Have you heard the terms “Section 199A” or “QBI Deduction” this tax season and wondered what they meant, or whether they will impact your taxes? You’re not alone.
The Tax Cuts and Jobs Act (TCJA) created a new tax deduction for business owners and others, called the Section 199A Qualified Business Income (QBI) Deduction. Since its release, there has been much confusion about the rules of this deduction, even in the tax world. In August, the IRS and the Department of the Treasury released some additional guidance, and in October, held a public hearing to field comments and questions.
On January 18, 2019, The IRS and the Treasury issued final regulations to clarify and update the proposed rules. Here’s a high-level overview:
Who can benefit from this deduction?
Taxpayers (other than C Corporations) with taxable income from a qualifying trade or business at or below the threshold amount—$315,000 for joint filers, or $157,500 for all others—for taxable years beginning after December 31, 2017.
How do you calculate the QBI?
Qualified taxpayers are entitled to a deduction equal to the lesser of:
- The combined QBI of the taxpayer (generally up to 20% of the QBI of each qualified trade or business, plus up to 20% of the amount of qualified REIT dividends and qualified publicly traded partnership income), or
- An amount up to 20% of the excess, if any, of the taxable income over the net capital gain of that year
What qualifies as a “Trade or Business”?
To help clarify whether a trade or business exists, the IRS explains that the following activities qualify for the deduction:
- Any activity in which the taxpayer participates (as an owner or partial owner) in considerable, regular, and continuous effort with a good faith intention to make a profit
- Gambling activities can also constitute a trade or business, if the activity is pursued full time, in good faith, and with regularity; and is in an effort to make a livelihood, as opposed to a mere hobby
Are there any special circumstances to be aware of?
Certain types of trades or businesses qualify for the deduction, but special rules apply. Be sure to talk to your advisor if your trade or business includes:
- Rental real estate activities
- Multiple trades or businesses within one entity
- Healthcare services
- Consulting services
- Financial services
This is just a general overview—the rules around the Section 199A Qualified Business Income Deduction can be fairly complex. If you think you might qualify for the deduction, you should talk to your advisor about how the rules will apply to your specific situation.
If you have any questions about Section 199A, or what constitutes a qualifying trade or business, leave a comment below, or feel free to reach out to me directly. I’m happy to help!