The Tax Cuts and Jobs Act created a new deduction for certain pass-through business income, known as the Qualified Business Income Deduction (QBID). The calculation of the QBID is complex, requiring the preparer to apply technical rules, and it involves detailed recordkeeping on behalf of the taxpayer. The QBID calculation is on one of two worksheets, both of which are on TaxSlayer Pro.
The specific worksheet used to calculate the deduction primarily depends on the taxpayer’s taxable income (without consideration of the QBID). For taxpayers below the income threshold of $157,500 (or $315,000 for Married Filing Jointly), the QBID will be calculated on the “Simplified Worksheet.” This simplified worksheet can be found in the instructions for Form 1040 and is a straightforward calculation.
However, for taxpayers with income at or above the taxable income threshold, the calculation is more complicated and is subject to additional limitations. For these higher-income taxpayers, the QBID calculation is on Form 8995. Also, there are limited situations, typically involving income from a specified agricultural or horticultural cooperative, which may require a taxpayer with income below the thresholds of $157,500 (or $315,000 if Married Filing Jointly) to use Form 8995.
Whichever worksheet is used to calculate the QBID, the underlying calculation starts with a separate determination of the Qualified Business Income (QBI) for each taxpayer’s pass-through business. The actual allowed QBID comprises the qualified business income components of each pass-through business reported on the tax return.
Basically, the income or loss that qualifies is defined as such that relates to the conduct of a business, and it does not include investment income, guaranteed payments to partners for services rendered to the partnership, or the “reasonable compensation” paid to an owner for services rendered to the entity.
In TaxSlayer Pro, K-1 information must be reported in certain boxes to be considered qualified business income. The area to report QBI can be found on the following forms:
- Schedule C, (Form 1040), Line 31 – Net Profit (or Loss)
- Schedule F, (Form 1040) Line 34 – Net Profit (or Loss)
- Schedule K-1 (Form 1065), Box 20, Code Z – Qualified Business Income
- Schedule K-1 (Form 1120S), Box 17V – Qualified Business Income
- Schedule K-1 (Form 1041), Line 20 – the fiduciary is required to provide a statement to the beneficiary with the Schedule K-1 (Form 1041) that specifies the portion of income that has been allocated to the beneficiary that is Qualified Business Income
Taxpayers with income (or loss) from rental property will not be eligible for the QBID when they hold the property for investment purposes. However, a taxpayer who owns rental property as a real estate business and can meet the standard of an active real estate business under the Section 199A regulations will also include their rental income (or loss) amounts reported on Schedule E, Line 26.
When the taxpayer’s income (including taxpayers that are considered Specified Service Businesses) is below $157,500 or $315,000 for Married Filing Jointly, the QBID will be the lesser of (1) 20% of the net Qualified Business Income (or Loss) from all sources plus 20% of any qualified REIT dividends and Publicly Traded Partnerships (PTP) income (or loss) recognized on the tax return, or (2) 20% of the taxpayer’s taxable income minus the net capital gains and qualified dividends recognized on the return.
This second provision is “income limitation.” It restricts taxpayers with significant capital gains and qualified dividend income from receiving the QBID on the portion of their income that has already received favorable tax treatment afforded by capital gains.
For taxpayers whose only income comes from pass-through businesses, the income limitation also reduces the allowed QBID. This occurs because the taxpayer’s taxable income before considering QBID will be lower than their income from the pass-through business because any adjustments have reduced taxable income, such as the deductible portion of self-employment taxes and the standard or itemized deduction.
When the taxpayer’s income is above $157,500 or $315,000 if Married Filing Jointly, the QBID is subject to further restrictions. For taxpayers with income above the threshold amounts who have income from a Specified Service Business, the QBID is phased out and eliminated once their taxable income reaches $207,500 or $415,000 if Married Filing Jointly.
To find out how to calculate QBID as a Specified Service Business, read here.
For higher-income taxpayers above the income threshold, the QBI used in determining the QBID is limited based on W-2 wages paid by the business and/or the qualified assets used by the business. Specifically, for taxpayers with income above the thresholds, the first aspect of determining the deduction is the Qualified Business Income component of the QBID. This QBI component is the lesser of the following:
- 20% of the Qualified Business Income comes from the trade or business. If multiple pass-through businesses are reported on the return, the QBI component is determined separately for each business. Any business with a loss will have that allocated proportionately among the taxpayer’s other pass-through businesses. The QBI for those businesses will be reduced by the amount of loss allocated. A separate form (Form 8995) is required to allocate losses among the QBI component for other businesses on the tax return.
- 50% of W-2 wages paid by that trade or business to generate the QBI, or if greater, 25% of W-2 wages paid by the trade or business plus 2.5% of the unadjusted basis of the qualified property used by the trade or business. For this calculation, the unadjusted basis of qualified property is generally defined as (A) the original cost of assets placed in service by the business in the past ten years and are still used by the business regardless of the asset’s condition or otherwise subjected to Section 179 or bonus depreciation treatment. And (B) the business is still depreciating the original cost of assets because the depreciation recovery period is over ten years.
For such higher-income taxpayers, the Qualified Business Income component will be determined based on the above criteria to obtain a total QBI component of all the separate pass-through businesses on the return. This total QBI component will then be added to 20% of any qualified REIT dividends and/or Publicly Traded Partnerships (PTP) income (or loss) recognized on the tax return to obtain the Qualified Business Income Deduction before the income limitation.
Then the actual allowed QBID will be the lesser of the Qualified Business Income component of all separately calculated business plus 20% of any qualified REIT dividends and/or Publicly Traded Partnerships (PTP) income (or loss). Or the income limitation, which is 20% of the taxpayer’s taxable income minus the net capital gains and qualified dividends recognized on the return.
This article was last updated on 10/31/2022.