Business Issues. Chapter 10 pp National Income Tax Workbook

Transcription

1 Business Issues Chapter 10 pp National Income Tax Workbook

2 Qualified Business Income Deduction Overview p. 331 Lesser of 20% of QBI or 20% of taxable income Tax Inc w/o QBI deduction Tax Inc w/o net cap gain (LTCG, collectibles unrecaptured 1250, 1202, qualified div.) W-2 wage limit (based on taxable income) Specified service Tor B limit (based on taxable inc.) Allowed for AMT calculation, not for SE tax Deduction after AGI May not be allowed for state income tax

3 BASIC OVERVIEW NIB FRONT 1040 BACK 1040 WAGES SCH C,E,F SCH D SCH E PG. 1 & 2 AGI STD/ITEMIZE TAXABLE INCOME QBID SE TAX AGI

4 Qualified Business Income Deduction QBI Definition p. 331 Qualified income, gain, deduction, & loss with respect to a qualified T or B Not qualified REIT dividends or PTP income Not wages, salaries, guaranteed payments Other exclusions: List p. 331 Must be effectively connected w/us Section 1231 gains/losses if ordinary

5 ACRONYMS NIB & PGS

6 Definitions pp Aggregated T or B = grouped under 1.199A-4 Applicable % = % for phasein Phasein range = threshold + 100K (50K MFS) QBI = net qualified items income, gain, deduction, loss Reduction amount = reduction for phasein of W-2 wage limit Threshold amount = $315,000 ($157,500 MFS)

7 p. 509 Definitions Total QBI amount = QBI from all T or Bs T or B defined w/ reference to IRC 162 UBIA = unadjusted basis immediately after acquisition W-2 wages = wages allocable to QBI

8 Let s try to take this one bite at a time.. MFJ LESS THAN $315K ALL OTHERS LESS THAN $157,500 NIB $315,001-$415,000 SSTB Phase in Range [1-(taxable income- $315K) $100K] $157,501-$207,500 SSTB Phase in Range [1-(taxable income- $157,500) $50K] Over $415K SSTB NO QBID W-2 limitation greater of: A. 50% of w-2 wages paid or B. 25% of w-2 wages paid plus 2.5% of unadjusted basis of qualified property This info MUST come from the Sch C, F, K-1 of the Entity or no QBID Over $207,500 SSTB NO QBID W-2 limitation greater of: A. 50% of w-2 wages paid or B. 25% of w-2 wages paid plus 2.5% of unadjusted basis of qualified property

9 p. 509 Calculating Deduction Below Threshold 20% QBI + 20% REIT + 20% PTP Limited to 20% taxable income (less net capital gain)

10 BASIC FORMULA NIB Combined qualified business income CQBI REIT Dividends PTP Income Taxable Income LTCG 20% of the LESSOR OF

11 Qualified Business Income Deduction US Trade or Business p (c), Treas. Reg (b)(1) Income is effectively connected w/us Tor B if: 1. Business has office/fixed place in US; 2. Office/fixed place is material factor in the realization of income, gain; or loss, and 3. Activities at office/fixed place substantially contribute to realization of income, gain, loss Puerto Rico business = US Tor B if taxable in US

12 Example 13.1 WAGES SCH C,E,F SCH D FRONT 1040 BACK 1040 SCH E PG. 1 & 2 100K AGI STD/ITEMIZE TAXABLE INCOME QBID 81K p. 510 SE TAX AGI LESSOR OF 20% OF: $16,200 QBID

13 Example 13.2 p. 510 FRONT 1040 BACK 1040 AGI STD/ITEMIZE WAGES TAXABLE 74K SCH C,E,F 100K INCOME - 7K SCH D 7K NET TAX INC 67K SCH E PG. 1 & 2 QBID SE TAX AGI LESSOR OF 20% OF: $13,400

14 Example 13.3 p. 510 FRONT 1040 BACK 1040 AGI STD/ITEMIZE WAGES 650K TAXABLE SCH C,E,F INCOME SCH D NET TAX INC SCH E PG. 1 & 2 100K QBID 270K 270K SE TAX AGI LESSOR OF 20% OF: $20,000

15 Example 13.4 WAGES SCH C,E,F SCH D SCH E PG. 1 & 2 PTP & REIT 1K + $500 SE TAX AGI FRONT 1040 BACK K 100K AGI STD/ITEMIZE TAXABLE 271.5K INCOME NET TAX INC 271.5K QBID LESSOR OF 20% OF: $20,300 p. 510

16 SSTB p. 528 Taxable income > phasein range then SSTB income, wages, UBIA don t count Pass through entity income is SSTB even if TP doesn t participate Ex Partnership owns professional sports team. Partners don t participate but it is SSTB and income not included in QBI

17 Qualified Business Income Deduction SSTB p. 332 Health, law, acctg, actuarial science, performing arts, consulting, athletics, financial/brokerage services, Tor B where principal asset is skill/reputation of 1 EE Invest g & investmt mgmt., trading, dealing in securities, PS interests, commodities But NOT engineering and architecture

18 Reputation or Skill p. 531 SSTB is any business principal asset is reputation/skill of EE or owner 1. Product/service endorsement 2. Use of image, name, etc. 3. Appearance at event

19 SSTB - Health pp Medical services by physicians, pharmacists, nurses, dentists, veterinarians, physical therapists, psychologists, and other similar HC pros Not health clubs, health spas, pharmaceutical/medical device research, manufacturing, sales

20 SSTB Law p. 529 Lawyers, paralegals, legal arbitrators, mediators, and similar professionals Not printers, delivery services, stenographers

21 SSTB Accounting p. 529 Accountants, enrolled agents, return preparers, financial auditors, bookkeeping and similar professionals Not payment processing, billing analysis

22 SSTB Actuarial Science p. 529 Services by actuaries Not economists, mathematicians, and statisticians not engaged in analyzing or assessing the financial costs of risk or uncertainty of events

23 SSTB Performing Arts p. 529 Creation of performing arts, such as actors, singers, musicians, entertainers, directors, and similar Not maintenance and operation of equipment or facilities or broadcast or disseminate video or audio of performing arts

24 SSTB Consulting p. 529 Professional advice and counsel to clients Includes lobbying Not sales, training, education courses Not ancillary consulting if no separate $ Ex (p. 530) Microcomputers sells computers, consult w/customers re setup, etc. Ancillary to sales and not in field of consulting

25 SSTB Athletics p. 530 Participate in athletic competition such as athletes, coaches, and team managers Not maintenance/operation of equipment and facilities or radio/video broadcast

26 SSTB Financial Services p. 530 Managing wealth; advising clients re finances; retirement and wealth transition plans; valuations, mergers or other restructuring, raising capital Not taking deposits, loans

27 SSTBs pp Brokerage services sale of securities Investing investment management Trading - Securities buying and selling securities Commodities buying and selling commodities Partnership interests buying and selling partnership interests

28 Examples p. 531 Ex Aaron recorded a song and gets royalties when streamed/played SSTB performing arts Ex Betty is partner in partnership that owns sports team SSTB athletics Ex Chris makes recommendations about personnel structure SSTB consulting

29 Examples p. 532 Ex Denice licenses software, advises about product needs not SSTB Ex Erika helps w/ financial planning SSTB financial services Ex Frank trades securities and commodities SSTB brokerage services Ex George owns bicycle sale/repair shop, success based on George s skill/reputation not SSTB

30 Examples pp Ex Hilary is well known chef, endorsement fee for name on cookware restaurant not SSTB but endorsement is Ex Jeffrey is well known actor, likeness and name to shoe company in exchange for partnership interest - SSTB

31 De Minimis Rule p. 533 Not an SSTB if less than 10% gross receipts is from SSTB (5% if gross receipts more than 25M)

32 Segregation Rule p. 533 Prop. Treas. Reg A-5 SSTB includes T or B that provides 80% or more property or services to SSTB if 50% or more common ownership Less than 80% include portion

33 Examples p. 533 Ex RML is law partnership Divides into law, leasing, staffing SSTBs b/c same owners, provide substantially all property and services Ex Dentist owns dental practice and office building. Building rental to dental practice is SSTB

34 Incidental Business p. 533 T or B 50% or more common ownership w/ SSTB, and shared expenses, T or B is part of SSTB if gross receipts not more than 5% of combined receipts

35 Ex p. 534 Andrew is dermatologist, provides medical services and sells skin care products Same employees/office Product sales do not exceed 5% and are incidental to SSTB

36 Services as Employee p. 534 Performing services as EE not a T or B for 199A Presumption that former EE is EE if: 1. Properly treated as EE for fed. tax 2. Later treats as nonemployee 3. Performs substantially same services

37 RPEs pp Relevant pass-through entities (RPEs) must: 1. Determine if more than one T or B and if any are SSTBs 2. Determine QBI for each T or B 3. Determine W-2 wages and UBIA of QP for each T or B 4. Determine REIT dividends and PTP income

38 RPE Reporting p. 536 Identify and report on K-1 for each T or B: Owner s share of QBI, wages, UBIA of QP Whether any T or B is a SSTB Share of REIT div. and PTP income Failure to separately identify and report = 0

39 Trusts and Estates p. 536 T or E treated as RPE if allocates QBI items T or E treated as individual if retains QBI items Grantor trust beneficiary calculates Nongrantor trust trust calculates then allocates based on share of DNI

40 Anti-Avoidance pp Can t form multiple trusts to each claim threshold Substantially same grantors and beneficiaries treated as one trust

41 Qualified Business Income Deduction SSTB, Tax. Inc. < Threshold p. 333 Ex SMLLC (Sch C) Acctg. $125,000 Wages on Sched C = $200,000 TI = $134,169 (Figure 10.2) < $157,500 Sched C income = QBI, no wage limitation Deduction = $25,000 = Lesser of 25,000 (20% x 125,000) or 26,834 (20% x 134,169) NOTE: Net cap gains in TI for phase-in threshold test but not for 20% of taxable income limitation

42 SINGLE TAXPAYER SCH C TAX PREPARER OFFICE (let s do SE for those of you that NEED to see it!) P.333 FRONT PAGE 1040 W-2 WAGES SCH C $ 125K SCH D 1099-R ANNUITY $ 30K SCH E SE tax $ 8,831 AGI $146,169 $125K X 20% = $25K BACK PAGE 1040 AGI $ 146,169 STD DED/ITEMIZE $ 12K NET TAXABLE INC $ 134,169 QBI DEDUCTION $ 25K TAXABLE INCOME $ 109,169 $134,169 X 20% = $26,834 QBI = LESSER OF: $25K

43 SINGLE TAXPAYER SCH C TAX PREPARER OFFICE (OK, let s change it up a little bit. Is it still an SSTB and do we care?) P.333 FRONT PAGE 1040 BACK PAGE 1040 W-2 WAGES AGI $ 146,169 SCH C $ 125K STD DED/ITEMIZE $ 12K SCH B $ 12K NET TAXABLE INC $ 134, R ANNUITY $ 18K QBI DEDUCTION $ 25K SCH E TAXABLE INCOME $ 109,169 SE tax $ 8,831 AGI $146,169 $125K X 20% = $25K ($134,169 - $12K)X 20% = $24,434 QBI = LESSER OF: $24,434

44 SINGLE TAXPAYER SCH C TAX PREPARER OFFICE P.334 FRONT PAGE 1040 W-2 WAGES SCH C $ 205K SCH B $ 12K 1099-R ANNUITY $ 18K SCH E SE tax $ 10,706 AGI $224,294 $205K EXCEEDS SSTB BACK PAGE 1040 AGI $ 224,294 STD DED/ITEMIZE $ 12K NET TAXABLE INC $ 212,294 QBI DEDUCTION $ -0- TAXABLE INCOME $ 212,294 QBI = -0- TAXABLE INC EXCEEDS THE $207,500 PHASE-IN RANGE

45 SINGLE TAXPAYER SCH C TAX PREPARER OFFICE P.335 FRONT PAGE 1040 BACK PAGE 1040 W-2 WAGES AGI $ 199,629 SCH C $ 180K STD DED/ITEMIZE $ 12K SCH B $ 12K NET TAXABLE INC $ 187, R ANNUITY $ 18K QBI DEDUCTION $ 14,400 SCH E TAXABLE INCOME $ 173,229 SE tax $ 10,371 AGI $199,629 40% x $180K = $72K X 20%=$14,400 QBI =$14,400; LESS THAN 20% OF TAXABLE INC

46 Specified Service Business Taxable Income in the Phase-in Range Formula P.335 $187, , $ 30,129 divided by $50,000 = 60% 100% - 60% SSTB = 40% ALLOWED For MFJ taxpayers, the formula is [1 (taxable income $315,000) $100,000]. For all other taxpayers, the formula is [1 (taxable income $157,500) $50,000].

47 Qualified Business Income Deduction W-2 Wage Limitation p. 336 No wage limitation if tax inc threshold Wage limit: Deduction the greater of: 50% of W-2 wages paid by qualified Tor B (other than SSTB or as EE) or 25% of W-2 wages + 2.5% of unadjusted basis of qualified property Applies to each separate Tor B (may group)

48 Qualified Business Income Deduction W-2 Wage Limitation p. 336 Qualified Property (basic definition) Held by/available for use in qualified Tor B at close of the year, and Used in the production of QBI W-2 Wages Wages, elective deferrals, deferred comp $ on return filed w/ssa w/in 60 days of due NOT guaranteed payments to PNs Special rules in prop regs for corrected W-2s

49 Notice pp Calculating W-2 wages for 199A Unmodified box method Modified box 1 method Tracking wages method

50 Calculating Wages-Three Methods Unmodified box method, lesser of employees total reported to SSA on all Form W-2s, Box 1 or 5 Modified box 1 method 1.Total reported to SSA on all Forms W-2s, Box 1 2.Subtract from amount in step 1, W-2 that are not wages for FITW purposes (including amounts that are treated as wages for purposes of income tax withholding, e.g.- greater than 2% health insurance, personal use of auto) 3.Add to the sum of step 1 and 2, total of the amounts reported on W-2, Box 12, codes - D, E, F, G, and S

51 Qualified Business Income Deduction W-2 Wage Limitation pp Ex = owners of LLC, tax inc > phasein range No EEs, just independent contractors Rents all equipment used No QBID: Wage limit applies and = 0 Could pay speakers as EEs Become S corp - pay owners W-2 wages Could purchase equipment used

52 Qualified Business Income Deduction W-2 Wage Limitation pp Qualified Property Tangible & depreciable, held at yearend Not: land, intangibles, or sold prior to yearend Depreciable period not ended by yearend MACRS < 10 yrs, use 10 years from purchase (NOTE: may need old depreciation schedules) MACRS > 10 yrs, period ends on last full day of last full year of MACRS recovery period

53 UBIA PROPERTY

54 Qualified Business Income Deduction W-2 Wage Limitation pp W/in phasein, limit applies proportionately Disallowance % MFJ: (tax inc 315,000) / 100,000 Others: (tax inc 157,500) / 50,000 % applied to difference between Deduction without wage limitation and Deduction with wage limitation Result reduces potential QBI deduction

55 Qualified Business Income Deduction W-2 Wage Limitation pp Joint return & multiple businesses 1. Compute tentative QBI deduction for each applying wage limit if applicable 2. Combine tentative QBI deductions 3. Deduct lesser of #2 or 20% x taxable income (w/o cap gains, qual. div.)

56 pp Depreciable Period Not affected by AFYD LKE date exchanged basis in replacement property placed in service is date relinquished property placed in service Excess basis starts date replacement property placed in service Rules for other nonrecognition transactions

57 UBIA Definition p. 521 Basis on placed in service date Purchase property generally cost Partnership 723 basis S corporation 362 basis Inherited property FMV on date of death No adjustments for 179, but adjusted for business %

58 p. 518 RPE Allocation of QBIA UBIA for partner or shareholder determined same as depreciation If no depreciation Partnership allocates based on share of gain on hypothetical sale S corp. allocates based on ratio of shares to total shares

59 UBIA Qualified Property pp Improvements treated as separate qualified property Ex Milly bought machine in 2018 and made capital improvements in 2020 two different qualified properties Partnership 734 and 743 not separate qualified property Acquired w/in 60 days of end of year, not used 45 days and disposed of w/in 120 days presumed not qualified

60 Ex p Adrienne purchase warehouse 1M 2018 adjusted basis is 821,550 UBIA is 1M

61 Qualified Business Income Deduction W-2 Wage Limitation p. 338 Ex businesses, no SSTB, no qual. prop. H: $260,000 net, $24,000 W-2 wages W: $310,000 net, $1,500,000 W-2 wages Taxable Income: $814,000 (Figure 10.9) > $415,000, limit applies in full Must compute QBI deduct. separately

62 Qualified Business Income Deduction W-2 Wage Limitation p Ex H: $12,000 QBI deduction = lesser of: $52,000 (20% x 260,000 QBI) or $12,000 (50% x 24,000 W-2 wages) W: $62,000 QBI deduction = lesser of: $62,000 (20% x 310,000 QBI) or $750,000 (50% x 1.5M W-2 wages) QBID = $74,000 [< 20% x (814,000 10,000)]

63 Qualified Business Income Deduction W-2 Wage Limitation p. 339 Ex Qual. Prop. H: $600,000, W: $1M H: $21,000 QBI deduction = lesser of: $52,000 (20% x $260,000 QBI) or $21,000 which is the greater of: $12,000 (50% x 24,000 W-2 wages) or $21,000 [(25% x 24,000) + (2.5% x 600,000)]

64 Qualified Business Income Deduction W-2 Wage Limitation p. 339 Ex Qual. Prop. H: $600,000, W: $1M W: $62,000 QBI deduction = lesser of: $62,000 (20% x $310,000 QBI) or $750,000 which is the greater of: $750,000 (50% x 1.5M wages) or $400,000 [(25% x 1.5M) + (2.5% x 1M)]

65 Qualified Business Income Deduction W-2 Wage Limitation p. 339 Ex QBI Deduction is $83,000 = lesser of: $83,000 - Combined QBI Deduction (21, ,000) OR $160,800 (20% x taxable income) [20% x (814,000 10,000)]

66 Qualified Business Income Deduction W-2 Wage Limitation p. 339 Ex Ex ($425,000) Jamaican resort Business not in US, no effect on QBI Taxable income: $389,000 (Figure 10.12) W/in phasein range (315, ,000) Disallowance % = 74% (389, ,000)/100,000

67 Qualified Business Income Deduction W-2 Wage Limitation p. 340 Ex H: Reduction = $22,940 74% x (52,000-21,000) = 22,940 52,000 = 20% x QBI 21,000 = 50% x wages w/o wage limit with wage limit H: QBID: $29,060 (52,000 22,940) W: No affect to wage limit, no reduction

68 Qualified Business Income Deduction W-2 Wage Limitation p. 340 Ex QBI deduction before TI limit: $ 91,060 (H 29,060 + W 62,000) Taxable income limitation: $ 75,800 [20% x (389,000 10,000)] QBI deduction: $75,800

69 Qualified Business Income Deduction W-2 Wage & SSBT Limitation p. 340 Ex Taxable income $395,000 W/in phasein (315, ,000) H: $300,000 = QBI (LLC, not an SSTB) W-2 wages $100,000 W: $325,000 = SSTB (Sole prop, Attorney) W-2 wages $100,000

70 Qualified Business Income Deduction W-2 Wage & SSBT Limitation p. 340 Ex H: Wage limitation phased in 20% x QBI = $60,000 (20% x 300,000) 50% x wages = $50,000 (20% x 100,000) Reduction % = 80% [(395K - 315K)/100,000] Reduction = $8,000 [80% x (60,000 50,000)] [80% x (QBID w/o wages limit QBID w/ wages limit)] $52,000 = H s QBID before TI limitation (60K-8K)

71 Qualified Business Income Deduction W-2 Wage & SSBT Limitation p. 340 Ex W: Wage & SSBT limitations phased in SSBT % = 20% [1-(395, ,000)/100,000)] QBI = $65,000 (20% x 325,000) 20% x QBI = $13,000 (20% x 65,000) 50% x wages = $10,000 [50% x (100,000 x 20%)] Reduction % = 80% (395, ,000)/100K Reduction = $2,400 [80% x (13,000 10,000)] $10,600 = W s QBID before TI limit (13K-2,400)

72 Qualified Business Income Deduction W-2 Wage & SSBT Limitations pp Ex.10.9 Combined QBID before TI limit: $62,600 (52, ,600) Taxable income limit: $79,000 (20% x 395,000) QBI deduction: $62,600 Figure Software QBI worksheet

73 Qualified Business Income Deduction Grouping Activities p. 343 Computed separately for each business Wages & qualified property kept separate May want to separate or combine Tor B Separate if one = SSTB, other is not Combine if one has higher W-2 wages or qualified property Proposed Regs. for 199A provide grouping rules (Chapter 13)

74 Aggregation pp Requirements: 1. Same person owns 50% or more of each business 2. Majority ownership for majority of tax year 3. Items reported on same tax year 4. None are SSTBs

75 Aggregation pp requirements for aggregation: Meet 2 of the three: a. Products/services are the same or customarily provided together b. Share facilities/centralized elements c. Operated in coordination w/ or reliance on each other

76 Aggregation Rules p. 524 Aggregate T or B direct or RPE RPE owners can aggregate diff. Compute QBI items for each T or B before aggregate Combined QBI items used for W-2 wage test

77 Aggregation Consistency p. 524 Consistently report Add to group if meet requirements Remove from group if no longer meet requirements

78 Aggregation Reporting p. 524 Attach statement to return: Description EIN New/ceased businesses Other info No statement IRS can disaggregate

79 Ex pp Anita has catering business and restaurant Share purchasing and accounting Anita can group the two Ex same result if two partnerships owned by same 4 owners

80 Ex p. 525 Wilma owns 75% in clothes business and 75% in pet business Same ownership but no similar good/services, no centralized elements, not in coordination/reliance Can t group

81 Examples pp Ex Eric has 60% interest in 4 hardware stores, one with a loss. OK to group 3 w/profits Ex Felicia owns 10% and Eric owns 50% of the 4 hardware stores. Felica can group. Ex Donna owns 75% of 3 grocery stores. Operates one separately. Donna can group 2. Ex Donna operates all 3 stores separately. She cannot group. Ex Gerald 80% in 2 LLCs and S. OK to group. Ex Gerald s son and mom own part. OK to group.

82 Example pp Forest 75% and Geoffrey 5% in 5 restaurants Hedy has 10% in two restaurants Geoffrey is chef of all, and share food/supplies Forest and Geoffrey can group all 5 Hedy can group 2

83 Examples pp Ex Claudia has sailboat racing team and marina. Can t group b/c racing team not T or B. Ex Trust owns trucking, supplies, and construction businesses. Operated in coordination/reliance, and can group.

84 Qualified Business Income Deduction Qualified Business Loss p. 343 Ex $150,000 Golf course (wages: $40,000) $150,000 Restaurant (wages: $30,000) ($20,000) Boutique (wages: $20,000) Each reduced by $10,000 (20K x 150K/300K) No qualified property in any business Taxable income = $418,000 Over phasein range (157, ,500)

85 Qualified Business Income Deduction Qualified Business Loss pp Ex Golf Course QBID = $20,000 = lesser of: $28,000 [20% x (150,000 10,000)] or $20,000 (50% x 40,000) Restaurant QBID = $15,000 = lesser of: $28,000 [20% x (150,000 10,000)] or $15,000 (50% x 30,000) QBID = $35,000 (< 20% x TI 418,000)

86 Qualified Business Income Deduction Qualified Business Loss p. 344 Overall QBI negative c/o to offset in future Ex.10.11: Ex but boutique ($400,000) Net loss for all qualified Tor B ($100,000) No QBID for current year (2018) ($100,000) c/o treated as separate Tor B loss in 2019 for QBID purposes Loss still deducted for TI on 2018 return

87 Qualified Business Income Deduction S Corps and Partnerships p. 344 No QBID for corporations S corp SH and PS PN claim QBID based on S corp and PS allocation of Qualifying business income/loss items W-2 wages paid by qualifying business Qualified property owned by qualifying business at yearend

88 Qualified Business Income Deduction Penalties p. 344 Substantial understatement penalty of 20% for TP claiming QBID: Understatement exceeds the greater of $5,000 or 10% of corrected tax replaced with Understatement exceeds the greater of $5,000 or 5% of corrected tax Adjustments need not be QBI adjustments

89 QBID Real Estate Businesses Qualified Business Income p. 367 Net income from qualified RE activities = QBI if activities give rise to 162 Tor B Rental to related Tor B is treated as Tor B if commonly controlled (for 199A only) Specific income exclusions (list p. 367) 1231 gain if held < 1 yr and 1231 loss = QBI (NOT gain treated as capital gain)

90 QBID Real Estate Businesses 162 Trade or Business??? p. 368 Case Law Facts and circumstances determination Continuous and regular activity with primary purpose for income/profit One property may rise to level of Tor B Long-term tenant, activities minimal not Tor B Activities of agent attributed to owner

91 QBID Real Estate Businesses 162 Trade or Business??? pp Net Investment Income Tax Regulations Defined w/reference to 162 One property may rise to level of Tor B Key facts: Type of property Number of properties Day-to-day involvement (owner/agent) Type of rental

92 QBID Real Estate Businesses 162 Trade or Business??? p. 369 Proposed Section 199A Regulations Mgmt of several parcels land = Tor B Triple Net Lease More like an investment than a rental Self-Rentals Rental to related business under common control automatically = Tor B

93 QBID Real Estate Businesses Deduction Limits pp % of QBI limited by 20% x taxable income (w/o net cap gain ) W-2 Wages and Capital Limitation Applies if TI > $157,500 ($315,000 MFJ) Phasein over $50,000 ($100,000 MFJ) Full limit if > $207,500 ($415,000 MFJ) Greater of 50% x wages or 25% x wages + 2.5% x qualified property unadj. basis

94 QBID Real Estate Businesses Deduction Limits p. 370 Wages for wage limitation Wages allocable to QBI Must be properly & timely reported to SSA Subject to wage withholding Includes elective deferrals/deferred comp NOT fees paid to prop. mgmt. companies

95 QBID Real Estate Businesses Deduction Limits p. 370 Qualified property for capital limitation: Tangible property, subject to depreciation under 167, held by & available for use in qualified Tor B at yearend, used in the production of QBI, and still w/in depreciable period at end of year (or 10 years from purchase if later)

96 QBID Real Estate Businesses Deduction Limits p. 371 Unadjusted basis Cost basis immediately after acquisition No depreciation, 179, no bonus dep Inherited: FMV at date of death Reduce by basis of personal use property Improvements to qualified property = separate qualified property

97 QBID Real Estate Businesses Deduction Limits p. 371 Ex Apartment rental, manage, cost $1M Joint return taxable income $210,000 $50,000 net income each from rental QBID = $20,000 - lesser of: $20,000 [20% x ($50,000 + $50,000)] $42,000 (20% x $210,000)

98 QBID Real Estate Businesses Deduction Limits p. 371 Ex Same but $250,000 rental income each Taxable income = $470,000 > $415,000 wage/capital limit applies QBID = $25, 000 which is the greater of: $0 (50% x wages paid) $25,000 [(25% x wages) + 2.5% x $1M] (no limit from TI 20% x 470,000 = 94,000)

99 QBID Real Estate Businesses Specified Service TorB pp SSTB = QBI if TI < thresholds Part of SSTB = QBI if TI in phasein range SSTB QBI if TI above phasein range Proposed regs clarify what SSTB RE agent/broker brokerage Directly managing real property investing & investment management Ex Broker income = QBI, limits apply

100 QBID Real Estate Businesses REIT Dividends p. 372 Qualified REIT dividend may yield QBID Qualified REIT dividend = REIT dividend that is not a capital gain or qualified dividend QBID = 20% x qualified REIT dividends received during the year QBID from REIT dividends + QBID of qualified Tor B (after wage/capital limit) limited by 20% x TI

101 QBID Real Estate Businesses REIT Dividends pp Ex Single, TI = $150,000, $10,000 cap gain Qualified REIT dividends = $80,000 Real estate business QBI = $100,000 QBID = $28,000 lesser of $36,000 [20% x (80, ,000)] $28,000 [20% x (150,000 10,000)]

102 Pass-Through Allocation of QBI Items pp PN or SH claim QBID at individual level QBID available w/o regard to participation Use share of each item for each Tor B Qualified business income Form W-2 wages paid Unadjusted basis of qualified property Fiscal year entity: Treat all items as incurred within year entity tax year ends

103 Pass-Through Allocation of QBI Items Qualified Business Income pp If Tor B item in TI, include in QBI Exclusions list p Prop Regs: 751(a) & (b) ordinary = Tor B income Previously suspended items allowed treated as current Tor B item N/A if from year beginning < 2018

104 Pass-Through Allocation of QBI Items Entity Computational Steps p Determine if engaged in 1 Tor B Identify if any are SSTB 2. Determine QBI for each Tor B (direct) 3. Determine W-2 wages & unadjusted basis of qualified property for each Tor B 4. Determine qualified REIT dividends & qualified PTP income earned directly or through another

105 Pass-Through Allocation of QBI Items Allocations based on general rules PS: PS agreement S corp: Pro rata share W-2 Wages pp Includes S corp SH wages but does NOT include PN s guaranteed payment PS: Allocate same as wage expense S: Allocate on per share/per day basis

106 Pass-Through Allocation of QBI Items W-2 Wages p. 376 Ex S corp QBI $350,000 John 40% $100,000 salary from S Jennifer 60% $40,000 salary from S John (40%): Wages: $56,000 (40% x $140,000) QBI: $140,000 (40% x $350,000) Jennifer (60%): Wages: $84,000 QBI: $210,000

107 Pass-Through Allocation of QBI Items Unadjusted Basis QBP pp General rule (prop. regs.): Basis share = Share of dep. / total dep. Determined property by property Basis share if no current dep. expense PS: Use % share of gain on sale at FMV S: Use % of total S shares owned

108 Pass-Through Allocation of QBI Items Multiple T or Bs pp Compute QBI for each separate Tor B Ex Separately report items for each Tor B on schedule with K-1

109 Pass-Through Allocation of QBI Items Multiple Tor Bs: Anti-Abuse Rules p. 378 T or B treated as part of an SSTB 50% common ownership Tor B provides 80% of its property or services to the SSTB, Tor B part of SSTB Tor B provides < 80% of its property or services to the SSTB, % of Tor B in SSTB 50% common ownership & shared expenses If Tor B GR 5% of combined gross receipts Tor B treated as part of the SSTB

110 Pass-Through Allocation of QBI Items Multiple Tor Bs: Anti-Abuse Rules p. 378 Ex S corporation optometry - sole SH Taxable income: $450,000 Eye exams $750,000 GR = SSTB Sales $ 35,000 GR As $35,000 < $39,250, sales = SSTB [5% x (750, ,000)] = 39,250

111 Pass-Through Allocation of QBI Items QBI Loss p. 379 Net of all QBI = loss, c/o to next year Ex : QBI = (30,000), c/o to : QBI of 20,000 and 30,000 c/o loss reduces 2019 QBI

112 Pass-Through Allocation of QBI Items Schedule K-1 p. 380 Figure QBI item Box 20 codes Separate schedule needed if > 1 Tor B No K-1 QBI item reporting all = QBI does not include comp or guaranteed payment rec d by SH or PN SH comp = W-2 wages, PN GP wages

113 Pass-Through Allocation of QBI Items Schedule K-1 p. 380 Ex /50 PNs, $125,000 GP each PS QBI = $800,000 (1,050, ,000) QBID for each computed on $400,000 GP vs distribution GP reduces QBI, distribution does not GP not subject to reasonable standard

114 Draft Schedule K-1 Schedule K-1 (1065) Box 20 Schedule K-1 (1120S) Box 20

115 Questions? 115