New Tax Client – What Do You Do?
New Tax Client – What Do You Do? What do you do if you have a new tax client walk through your doors? What questions do you ask? What information…
June 24th, 2019
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
Disclaimer: The information referenced in Tax School’s blog is accurate at the date of publication. You may contact email@example.com if you have more up-to-date, supported information and we will create an addendum.
University of Illinois Tax School is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information in this site is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information. This blog and the information contained herein does not constitute tax client advice.