199A Q&A from the IRS newsroom

Technical topics regarding tax preparation.
#1
Doug M  
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There are some items clarified, others are a little murky

https://www.irs.gov/newsroom/tax-cuts-a ... ction-faqs

And they are adding add'l Q&A as questions arise
 

#2
dave829  
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Whatdya think of their answer to Q33?
Q33. Health insurance premiums paid by an S-Corporation for greater than 2% shareholders reduce qualified business income (QBI) at the entity level by reducing the ordinary income used to compute allocable QBI. If I take the self-employed health insurance deduction for these premiums on my individual tax return, do I have to also include this deduction when calculating my QBI from the S-Corporation?

A33. Generally, the self-employed health insurance deduction under section 162(l) is considered attributable to a trade or business for purposes of section 199A and will be a deduction in determining QBI. This may result in QBI being reduced at both the entity and the shareholder level.

Didn't the health insurance premiums already reduce QBI at the S corporation level? Are they saying that it gets reduced again at the shareholder level?
 

#3
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Q&A #33 is complete crap. The health insurance premiums were already deducted from the S-Corp income via wages as required under notice 2008-1. I'm not amending any returns to reduce QBI for this scenario at this time.
 

#4
Bob A  
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taxguy2399 wrote:Q&A #33 is complete crap. The health insurance premiums were already deducted from the S-Corp income via wages as required under notice 2008-1. I'm not amending any returns to reduce QBI for this scenario at this time.


And respectfully...... how about 1120S / QBI on extension? Anyone planning to account for #33?
 

#5
Chay  
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taxguy2399 wrote:Q&A #33 is complete crap.

It's not a completely unfounded position. In fact, it was predicted by Jeff-Ohio and Wiles a few months ago on this thread:

viewtopic.php?f=8&t=13968

Jeff-Ohio wrote:
Chay wrote: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.

Wiles wrote: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.

It's going to come down to whatever the hell the following underlined phrase in Regs 1.199A-3(b)(1)(vi) means:

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.

Are the wages received from the S corp "gross income received from the trade or business", or are they instead gross income received from a separate trade or business of performing services as an employee? Are only the wages "taken into account" when calculating the deduction under section 162(l), or is the S corp distributive share of income also "taken into account"?

Sometimes I think Congress and the IRS are deliberately instigating these debate questions with their vaguely worded statutes and Regs.
 

#6
Bob A  
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Anyone heard any resolution to "the issue" with Question 33? (SEHI, reduce QBID at the 1040 level again after it's already been reduced at the 1120S level)

I'm working on S Chapters with 1040 (extensions).

ty
 

#7
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Has the FAQ's Q33 been published in the Internal Revenue Bulletin (I.R.B.)?
See SBSE Memo SBSE-04-0517-0030 (2017) where IRS agents are specifically cautioned regarding the limitations of FAQs.
"FAQs that appear on IRS.gov but that have not been published in the Bulletin are not legal authority and should not be
used to sustain a position unless the items (e.g., FAQs) explicitly indicate otherwise or the IRS indicates otherwise by press release or by notice or announcement published in the Bulletin."
 

#8
Chay  
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I've taken a fresh look at this issue and come to the conclusion that the answer to FAQ #33 is bogus. Here's why:

  1. Under Reg. § 1.199A-5(d)(1), the presence of wages "earned in a capacity as an employee" gives rise to a "trade or business of performing services as an employee". By virtue of being included on Form W-2, wages are therefore derived from a business other than the S corporation's business.
  2. Under Reg. § 1.199A-5(a)(3), "items of income, gain, deduction, or loss from the trade or business of performing services as an employee" do not constitute QBI. Thus, if a deduction is "from" the shareholder's separate business of being an employee, it doesn't affect the QBI deduction.
  3. Under sections 1372(a), 162(l)(2)(A), and 401(c), solely for the purpose of determining the SEHI deduction that the shareholder qualifies for, we pretend that the S corporation is a partnership and decide how much "earned income" the shareholder has from the "partnership". This results in the shareholder's SEHI deduction being computed with reference to his medicare wages shown on Form W-2.
  4. Under Reg. § 1.199A-3(b)(1)(vi), we regard the SEHI deduction as attributable to a trade or business to the extent gross income from that trade or business "is taken into account in calculating the allowable deduction". Because the SEHI deduction is determined solely with reference to the shareholder's income from his trade or business of being an employee, it is attributable only to that business. Therefore, the deduction is "from" that business and doesn't affect the shrareholder's QBI deduction.
To me, this is the only reasonable way to read the regulations that have been published.

I've got a bunch of S corp shareholders' returns on extension, and I plan on taking this position on all of them. I hope all of you will join me. If any of the returns are audited, I'd like to know whether the revenue agent will even bother trying to assert the answer to FAQ #33, and if so, how he responds to the above.
 

#9
dsocpa  
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Chay, I'm with you 100%. Small businesses are already gouged with ridiculous premiums. Possibly they are attempting in their misguided poorly worded fashion to reduce or eliminate QBI from those who aren't including the amount on their W2 in box 1 and still take the deduction? There are plenty of those out there - I know of one CPA firm that routinely does not include the SEHI in box 1 on any W2's nor do they correct for any previously prepared W2's with no SEHI included in box 1 when it is apparent SEHI should have been included.

In any event I am not amending any returns nor do I intend to reduce QBI by the SEHI.
 


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