In the 2018 tax program, the calculation of the Qualified Business Income Deduction (“QBID”) is found under the Tax Computation Section. The actual calculation of the deduction is done on one of two (2) worksheets (which were the subject of the January 2nd blog entry) depending on the income and items entered on the tax return. Then the allowed QBID will carry to Form 1040, Line 9 as a “below the line” deduction, and it is located on the tax return right below the Standard or Itemized Deduction. If a QBID is generated, the QBID worksheet can then be viewed from the main menu of the tax return under View Results or by selecting the view icon on the top of the program when on the QBID Menu.
The specific QBID worksheet used to calculate the deduction is automatically selected by the tax program and the worksheet that is used is primarily based on the taxable income threshold of $157,500 (or $315,000 for Married Filing Jointly). TaxSlayer Pro users will find that many items needed for the calculation of QBID are automatically calculated by the tax program and data flows into the applicable worksheet from other entries made in the return. However, some information and certain data needed for determining the QBID will have to be entered by the preparer to correctly calculate the QBID.
Basically, the 2018 tax program has been designed to automate much of the calculation of the QBID by gathering, whenever possible, information from the schedules or other sections of the tax return. For example, all the data that is entered on the return that will comprise taxable income and/or net capital gains is automatically pulled to the applicable QBID worksheet and used in the calculation of the limitations on the QBID (which is 20% of Taxable Income before the QBID).
Other data that is automatically pulled by TaxSlayer Pro into the QBID worksheets and the QBID menu are the following:
- All Qualified Business Income from any Form 1040, Schedule C and/or Schedule F will flow to the QBID worksheets. The income that comes from these pass-through businesses qualifies as QBI and is automatically pulled to the worksheets from the applicable schedules unless the taxpayer has marked that they do not materially participate in the business. In the case of real estate income or loss reported on Schedule E, the program will automatically pull the data to the QBID Worksheet only if the taxpayer materially participates, i.e., is a real estate professional. If the taxpayer does not materially participate in a business, any income or loss from that business is considered investment income and not QBI.
- All Section 199A information that is entered on the Schedule K-1 Entry Menus will carry to the worksheets. On each K-1 Entry Menu, there is an applicable section for Qualified Business Income, W-2 Wages and Qualified Property which aligns with the information contained on the three (3) different types of Schedule K-1’s. Starting in 2018, the entities that generate Schedule K-1’s (partnerships, S Corporations, and trusts and estates) have to report in the Other Information section of the Schedule K-1’s that they issue items needed by the partner, shareholder, or beneficiary to calculate any QBID that is predicated on that entity’s activities. The information from these pass-through businesses is entered on the K-1 Entry Menu under the applicable line and code associated with 199A Income, 199A W-2 Wages and 199A Qualified Property. The tax program will then automatically pull any of the 199A amounts entered on the applicable K-1 Entry Menus into the QBID worksheets. Also, in the case of a Publicly Traded Partnership (“PTP”), the applicable amounts of are also pulled to the QBID worksheet.
- REIT Dividends. These dividends also receive special treatment in the calculation of the QBID and the program will pull these amounts from the 1099-DIV menu (and the K-1 Menus).
- Qualified Property is tangible property that is subject to depreciation and is used by a trade or business to produce QBI. To be consider Qualified Property the property must have been placed in service either (a) within the past 10 years or (b) if more than 10 years is still being depreciated in accordance with its applicable recovery period established in the Internal Revenue Code (Section 168), e.g., real property, which can have a significantly longer recovery period. The tax program will calculate a Qualified Property amount for each pass-through business on the tax return based on the original cost and date placed in service information that was input into the depreciation module for that specific pass-through business (Schedule C, Schedule E, and/or Schedule F). This calculated amount will carry to the QBID worksheet and be used to calculate any limitation on the deduction for taxpayers above the threshold amounts. Any calculated amount for Qualified Property can be overridden if property that satisfies the criteria was not included in the depreciation module. The most common situation where a user may override the Qualified Property calculated amount occurs if the preparer had not previously done the tax returns for a taxpayer, but the taxpayer has property used in the business that was fully depreciated but had been placed in service within the 10-year look back period. The override of any calculated amount is found on the applicable Edit Menu for a Schedule C, Schedule E, or Schedule F under “Qualified Business Income Deduction Amounts.”
Information and data that is NOT automatically pulled by TaxSlayer Pro into the QBID worksheets and QBID menu are the following:
- W-2 Wages – Other than W-2 Wages that are identified on a Schedule K-1, no other W-2 Wages are pulled directly from any Schedule C or Schedule F. What constitutes W-2 Wages paid by these pass-through business does not correspond to anything specifically reported on Schedule C and/or Schedule F. Although these entities report labor costs under cost of goods sold and in the expense section, those entries are not the same as W-2 Wages for the limitations on QBID. Accordingly, the W-2 Wage information for a Schedule C or Schedule F business must be ascertained from the taxpayer’s records and it must be entered in the Edit Menu for a Schedule C, Schedule E, or Schedule F under “Qualified Business Income Deduction Amounts”.
- If the pass-through business is a Specified Service Business, this designation must be indicated in the Edit Menu for a Schedule C or Schedule F under “Qualified Business Income Deduction Amounts” and for a partnership, S Corporation, or estate or trust in the Heading Section of the respective K-1 Entry Menu. Tomorrow’s blog posting will address issues involving how a Specified Service Business can impact the QBID.