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How are you handling 199A issues?

Key tips and advice the working tax pro can use.
#1
ATSMAN  
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Since I finished the 3Q estimated payments consultation, I am beginning to get a lot of more calls regarding next years tax situation. A typical question is how much tax reduction will result from 199A, which I am hopelessly not prepared to give, pending my understanding of the IRS regulation. I need to take some more courses!

What are you guys seeing? How are you handling 199A issues?
 

#2
JAD  
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I'm being honest. Guidance has been issued, although there is still a lot of discussion among professionals regarding areas of confusion....and I will be better prepared to answer their questions in a few weeks, as I am fully immersed in 2017 law through the deadline.
 

#3
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My response is similar to JAD. I'll be honest, that we have some guidance, but there are still details that we need. The biggest thing at issue are the planning issues, especially with aggregation/non-aggregation of activities.

I would be happy to come up with a worst-case scenario in the interim and see if there are ways to improve that by tax time. Underpromise, overdeliver.
 

#4
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I am signed up for a webcast on 199A for tomorrow. I have been reading through the literature for the course, and there is so much more to this calculation than I realized. How the heck did they even come up with this stuff? For example:
The 199A deduction is equal to 1) the lesser of a)20% of QBI of each qualified trade or business or b) the W-2 Wage & Qualified Property Limitation for each trade or business. PLUS 20% of the aggregate qualified REIT dividends and qualified publicly traded partnership income for the year. LIMITED TO: 20% of taxable income minus net capital gains. BUT the W-2 Wage and Qualified Property Limitation is NOT applicable where taxable income is $315,000 MFJ … REALLY??? Somebody has too much free time on their hands!
 

#5
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Don't forget if the taxable income for MFJ is less than $315,000 the calculation is super easy. Lower of 20% of QBI or 20% of taxable income excluding gains.

I suspect for most tax preparers a lot of their qualifying clients fall in to this camp so working out the 199A deduction is not a real complication for planning purposes.
 

#6
ATSMAN  
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I quickly looked at some of my clients who will be affected by 199A and their taxable income exceeds the threshold and they have multiple businesses that require aggregation. But in general most of by Sch C clients with one business are below threshold.
 

#7
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AZUK, I agree a lot of clients will have TI less than the thresholds, so calculating the deduction will be fairly easy for planning. The problem lies in the actual reporting. Even if client is below the threshold, the entities still will have to report everything appropriately.
 

#8
lucyko  
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Pretty much in line with what the rest of you are doing by looking at the specifics of client at it relates to 199 A. However I am also doing tax projections for 2018 with live data as many of my clients are significantly impacted by all the other tax law changes (Salt deductions ,AMT partial elimination,changes in withholding , child tax credit , standard deduction,loss of Misc itemized deductions etc ) I came to the conclusion very quickly that if I only focus on the 199 A issues I will be doing a disservice to my client as it does not tell the whole story .
 

#9
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Hi All,

Since I saw you folks were addressing 199A issues I figured I'd sign up and float something out to you that I just ran across.

Scenario is that the taxpayer is an S-Corp with a very modest income. Taxpayer does not have health insurance but does have an HRA. 2017 health reimbursements generated a loss for the S-Corp. Looking at 2018 it appears that the taxpayer will be better off by NOT claiming health reimbursements. The difference will be that the 199A adjustment on pass through profit will be a 20% credit which offsets the 12% tax on the additional income. Since TI will be the same whether the HRA is claimed or not, showing a profit on the S-Corp results in 8% LESS tax because of the QBI credit.

Am I missing something or does that sound like it's the way things are supposed to work under the new rules?
 

#10
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It is a 20% deduction, not a 20% credit.
 

#11
lucyko  
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Even with what appears to be a simple calculation of the tax savings /benefits generated for QBI I recommend you run the numbers thru the tax software . There are just too many limitations /phaseouts of the QBI to remember . Generally your tax software for 2017 should have the ability to run 2018 scenarios with the new tax law provisions .
 

#12
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I downloaded my 2018 tax software and started playing with a test return. UltraTax's initial computation of QBI is that it is taking Schedule C income to the deduction worksheet, with no reduction for a solo 401k deduction, and most surprisingly to me, no adjustment for the 1/2 of SE tax. I didn't test it with SEHI yet.

Just curious -- what is the interpretation of other tax programs on what qualifies as QBI?
 

#13
makbo  
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missingdonut wrote:I downloaded my 2018 tax software and started playing with a test return. UltraTax's initial computation of QBI is that it is taking Schedule C income to the deduction worksheet, with no reduction for a solo 401k deduction, and most surprisingly to me, no adjustment for the 1/2 of SE tax. I didn't test it with SEHI yet.

Just curious -- what is the interpretation of other tax programs on what qualifies as QBI?

Has the IRS released its final worksheets and forms related to QBI yet? I suspect no reasonable software vendor is going to try implementing calculation details that are as yet unknown, especially in a November initial release.

Update: I went to look at the documents ("when all else fails, read the manual"). UltraTax bulletin says this: "Note: As of this release, the IRS has not provided IRS Publication 535, Business Expenses, or a draft version of the worksheet. A preliminary Qualified Business Income (QBI) Component Worksheet is included in UltraTax CS. The worksheet will not be fully functional until the release of IRS worksheet."
 

#14
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I'm not saying/implying that this is a final interpretation, I'm finding the initial computation interesting, that's all. I'm one of those people who downloads the program right away and just plunks away on a test return seeing what's around.

I am curious about what other software is thinking given that us mere mortals know nothing on this topic.
 

#15
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Has it been determined if income from an "S" corp. with a fiscal year ending in 2018 will qualify for Sec. 199A?
 

#16
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Yes, it does. Just finished a 5-31-18 year-end about a month ago and had to report all of the 199A info on the K-1's, on the 2017 form which doesn't have anything on it for all of those numbers. Fun, fun!!!
 

#17
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If you had not included the 199A information on the K-1's, this would not stop the shareholders from taking the deduction, would it, if you subsequently gave the shareholders the information regarding 199A such as the W-2 wages and the cost of property that can be taken into account?
 

#18
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It is my understanding that if the information is not on the K-1, the shareholders get no deduction. Just add the information as an attachment to the K-1, or on Line 17 of the K-1 - Other Information area. I went by the draft 2018 form to see what needed to be shown.
 

#19
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I prepared a Oct.31, 2018 Form 1120S that reflected taxable income but I did not include any information regarding Section 199A as I was waiting for definitive information to let me know if a fiscal year end in 2018 would be eligible for Sec. 199A. I was going to send information regarding wages and eligible fixed assets to the shareholders in a separate letter once I knew for sure Sec. 199A would be allowed for a fiscal year end in 2018. Would amending the return with an attachment to Sch. K-1 be the ONLY solution now or could I try the approach I was going to use? I didn't think the IRS would disallow a shareholder taking a 199A deduction because the 1120S didn't reference Sec. 199A. Also, are the 12 months of income eligible for the deduction or only the 10 months that fall into 2018?
 

#20
lucyko  
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Using the recent release of Drake software, I prepared a dummy return for 2018 . My focus was on the 199 A provision and how the software is calculating the 20 % pass thru. In developing the scenario, I included income for a Schedule C business , rental income on a single family residence , REIT dividends and income from a PTP from a K-1 . I made sure the taxable income stayed below $315,000 . Drake software utilized the identical "Simplified Worksheets contained in the September 26,2018 IRS draft when calculating the 20 % pass thru .(page 34-39 of 1040 Instructions )

I was able to track all the amounts from the various input screens to the Simplified Worksheet and the ultimate pass thru deduction amount. It appears that Drake has a small problem in the K-1 area where they are picking up carry-forward loss from 2017 that I don't think is appropriate . I anticipate this will be corrected in the final version of the software.

Interestingly, on the rental screen (Schedule E ) there is question whether the activity is subject to QBI . If you answer yes it will flow the gain to the Simplified Worksheet . I also thought it interesting that line 12 of the Simplified worksheet "Net capital gains " also includes qualified dividends .

This may not be the final worksheets because as pointed out earlier as we are still waiting for Publ 535 for additional clarification on the more complicated scenarios ( phase outs , utilizing wages ,etc ) This at least gives me a framework or starting point as to how Drake will be addressing the issue .
 

#21
makbo  
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lucyko wrote:Using the recent release of Drake software, I prepared a dummy return for 2018 . My focus was on the 199 A provision and how the software is calculating the 20 % pass thru

How about the items in post #12 (which was sort of a re-boot of this thread)? What about 2.5% of unadjusted basis in rental assets?
 

#22
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Ken, see Prop. Reg. 1.199A-6(b)(3). Pass-thru entities must separately identify and report on a Schedule K-1 ...If a passthru entity fails to report these items...the owner's share of QBI, W-2 wages, etc. will be presumed to be zero.

I would amend the K-1 in order to take the deduction. As far as I can tell and everything I have been told in CPE, you will get the full 12 months for fiscal year-ends ending in 2018.
 


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