Can I evaluate how the new qualified business income deduction detailed in the Tax Cuts and Jobs Act will affect my taxpayer's 2018 return?
The Drake Tax Planner can be used to evaluate how changes to tax law and a taxpayer's personal changes might affect their next year's tax return. To access the Drake Tax Planner, open the taxpayer's return and click the Tax Planner icon at the top. The Drake Tax Planner is only available for individual 1040 returns. In Drake17, update 32, released on 03/28/2018, activates new fields and screens in data entry that will allow you to input information that is necessary to compute the new qualified business income deduction. These new fields are only used for calculating the potential QBI deduction in the Tax Planner - they do not affect the 2017 return or the Tax Act Impact worksheet*.
Note: This feature is meant to be used for preliminary analysis of next year's tax return as not all provisions from the Tax Cuts and Jobs Act have been addressed by the IRS at this time. Additional guidance from the IRS is necessary to be able to fully calculate this deduction. Override fields can be used to make adjustments to the qualified business income as needed, see below for details.
Sections on each of the following screens have been added to allow data entry related to the QBI deduction:
For partnership income:
- K1P screen, on the 1065 K1 13-20 tab
- E2 screen
Review additional information below.
For fiduciary income:
- K1F screen, on the 1041 K1 12-14 tab
- E3 screen
For s-corp income:
- K1S screen, on the 1120S K1 12-17 tab
- E2 screen
For other business income:
- Schedule C, Schedule F, and 4835 screens:
For rental income:
- Schedule E screen. Note that only certain rentals may qualify for this deduction. If the rental should be included in the deduction calculation, Y must be selected in the droplist Trade or business income for QBI deduction.
New QBI worksheets Wks QBI Summary, Wks QBI Non-service, and Wks QBI Service have been created based on Drake Tax’s preliminary analysis of the new law. These worksheets will populate in a Tax Planner return when entries have been made on the above screens, as applicable, and the deduction will be calculated automatically in 2018 tax planning scenarios. Be sure to select 2018 scenario when creating a new scenario in the Tax Planner:
A separate worksheet (either Wks QBI Service or Wks QBI Non-service) is generated for each business and calculates the actual qualified income from that business. The results from those worksheets carry to the Wks QBI Summary.
- Wks QBI Summary (QBI SUMM) summarizes the combined results of the two worksheets to determine the amount to carry to line 42 of Form 1040.
- Wks QBI Non-service (QBI_OTHR) is generated when there is business income relevant to the QBI from a business that is not a "Specified Service Business."
- Wks QBI Service (QBI_SERV) is generated when there is business income relevant to the QBI from a business that is from a "Specified Service Business." If a business should be treated as a "Specified Service Business," check the indicator box on the relevant screen (press F1 in this box for details):
- K1P screen > 1065 K1 13-20 tab
- K1S screen > 1120S K1 12-17 tab.
- C screen
A QBI screen is now available on the Adjustments tab if adjustments or overrides are needed for the QBI worksheets Wks QBI Summary, Wks QBI Non-service, and Wks QBI Service.
Definitions and Additional Information:
Qualified Business income is defined generally in the Tax Cuts and Jobs Act as follows:
"IN GENERAL—The term ‘qualified business income’ means, 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. Such term shall not include any qualified REIT dividends, qualified cooperative dividends, or qualified publicly traded partnership income."
QBI Deduction for Partnership Income:
If there are guaranteed payments or other non-qualified amounts on the K1P screen, an override may be needed on the Override qualified business income for this business line. According to the Tax Cuts and Jobs Act, Part II, page 13,
"Qualified business income shall not include—
(A) 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,
(B) any guaranteed payment described in section 707(c) paid to a partner for services rendered with respect to the trade or business, and
(C) 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."
While guaranteed payments are entered on the K1P screen, they are not subtracted from the business income for the purposes of calculating the QBI deduction. If you determine that there are amounts that should not be included in the qualified business income, the override will need to be used to show only the qualified business income amount.
For more information and other limitations, see the Tax Cuts and Jobs Act, starting in part II, section 11011. In addition, F1 field help is available on many of the fields to assist with definitions of selections and entries.
Review Tax Cuts and Jobs Act, Provision 11011 Section 199A - Deduction for Qualified Business Income FAQs for some frequently asked questions and answers from the IRS.
For more information about the Tax Planner in general, see Related Links below.
Note: These new entry fields do not affect the Tax Act Impact worksheet. The estimated QBI on the Tax Act Impact worksheet in the 2017 return is only computed based on the sum of the following:
- 20% of net Schedule C income
- 20% of net Schedule F income
- 20% of the sum of all 1065 K1 Income and 1120S K1 income
This may not be an accurate representation of the actual QBI as there may be applicable limits that have not been considered because necessary information is not available in the return and entries on the fields indicated above only flow to a tax planner return. For a more accurate estimate of tax implications and computation of the QBI, create a 2018 Tax Planning scenario and enter the necessary data on the applicable screens.