Starting in 2018, taxpayers other than C Corporations will be able to deduct up to twenty percent of their pass-through income from their taxable income. This deduction is known as the Qualified Business Income Deduction (QBID) or Section 199A Deduction, and it will basically be twenty percent of the business income a taxpayer reports on their Schedule C’s (or Schedule F’s in the case of farm income) as well as certain income that they receive from Schedule K-1’s. Also, some rental income will qualify for the deduction.
On the new Form 1040, the QBID will be entered as a “below the line” deduction and it will be in addition to any standard or itemized deduction taken on the return. Because it is entered as a reduction to the taxpayer’s AGI, the QBID will not impact the calculation of earned income. Thus, the QBID will not impact items on the tax return that use earned income to calculate a credit such as the Child Tax Credit and Earned Income Credit. The QBID will also not reduce the income amount used to calculate any Self-Employment Tax that may be imposed on the income coming from the pass-through business.
The first step to understanding the Qualified Business Income Deduction is knowing what income is eligible for this treatment. “Qualified Business Income” is generally defined as income that relates to the conduct of an entity’s business and 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. For most small business owners, this income will consist of what is reported as their Net Profit (or Loss) on a Schedule C or what is considered “Ordinary Income” on a Schedule K-1.
If the taxpayer’s income is below $157,500 or $315,000 for Married Filing Joint, the QBID will normally not be restricted and will be 20% of the net Qualified Business Income recognized on the tax return from all sources, or (2) 20% of the taxpayer’s taxable income minus the net capital gains recognized on the return. For most taxpayers, it is anticipated that the QBID will be calculated automatically in the program. If the taxpayer’s income is above $157,500 (or $315,000 for Married Filing Jointly), the QBID becomes subject to multiple limitations and it can be restricted based on the following items:
- The type of business that produces the income,
- The level of taxable income on the return,
- The W-2 wages paid by the business and
- The unadjusted basis of property owned by the business.
As tax season approaches, TaxSlayer Pro will publish additional guides and resources in the Knowledgebase on the QBID as guidance is forthcoming from the IRS on the reporting requirements for the deduction. Also, a summary of the Section 199A deduction was featured in our November edition of the ProSupport newsletter, The Support Connection for our preparers. Finally, we will publish a series of additional blog articles on the following dates to assist our preparers with the new deduction.
- January 2, 2019 – How the QBID is Calculated
- January 3, 2019 – How the Program Will Treat the QBID
- January 4, 2019 – How a Personal Services Business can impact the QBID
- January 5, 2019 – How the QBID can impact the Accuracy Related Penalty for Substantial Underpayment.