1231 loss as QBI

Technical topics regarding tax preparation.
#1
JAD  
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1.199A-3(b)(2)(ii)(A) says that capital gains/losses are not QBI, including items treated as capital, such as gains or losses under 1231.

A 1231 loss would be treated as capital if it were netted with a 1231 gain.

Client realized a substantial 1231 loss in 2018 and has no capital gains. This is a QBI loss, correct? It must be property sold that was held in a t/b, otherwise it would not have generated a 1231 loss.

Does anyone see a mistake in my thought process? Thanks.
 

#2
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Does anyone see a mistake in my thought process? Thanks.


No. As you point out, capital gains and losses [or things treated as such] are not QBI. If we have a standalone Sec 1231 loss, it is ordinary. Therefore, the standalone 1231 loss in your situation is included in QBI. This issue was raised in the preamble:


a. Treatment of Section 1231 Gains and Losses
Section 199A(c)(3)(B)(i) provides that QBI does not include any item of short-term capital gain, short-term capital loss, long-term capital gain, or long-term capital loss. The Treasury Department and the IRS have received comments requesting guidance on the extent to which gains and losses subject to section 1231 may be taken into account in calculating QBI. Section 1231 provides rules under which gains and losses from certain involuntary conversions and the sale of certain property used in a trade or business are either treated as long-term capital gains or long-term capital losses, or not treated as gains and losses from sales or exchanges of capital assets.
Section 199A(c)(3)(B)(i) excludes capital gains or losses, regardless of whether those items arise from the sale or exchange of a capital asset. The legislative history of section 199A provides that QBI does not include any item taken into account in determining net long-term capital gain or net long-term capital loss. Conference Report page 30. Accordingly, proposed §1.199A-3(b)(2)(ii)(A) clarifies that, to the extent gain or loss is treated as capital gain or loss, it is not included in QBI. Specifically, if gain or loss is treated as capital gain or loss under section 1231, it is not QBI. Conversely, if section 1231 provides that gains or losses are not treated as gains and losses from sales or exchanges of capital assets, section 199A (c)(3)(B)(i) does not apply and thus, the gains or losses must be included in QBI (provided all other requirements are met).
 

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Sure glad I don't do this for a living.
 

#4
JAD  
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Thanks
 

#5
Nilodop  
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It must be property sold that was held in a t/b, otherwise it would not have generated a 1231 loss.. A 1231 loss can also happen from an involuntary conversion of a capital asset held in connection with a transaction entered into for profit.

But the answer by Jeff-Ohio is still correct, even if the 1231 loss came from such an event, because they structured the statute to define QBI in part by reference to section 864(c), which is a broad definition and includes the type of 1231 loss that would otherwise arguably not be
effectively connected with the conduct of a trade or business within the United States
. I wonder if that was inadvertent. Oh well.
 


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