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…
October 21st, 2019
Please note: the QBID Calculator is no longer active on the Tax School website.
Still confused about qualified business income deduction (QBID)? Not sure how to advise your clients?
Well, Tax School is here again to help. Our QBID calculator, created by our very own Marshall Heap, EA, has been updated for the very latest in 2019 IRS guidance. Marshall also provides us with useful insights into the whole QBID process, so please read the blog in its entirety. Then head to the online calculator to try out various scenarios with your client information (or just to become more comfortable with the QBID process). Enjoy!
You may have noticed that our Tax School QBI/QBID Calculator was recently updated. Now you can calculate 2019 QBID amounts.
If you remember last year, there were concerns about how to determine net capital gain for purposes of the overall taxable income limitation and what deductions reduce QBI. With the release this year of the final IRC §199A regulations and other IRS guidance, we now have some answers to these questions. First, as regards net capital gain, the regulations define this as the excess of net long-term capital gain over the net short-term capital loss for the tax year plus qualified dividends.
Responding to the second concern, although the IRS state that generally all deductions attributable to a trade or business reduce QBI, fortunately the regulations clarify this requirement by providing specific examples of allocable deductions. These include the deduction for 50% of self-employment tax, the self-employed health insurance deduction, and the deduction for contributions to qualified retirement plans. Furthermore, allocable deductions can also include charitable contributions, unreimbursed partnership expenses, and business interest expense for the purchase of an interest in a passthrough entity. This latter clarification comes from the Form 8995 draft instructions.
For those of you who have never heard of Form 8995, it’s a new IRS tax form for computing the QBID. In fact, next filing season, tax returns claiming the QBID must include either Form 8995 or Form 8995-A (the longer version). Unfortunately, both forms require entry of net QBI without clearly explaining how this is determined. Therefore, you may find the “Net QBI by business” tab on the QBID calculator of help in this regard.
The eagle-eyed among you may have noticed the additional filing status categories on the 2019 QBID calculator. This stems from the inflation adjustments to the taxable income thresholds for 2019. As a result, married filing separate taxpayers now have a slightly higher taxable income threshold ($160,725) than single and head of household taxpayers ($160,700).
Lastly, taxpayers engaged in specified trades or businesses (SSTBs) will be pleased to know that when combining QBI from all their qualified businesses, only the applicable percentage of a qualified business loss from an SSTB is considered. The QBID calculator reflects this clarification from the final regulations.
To all users of the QBID calculator, we hope that you continue to find this a useful tax planning tool!
by Marshall Heap, EA
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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.