or business. Partners in partnerships and shareholders of an S corporation take into account their pro rata share of the tax items of each QBI generated by the pass- through entity.
or business, 2) any guaranteed payment described in IRC Section 707(c) paid to a partner for services rendered to the trade or business, and 3) any payment described in IRC section 707(a) for ser- vices rendered to the trade or business, to the extent provided in regulations. For W-2 employee shareholders in an S corporation, for example, the com- pensation received by the employee shareholder, assuming such compensa- tion meets the requirements for deductibility under IRC section 162, will not qualify for the 20% deduction. In the partnership area, distributions in the form of advances under the regula- tions to IRC section 731 will not be treated as compensation received by the partner for services.
If the net amount of QBI from all qualified trades or business of a taxpay- er represents a loss, such loss is permit- ted to be carried forward in accordance with the new IRC section 199A(c)(2), but the deduction allowed in a subse- quent year is reduced (but not below zero) by 20% of any carryover qualified business loss.
The definition of qualified business income or loss set forth in the new IRC section 199A(c) includes, for any taxable year, the net amount of qualified items of income, gain, deduction, and loss, to the extent such items are effectively con- nected with the conduct of a trade or business within the United States (within the meaning of IRC section 864(c), replacing nonresident or foreign corpo- ration as defined terms) and are included or allowed in determining taxable income for the taxable year.
Under the new IRC section 199A(d), a qualified trade or business means any trade or business other than: a specified service trade or business or a trade or business of performing services as an
Example. Taxpayer has QBI of $20x from qualified business A and QBI of ($50x) from qualified business B in 2018. Taxpayer has no QBI in 2018 and the QBI (loss) of ($30x) is carried over into 2019. In 2019, taxpayer has QBI of $20x from qualified business A and $50x of QBI from qualified business B. In determining the carryover loss deduc- tion for 2019, the conference committee report states that the taxpayer can only reduce the QBI of $70x by only 20% (23% before final revision) of the ($30x) carryover qualified business loss.
Items not taken into account in com- puting QBI income or loss include (but are not limited to) the following:
n capital gains and losses
Under the new IRC section 199A, as mentioned above, qualified business
n dividends or deemed dividends
28 JANUARY 2018 / THE CPA JOURNAL