I have written about the QBI (qualified business deduction) a few times. And, it is now the law of the land- affecting each and every pass-through entity.

You do recall that a pass-through entity is a business that passes the profits and losses through directly to the stockholders. Which means
• an unincorporated business (often called a solopreneurship), which files a Schedule C attachment to the personal 1040.
• A partnership, which files Form 1065, with K-1’s (akin to W-2) detailing the pass-through details to each partner.
• An LLC that is NOT operating as a partnership or a corporation, which means this can be a disregarded entity (one stockholder) that files a Schedule C or a 1065 covering more than one stockholder. This formulation lets the business allocate profits, losses, and capital to the partners on an almost at-will basis
• An S entity (which can be a corporation that has agreed to operate as a ‘small’ (not in size, in regulations) business or an LLC that agreed to operate as an S). This means the entity files Form 1120S, with K-1s issued to each partner.
• Trusts and estates that file Form 1041, with K-1s to each member.
• A publicly traded partnership (PTP). Most often these are real-estate ventures (including REIT’s -real estate investment trust) that yield dividends to their partners. (Qualified REIT dividends may not include capital gains; PTP payments for income, gains, deductions, and losses work- as long as they are not part of a disallowed enterprise. [See SSTB below. Then, the income must be apportioned between SSTB and non-SSTB monies.])
• Agricultural or horticultural cooperatives.

Unless the firm is filing a Schedule C (a ‘schedule’ of the 1040), all the above entities above are required to file their tax returns by 15 March. (This gives the K-1 recipients a month to file their personal taxes.) Schedule C filers must file this schedule along with their 1040’s by 15 April. (I have one more exception listed below- Schedule E filers- which have very special provisions to qualify).

Another definition is needed- SSTB. Specified services, trades, or businesses. These are entities that operate in the fields of health, law, accounting, actuarial sciences, financial services (including investment management, securities trading, commodities), consulting, performing arts, and/or athletics; as you can see these businesses are fully reliant on the skill or reputation of at least one of its employees or owners. So, any such business has special limitations when it comes to QBI. That limitation where the QBI can be taken is $ 315K for married couples filing jointly; everyone else has a $ 157.5K limitation. (These limits will be adjusted for inflation.)

Another inclusion- perhaps. Rental businesses. That is as long as the activity is a Section 162 trade or business. That means you (if this is a Schedule E filing) You must spend a certain amount of time maintaining and operating the property or properties. (You need a LOG!!!)

Here’s another kicker. You cannot combine residential real estate and commercial real estate within the same enterprise. You need two (or more) separate entities. And, the residential real estate enterprise must have you (the person hoping to obtain a QBI) involved for 250 hours or more. They can be performed by the owner, by employers, by agents and/or independent contractors. (Negotiating leases, verifying tenant information, collecting rent, purchasing materials, maintenance, supervision- all those activities count.)

If you are entitled to a QBI, that means that up to 20% of the qualified net business income (from the qualified trades or businesses) can pass through to the partners or stockholders without incurring income taxes.

The QBI is reduced by the deductible portion of the self-employment taxes, self-employed health insurance, and/or contributions to retirement or pension plans. (Any interest expenses that are incurred to purchase the partnership or S entity are also not allowed to be included in the deductions that affect QBI.) Since QBI only apply to United States business, foreign currency gains and losses can’t apply.

Generally, the QBI deduction is the lesser of the QBI component from the various entities, supplemented by 1/5 (20%) of the sum of any qualified REIT dividends and qualified PTP income OR 1/5 (or 20%) of the taxable income less the net capital gain. (The net capital gain is the sum of the qualified dividends as denoted on Form 1040- line 3A, plus the smaller of the amounts on Schedule D (capital gains) line 15 or 16- unless those are zero or a net loss, which means the capital gains are zero. However, if Schedule D is not required, it will be the gain on Schedule 1- line 13- of Form 1040.)

Guaranteed payments received from a partnership, reasonable compensation received from an S entity, or payments to a partner that are not related to services for the business are not deductible.

All K-1’s now include a separate form detailing the qualified business income, the share of W-2 wages paid by the entity, and the allocation for qualified property. Why those last few items?
Because they provide the taxpayer the potential to claim a QBI even if their income exceeds those threshold limits. Because a credit exists for the property purchased and the W-2 wages paid, that raises the threshold slightly. These work only within a small phase-in range. (The phase-in range adds $ 100K to the income limitations for married folks filing jointly and $ 50K to everyone else’s income- meaning the totals where there QBIO is no longer deductible are $ $415K for joint filers or $ 207.5K for singles.)

And, those agricultural and horticultural coops? They have special rules. If the taxpayer looking to oblige themselves of the QBI deduction is a patron of those co-ops, they are required to reduce the QBI by the lesser of the 9% of the qualified business income (QBI) that is derived from the business of the coop- or 50% of the W-2 wages paid by the coop- whichever is lesser. If the taxpayer is not a patron of the coop- no such reduction is required.

Now, if the entity is losing money, then the W-2 wages or property purchases are not taken into account- nor can they be carried over to a future year. As you might suspect from this statement, there is another kicker for the QBI. If the overall QBI for all the businesses is less than zero for a given year- the NEGATIVE amount gets carried over to the next year and will reduce the QBI for that next year. The W-2 wages and property acquisitions do NOT also carry forward.

So, if there are multiple businesses, negative QBI gets deducted from those entities with a positive QBI.(In other words, there is a netting of the QBI.) With an exception- of course. A net loss in QBI doesn’t affect the REIT/PTP components- or vice versa. These are separately netted.

But, remember- once one’s income exceeds the thresholds- there is no QBI. Taxes are due on 100% of the taxpayer’s (or taxpayers’ ) income.

Doesn’t this make everything perfectly clear?