Clearing up QBID Confusion

Clearing up QBID Confusion

Confused by the qualified business income deduction (QBID)? Well, if you weren’t confused enough already, there is another potential minefield that you may want to try to avoid.

Here’s the lowdown:

Some continuing education providers and internet research services are suggesting for 2018 tax returns (only 2018) that taxpayers may use the proposed regulations from August 2018. Their thought is that taxpayers can choose not to reduce qualified business income (for Schedule C and Schedule F filers) by certain adjustments to income effectively connected with a trade or business. These adjustments include items such as: one half of self-employment tax, self-employed health insurance deductions, and pension plan contributions. They believe this is the case because the original law and the proposed regulations were supposedly silent as to these items.

The IRS addresses this supposed omission and states there was no silence and that the final regulations merely confirm that fact.  

Specifically, FAQ #32 states the original law considered items of deduction effectively connected with a trade or business to impact the QBI calculation.  “There is no inconsistency between the proposed and final regulations on this issue.  QBI must be adjusted for these items in 2018,” states the FAQ.

So to clarify for all of us, qualified business income includes items of income, deduction, gain, or loss effectively connected with a trade or business in the United States.  You must reduce the qualified business income for adjustment items effectively connected with a trade or business.

Be careful should you decide to take this position and not reduce QBI for adjustments to income effectively connected with a trade or business on an originally filed or amended return. Get it wrong and you and/or your tax client may face penalties. Tread lightly! If a taxpayer doesn’t reduce QBI for those adjustments and the taxpayer is audited, the IRS could assess penalties, concluding your client has taken a position which has no support in either the Code, the proposed regulations or the final regulations. You as the preparer could also be subject to penalties for taking a position on a tax return not supported by law.

by Tom O’Saben, EA