Skip to main content

How to calculate the Sec. 199A QBI deduction in 2019?


The Tax Cuts and Jobs Act (TCJA) of 2017 enacted the IRC Sec. 199A qualified business income (QBI) deduction. The QBI deduction allows a deduction of up to 20% of qualified business income for eligible flow-through entities. The deduction is available to all taxpayers other than regular C Corps. The QBI deduction is taken from AGI.

What is qualified business income?

QBI is ordinary, trade & business income minus ordinary deductions earned by flow-through entities (sole proprietorship, S Corp, LLC, or partnerships). Compensation (wages, guaranteed payments, etc.) and separately stated items (dividends, interest, capital gains) are not includable in QBI.

What flow-through entities are eligible?

Sec. 199A classifies two types of eligible flow-through entities: Qualified Trade or Business (QTB) and Specified Service Trade or Business (SSTB). The IRC defines QTB as any other business other than a SSTB (real helpful!). Examples of QTB include engineering businesses and architectural business. The IRC states that a SSTB is a trade or business in the fields of health, accounting, law, performing arts, consulting, investing, and athletics. It goes further stating that the SSTB category includes trades dependent upon reputation and skill. QTBs and SSTBs face different limitations relating to the deduction.
How to calculate the QBI deduction?
20% x QBI = QBI deduction

The taxpayer’s taxable income and the category of business (QTB vs. SSTB) create limitations. The limitations will reduce or eliminate the deduction.

Taxable Income Limitation

*the taxable income amounts are subject to inflation changes

 The taxable income limitation creates three types of taxpayers.
  1. Taxpayers with taxable income at or below $160,700 (S)/$321,400 (MFJ)
  2. Taxpayers with taxable income between $160,700 and $210,700 (S)/$321,400 and $421,400 (MFJ)
  3. Taxpayers with taxable income above $210,700 (S)/$421,400 (MFJ)

Remember that these amounts are subject to change. They reflect the current 2019 amounts.

W-2 wage and property limitation
The taxpayer’s taxable income triggers the W-2 wage and property limitation. When applicable to the taxpayer, the W-2 wage and property limitation limits the QBI deduction to the greater of:
  •        50% of W-2 wages for the business entity; or
  •        25% of the W-2 wages + 2.5% of the unadjusted basis of all qualified property.

Overall Taxable Income Limitation
Sec. 199A also places an overall taxable income limitation on the QBI deduction. The overall taxable income limitation states that the QBI deduction is the lesser of:
  • QBI deduction; or
  • 20% of the taxpayer’s taxable income in excess of net capital gains

Taxpayer Category and Limitation Application

Type 1 [Taxpayers with taxable income at or below $160,700 (S)/$321,400 (MFJ)]
  • If QTB, then Full 20% QBI deduction
  • If SSTB, then Full 20% QBI deduction

Basically, if the taxpayer is below the threshold, then no limitations and restrictions apply to the QBI deduction.


Type 2 [Taxpayers with taxable income between $160,700 - $210,700 (S)/$321,400 - $421,400 (MFJ)]
  • If QTB, then phase-in the W-2 wage and property limitation
  • If SSTB, then QBI, W-2 wages, and qualified property amounts are reduced, followed by the phased-in W-2 wage and property limitation reduction

Due to the complexity of the Type 2 SSTB category, please see the separate post explaining the category and providing a helpful example! Link HERE!

Type 3 [Taxpayers with taxable income above $210,700 (S)/$421,400 (MFJ)]  
  • If QTB, then full W-2 wage and property limitation reduction applies     
  • If SSTB, then no QBI deduction allowed


 
For any questions or concern relating to the QBI deduction and how to calculate it in 2019, please comment below.


Labels:

Comments

Post a Comment

Popular posts from this blog

Cryptocurrency Taxation: How does the U.S. tax cryptocurrency? - Textbook Tax

The cryptocurrency market continues to rise in popularity in the U.S. and throughout the world. The decentralized finance ("Defi") sector has seen massive growth. Additionally, ease of access has increased as new and established companies offer crypto services and exchanges. As more and more individuals and institutions adopt cryptocurrency, it becomes more important for people to understand the tax laws and regulations governing the cryptocurrency industry. It is important to note that each country views and regulates virtual currency differently.  The scope of this article covers the crypto tax laws in the United States.  T he IRS defines virtual currencies as  digital representations of value that function as mediums of exchange, units of account, and/or stores of value. Further, t he U.S. views crypto as property subject to capital gains and losses for US federal tax purposes. Based on its designation as property, i n general, there are four taxable events when d...
18 comments
Read more

20 Tips & Tricks for Studying for the CPA Exam

For those on the way to becoming a certified public accountant, you now know it is a long and difficult journey. For those just beginning, good luck! The most difficult and time-consuming task is passing the CPA Exam. CPA candidates must spend hundreds of hours preparing for all four sections of the CPA. Each CPA section represents an entirely different topic, creating a daunting task for anyone looking to start studying for the CPA exam. I passed all four sections of the CPA with an average score of 91. Luckily, I did not have to retake any of the exams, which is a common occurrence as the average passing rate is around 40-50% per exam. Having personal experience dealing with the CPA exam process, I want to share valuable tips for conquering the CPA exam. I want you to feel confident and comfortable during the CPA exam process, and so, I believe the following tips will help you during the CPA exam process. Lets begin! Related Posts -  Preparing for the CPA Exam: How to St...
8 comments
Read more

Gambling Winnings & Losses: How to report gambling income and losses

People love to gamble.  During the past NFL Super Bowl (2019),  gamblers wagered approximately $146 million in Nevada’s sports books, which fell short of the record set the year before of $159 million. The gambling industry continues to grow as U.S. legislation becomes less restrictive relating to the gambling industry.  Because of the size of the gambling market, the IRS set forth guidance to control the tax treatment of gambling winnings and losses. I will discuss income and losses, record keeping, reporting forms, and special rules. If you participate in gambling activities, it is important to know the unique personal tax rules. The term 'gambling' applies to a wide range of activities, including: sports betting, casino games, lotteries, etc. You will need to follow the established gambling tax rules when reporting winnings and losses from gambling activities. Related Posts IRA Income: Must know tax rules relating to your IRA Are your income items taxable?...
144 comments
Read more