QBID and Adjustments to Income - Final Regs

Technical topics regarding tax preparation.
#1
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Am I mistaken or did the final regulations sneak in the reduction of QBID for the deductions for 1/2 SE tax, self-employed health insurance premiums, and retirement plan contributions?

Page 198 of the Final Regulations.

"(vi) Other deductions. Generally, deductions attributable to a trade or business are taken into account for purposes of computing QBI to the extent that the requirements of section 199A and this section are otherwise satisfied. For purposes of section 199A only, deductions such as the deductible portion of the tax on self-employment income under section 164(f), the self-employed health insurance deduction under section 162(l), and the deduction for contributions to qualified retirement plans under section 404 are considered attributable to a trade or business to the extent that the individual’s gross income from the trade or business is taken into account in calculating the allowable deduction, on a proportionate basis to the gross income received from the trade or business."
 

#2
JAD  
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I agree. What is your opinion on whether the IRS stepped beyond the law itself to create this? Did they go too far?
 

#3
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Good catch. We ran all of our projections that way…

I wonder about a straight IRA contribution, when the only source of the taxpayer’s earned income is, say, a Schedule C profit.

Also, it would not make sense to me that a 2% S-corp shareholder, who includes health insurance on his W2, would have to reduce QBI by the S/E Health deduction that shows up on the face of his 1040. Seems to me like that deduction would have reduced QBI twice in such a case (once inside the corp [as wages] and then again at the personal level [as S/E Health]). But then again, maybe it does make sense. Although in reality, it is the same “thing.”
 

#4
lucyko  
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Yes lots of stuff has been added .The final regulations contain 246 pages while the draft contained 184 pages . The topic you brought up starts at page 196 and paragraph 5 is a new addition .

My understanding ,could be wrong, is that IRA contributions are not part of the "other deductions "discussed on page 198 .

I am confused by the reference on page 198 that "the deduction for contributions to qualified retirement plans under section 404 " Should this state section 401 ?
 

#5
Nilodop  
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i guess there's some ambiguity there, but it means the deduction is under 404, not the plan (which is under 401).
 

#6
dave829  
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The final regs say that taxpayers may rely on the proposed regs for 2018 returns. Does this mean that for 2018, taxpayers can take the position that the deductions for 1/2 SE tax, self-employed health insurance premiums, and retirement plan contributions don't reduce QBI, but for later returns, they do reduce QBI?
 

#7
JR1  
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Right, and tell that to your software so it'll clear efiling error checking...
Go Blackhawks! Go Pack Go!
Remembering our son, Ben Jan 22, 1992 to Aug 26, 2011.
For FB'ers: https://www.facebook.com/groups/BenRoberts/
 

#8
lucyko  
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The adjustment /reduction of QBI for 1/2 SE tax ,self employed health insurance premiums ,and contributions to qualified retirement plans is contained in the final regulations (REG 107892) which supersedes the proposed regulations issued last summer .
 

#9
Wiles  
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dave829 wrote:The final regs say that taxpayers may rely on the proposed regs for 2018 returns. Does this mean that for 2018, taxpayers can take the position that the deductions for 1/2 SE tax, self-employed health insurance premiums, and retirement plan contributions don't reduce QBI, but for later returns, they do reduce QBI?

Is anybody taking this position?
 

#10
dave829  
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Here’s what it says in the preamble to the final regulations:

5. Treatment of Other Deductions

Section 199A(c)(1) provides that QBI includes the net amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer. Commenters requested additional guidance on whether certain items constitute qualified items under this provision. Several commenters suggested that deductions for self-employment tax, self-employed health insurance, and certain other retirement plan contribution deductions should not reduce QBI. One commenter reasoned that qualified retirement plan contributions should not reduce QBI because they should not be treated as being associated with a trade or business, consistent with the treatment when calculating net operating losses under section 172(d)(4)(D). The commenter also suggested that while self-employed health insurance is treated as associated with a trade or business, such expense should likewise not reduce QBI for purposes of simplification in administering the rule. Another commenter suggested that QBI should not be reduced by these expenses because they are personal adjustments. One commenter also requested guidance on whether unreimbursed partnership expenses, the interest expense to acquire partnership and S corporation interests, and state and local taxes reduce QBI.

The Treasury Department and the IRS have not adopted these recommendations because they are inconsistent with the statutory language of section 199A(c). Whether a deduction is attributable to a trade or business must be determined under the section of the Code governing the deduction. All deductions attributable to a trade or business should be taken into account for purposes of computing QBI except to the extent provided by section 199A and these regulations. Accordingly, §1.199A-3(b)(1)(vi) provides that, in general, deductions attributable to a trade or business are taken into account for purposes of computing QBI to the extent that the requirements of section 199A and §1.199A-3 are otherwise satisfied. Thus, for purposes of section 199A, deductions such as the deductible portion of the tax on self-employment income under section 164(f), the self-employed health insurance deduction under section 162(l), and the deduction for contributions to qualified retirement plans under section 404 are considered attributable to a trade or business to the extent that the individual’s gross income from the trade or business is taken into account in calculating the allowable deduction, on a proportionate basis. The Treasury Department and the IRS decline to address whether deductions for unreimbursed partnership expenses, the interest expense to acquire partnership and S corporation interests, and state and local taxes are attributable to a trade or business as such guidance is beyond the scope of these regulations.

Some have argued that the language I’ve highlighted in red means that these deductions should have reduced QBI all along as that’s what the statute intended. Others, such as the people described in the preamble who submitted comments on the proposed regs (AICPA was one) say no. I’m just not sure that taxpayers can rely on the proposed regs. for 2018 for this issue, which is why I asked the question.
 

#11
EZTAX  
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In the UltraTax chat room, some are arguing that for 2018 you have a choice between following the proposed regs or the final, and that the final must be used in 2019 forward.
 

#12
Keyad22  
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Item for Monday, February 4, 2019

IRS Releases Corrected Final Regulations on Qualified Business Income Deduction: The IRS has released corrected final regulations on the new Qualified Business Income (QBI) deduction under IRC Sec. 199A. Included are corrections to the definition and computation of excess Section 743(b) basis adjustments, a correction to the description of a disregarded entity for purposes of IRC Sec. 199A , and other minor edits. The final regulations are effective when published in the Federal Register. However, for tax years ending in calendar year 2018, taxpayers may rely on the final regulations (in their entirety) or the August 2018 proposed regulations (in their entirety). The additional proposed regulations issued in January 2019 (REG-134652-18) would apply to tax years ending after the date they are adopted as final. However, taxpayers may rely on the rules pending their finalization. Regs. 1.199A-1 through -6 and 1.643-1.


From Checkpoint.
 

#13
jon  
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Is the 250 hours in the FINAL that is optional for 2018 application??
 

#14
Chay  
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Do the proposed regs have any language that would specifically exclude 1/2 SE tax, self-employed health insurance premiums, and SEP, etc. contributions from the calculation of QBI? If not, that would mean people who choose to adopt the proposed regs are embarking on their own direct interpretation of the law for that purpose, and the position that these deductions aren't "attributable to a trade or business" would be hard to support at this point.
 

#15
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If not, that would mean people who choose to adopt the proposed regs are embarking on their own direct interpretation of the law for that purpose, and the position that these deductions aren't "attributable to a trade or business" would be hard to support at this point.


Totally agree. We ran all of our projections under the assumption that these things reduce QBI. It’s still somewhat unclear, however, as to how to handle the SE Health deduction for a 2% S-corporation shareholder or a partner.
 

#16
Chay  
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Jeff-Ohio wrote:It’s still somewhat unclear, however, as to how to handle the SE Health deduction for a 2% S-corporation shareholder or a partner.

For a PTE the trade or business has already received the SE Health deduction at the entity level in exchange for increasing a partner or shareholder's income at the individual level. Therefore the corresponding SE Health deduction on the 1040 is attributable specifically to that additional individual-level income. The additional income is in the form of wages and guaranteed payments, and these don't increase QBI, therefore the deduction should not decrease QBI.

Unless you want to argue that the partner health insurance guaranteed payments are for the use of capital and not for services rendered with respect to the partnership. In that case they would increase QBI, and I would say the deduction would bring it back down to a net of 0 again for the same effect.
 

#17
Wiles  
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Self-employed taxpayer makes a SEP IRA contribution, this reduces QBI. What if, instead they make a traditional IRA contribution? Does this not reduce QBI?

Edit - Please disregard. This was answered in #3 - #5 already.
 

#18
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What about the SEP IRA deduction the S Corp takes on its books. It that a reduction to the QBI on the shareholders personal return? Or are we just talking the self employed with a Sch C?
 

#19
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For a PTE the trade or business has already received the SE Health deduction at the entity level in exchange for increasing a partner or shareholder's income at the individual level.


(Unrelated to health insurance, the PTE also received a normal wage deduction in exchange [if we are to use that term] for increasing a shareholder’s income at the individual level. And that wage income is not QBI at the 1040 level).

I get it that it would be duplication if we reduced QBI inside of the S and then again on the guy’s 1040 for what amounts to the same amount/deduction.

Some might argue, though, that the health insurance is just additional wages, deductible by the S as such, just like normal wages, and includible as wage income on the 1040, just like normal wages. And normal wages don’t represent QBI income. Then they’d point to the final reg which just says to reduce QBI by the SE Health Deduction, with no differentiation between a 2% S shareholder and a sole-proprietor.
 

#20
Wiles  
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Some might argue, though, that the health insurance is just additional wages, deductible by the S as such, just like normal wages, and includible as wage income on the 1040, just like normal wages.

To expand on (or restate) this - for an S, at least - the IRS has the reasonable comp argument on their side. As we know, QBI is reduced by reasonable compensation paid to the S shareholder. The IRS can ignore that the origin of this increase to wages is from that SEHI paid by the S. They may just say that whole amount reported on the W-2 represents reasonable comp.
 

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