Review the following FAQs about the Qualified Business Income Deduction (QBI).
In what return type is the QBI deduction figured?
- Generally, a QBI deduction is figured in an individual return (1040). Some trusts may allow for a QBI Deduction as well.
The QBI deduction is available for income from what types of businesses?
- Qualifying taxpayers include those with a domestic business operated as a sole proprietorship or income received through a partnership (as a partner), S corporation (as a shareholder), or from a trust or estate (as a beneficiary). It also includes farms and certain rental properties that rise to the level of a trade or business.
What do I do if the K1 doesn’t have any information in the new QBI codes?
- If the taxpayer gets a K-1 that does not have any info in the new K1 codes, but you believe it should be a qualifying trade or business, the taxpayer should request a corrected K-1 from the partnership, scorp, or fiduciary. If the QBI info is not recorded in the codes, the IRS will assume it is not a qualifying business, so the taxpayer will not be allowed to take the deduction from the pass-through entity.
What should be entered in the Section 199A W-2 wages field on screens K1P, K1S, and/or K1F in an individual (1040) return?
- This amount gets passed through to the partner on the K1. Enter only the amount shown on the K1 for Section 199A W2 Wages.
Where can I see calculations for QBI and the QBI deduction?
- Review the Wks QBI Simple worksheet in view mode for limitations and calculation breakdown.
Are the thresholds for calculating the QBI deduction based on the amount of business income?
- No, the thresholds are based on the taxable income before any QBI deduction. In other words, the AGI minus the standard or itemized deduction amount (Form 1040, line 7 minus line 8).
What happens to the QBI deduction for a qualified business when qualified business income is between the thresholds?
- The limits (W2 and capital limits) are phased-in to determine the allowed deduction. Ranges are indicated below by filing status.
|Single, HOH, MFS, QW
||$157,500 - $207,500
||$315,000 - $415,000
What limitations affect the QBI deduction for a qualified business when income is in the phase-out range or over the threshold?
- Limitations include W-2 wage and capital property limits (UBIA).
What is a specified service trade or business (SSTB)?
- See QBI Deduction - Specified Service Trade or Business (SSTB) in Related Links below for details about SSTBs and the QBI deduction.
What if there is no qualified business income or loss?
- If there is no income, there is no deduction allowed for the current year. If there is a business loss it is carried over to the next year.
How is qualifying business income calculated when there are multiple businesses? What is the BAN field for?
- See QBI Deduction - Business Aggregation in Related Links below.
Does the business code on Schedule C affect the QBI Deduction?
- No, business codes do not determine or limit the availability of the qualified business income deduction.
- If the business should be treated as a "specified service trade or business (SSTB)" check the box on the C screen Treat as a "specified service business" and then review Wks QBI Simple to see if the deduction is still allowed. Some specified service businesses are still eligible for QBI.
How do I indicate that a Schedule C or F is considered to be a trade or business?
- In Drake Tax, entries on the C or F screens are generally considered to be related to a qualified trade or business venture. There is no checkbox to indicate whether the income or loss should be included in the calculation for QBI; it will be included by default.
- If you determine that the Schedule C or Schedule F activity is not a trade or business, enter a zero 0 in the Qualified Business Income (or loss) override field on the C or F screen. This will eliminate the QBI calculation for that activity.
How do I indicate that a Schedule E or Form 4835 is considered to be a trade or business?
- You must select whether or not the activity is considered to be a trade or business by indicating Yes or No in the drop list This activity is a trade or business in the QBI section of the screen. This entry is required to be made on each instance of screen E or 4835. If this is selected Yes, any income or loss from the activity will be included in the calculation of QBI deduction on the return.
- Note: If you select that the activity is a trade or business, you cannot change this selection in future years, unless facts and circumstances change.
Are W2 wages for Section 199A allocated based on shareholder percentage or officer salary in a s-corp return (1120S)?
- See QBI Deduction - W2 Wage Allocation 1120S in Related Links below.
Are deductions such as self-employment tax, the self-employed health insurance deduction, and SEP or Simple contributions taken into account when figuring the Qualified Business Income or Loss?
- Yes, the final regulations for QBI, page 44, state that:
- "Thus, for purposes of section 199A, deductions such as the deductible portion of the tax on self-employment income under section 164(f), the self-employed health insurance deduction under section 162(l), and the deduction for contributions to qualified retirement plans under section 404 are considered attributable to a trade or business to the extent that the individual’s gross income from the trade or business is taken into account in calculating the allowable deduction, on a proportionate basis."
- In Drake Tax, if the income is subject to SE tax, the taxpayer (spouse) is taking a self-employed health insurance deduction, or they have SEP or Simple Contributions, and the QBI Simple Wks is being used, this subtraction from the QBI will be shown as a separate line item before the QBI Deduction is calculated:
- Note: If the SEHI deduction is related to partnership or scorp income and it should not affect the QBI calculation, use the checkbox This deduction is attributable to a partnership or S corporation and should NOT reduce QBI on the SEHI screen.
The IRS provides more information in their Section 199A FAQs and Notice 2018-64.