QBI gets ‘formified’

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Qualified Business Income.

I’ve written about this before.    Most recently this past June.  So, why am I writing about this again?

Because, although I computed and provided the IRS a full accounting of Qualified Business Income for each of my clients that were so entitled, too many other practitioners didn’t- or played fast and easy with the rules and exceptions.  So, now the IRS has formalized the process with specific forms that must accompany tax submissions claiming the 20% reduction in taxable income.

Let’s first recount the particulars of this deduction.

The new (OK.  It’s 24 months old, but only been in effect since the 2018 tax filings) tax law afforded pass-through entities a  special tax break.  (A “pass-through’ is a business entity that is not taxed itself, but ‘passes through’ its income and deductions to those that own the entity.)  20% of their income would be exempt from income taxes- under certain conditions.  The first condition for the 2019 tax year is that (generally) one’s taxable income cannot exceed $ 160700 ($ 321400 for married couples).  (Yes, this can be extended upward to about $ 210700 [or 421400 for married couples], with certain provisos- and that number is adjusted each year.)

Of course, if one effects specified services, trades, or businesses, there are additional hoops.  So, doctors, lawyers, nurses, accountants, artists, athletes, stock brokers, and the like have special rules that govern this pass-through exemption.  Otherwise unincorporated businesses, partners in a partnership or LLC’s, S corporation shareholders, trusts and estates, REIT [real estate investment trust] partners, and cooperatives- pass-through businesses all– get this special tax relief.

How we handled QBI reporting for CY 2018

The form above is what we provided our clients and the IRS to justify the QBI deductions we employed on the tax return. But, now the IRS has developed (I have updated this post [4 January 2020, to include the final version of the form) Forms 8995 and 8995A.

As you can see, Form 8995 follows the format of what we used last year.  Line 1 [subs (i) through (v)] requires one to identify each pass-through business, with its name and Federal Employer Identification Number (FEIN), as well its specific Qualified Business Income (or Loss).   [Note:  Some folks may aggregate similar businesses together on an individual line; electing to do so- or having more than 5 pass-throughs will necessitate filing Form 8995A.]

The net of the income and losses reported in the far right column of the form are aggregated and totaled in Line 2.  (Some folks may have carry-forwards, which get included in Line 3.)  The net of these results is reported in Line 4.  One then multiplies this value to obtain the 20% deduction.

Then, REIT’s and Publicly Traded Partnership (PTP) contributions (and carryovers) are added to the mix- and the 20% exemption is computed, as shown in Lines 6 through 9.

The REIT’s, PTP’s. and pass-through results are then summed together in Line 10.

Then, there is the determination of whether one is entitled to this 20% reduction in income.  Line 11 requires one to list the adjusted gross income (AGI, as shown on Form 1040 or 1041) and reported capital gains  (Line 12), which is subtracted from the AGI (Line 13), which in turn is multiplied by 20%  in Line 14 to determine if one’s income is above or below the threshold for the 20% QBI exemption.  The lower amount of Line 10 (the potential QBI) or the income threshold (Line 14) sets the QBI.  This is then used to determine the taxes one owes the IRS.

I know- it seems complicated.  But, for practitioners like me, this is a breeze.Roy A. Ackerman, Ph.D., E.A.

 

Yeah, I bet this passed you by without a thought.  Yesterday was the 228th anniversary of Bill of Rights day.  Those 10 freedoms that are being withered away by the WrongWing, cutting our Freedom of Speech, our freedom from undue spying by our government, etc.   If we don’t relish them and hold them dear, the disregard of these vital freedoms will become rampant.

Bill of Rights depicted in cartoon format from 1971 Young Citizen teacher’s guide transparency by Syracuse University. Retrieved from http://govbooktalk.gpo.gov/2013/12/13/quiz-and-history-for-bill-of-rights-day-december-15/.

Take a moment to refresh yourself of the vital entitlements these first 10 amendments offer us citizens.

 

 

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