IRS 2019 Draft QBID Forms/worksheets

The IRS recently released drafts of the 2019 Form 8995 for QBID calculations
https://apps.irs.gov/app/picklist/list/ ... earch=Find

The draft instructions provides insight as to what IRS is thinking about when determining Qualified Business Income for purposes of the 20 % pass thru deduction going forward. Not good news if this language is adopted .

In the draft they are proposing 3 additional expense adjustments which reduce QBI income :
1) Charitable deductions related to the business
2) Unreimbursed partnership expenses
3) Business interest expenses

These adjustments would be in addition to the already existing adjustments for deductible part of self-employment tax, self- employment health insurance deduction,and contributions to qualified retirement plans.

I had already been assuming these. It would have been nice if charitable contribution deductions could be an add back to the QBI amount but I would not have been aggressive enough to try it or even have thought of it.

It would have been nice if charitable contribution deductions could be an add back to the QBI amount but I would not have been aggressive enough to try it or even have thought of it.

The form is off-base is treating charitable contributions as QBI reductions. I haven’t been reducing QBI by charity and I won’t going forward. Ditto for health insurance.

My interpretation of the adjustment for charitable contributions relates only to business promotions ,sponsorships,etc which we consider advertising and is placed on the advertising line of Sch.C. I don't think the adjustment relates to charitable contributions that end up on Sch. A as cash contributions .

On page 46 of Pub 535 it states the following " Cash payments to an organization, charitable or otherwise ,may be deductible as business expenses if the payments aren't charitable contributions or gifts and are directly related to your business. If the payments are charitable contributions or gifts you can't deduct them as business expenses" .

The Pub then provides a couple of examples where the intended purpose of the of a contribution was to increase a company's income and therefore is reported as advertising .

My interpretation of the adjustment for charitable contributions relates only to business promotions ,sponsorships, etc which we consider advertising and is placed on the advertising line of Sch.C. I don't think the adjustment relates to charitable contributions that end up on Sch. A as cash contributions .

If that’s your interpretation, and your interepretation is right because that’s what the Form/Instructions say, then it is silly that this issue is even being brought up on the Form and in the Instructions. Obviously, if we take the charity as a business deduction, it should reduce QBI. That’s because we’re treating it as an advertising expense.

But I have a feeling your interpretation isn’t right. I have a feeling the Forms/Instructions are really saying, “If you pass thru a charitable deduction, reduce QBI accordingly.”

I haven’t read the Form/Instructions, but it just seems too stupid for the IRS to tell us, “If you deducted charity as advertising, then reduce QBI.” That is so obvious that the IRS probably wouldn’t bother mentioning it anywhere.

Ethical dilemma - Sch C client brings in their P&L showing an expense for donations. Of course, we do the right thing and report that on the Sch A. But what about QBI? Do we treat that as a donation from their business and reduce QBI or do we assume the client doesn't know any better and that is just a personal donation and not reduce QBI?

Do we treat that as a donation from their business and reduce QBI

What if your client paid his personal mortgage through the business? Would the Schedule A interest deduction reduce QBI?

What if your client doesn't itemize on Schedule A and therefore does not actually deduct any charitable contributions?

And what if your client read this in the Proposed Regs (preamble)…how would your client interpret it?

Similarly, the fact that a deduction is allowed for purposes of computing effectively connected taxable income does not necessarily mean that it is taken into account for purposes of section 199A. For example, for purposes of computing effectively connected taxable income, section 873(b) allows certain deductions, including for theft losses of property located within the United States and charitable contributions allowed under section 170, to be taken into account regardless of whether they are connected with income that is effectively connected with the conduct of a trade or business within the United States. However, for purposes of section 199A, these items would not be taken into account because section 199A only permits a deduction for income that is both attributable to a trade or business and that is also effectively connected income.

There’s some wording like “does not necessarily mean” and “whether they are connected with income that is effectively connected.” Does this imply that such deductions could still possibly be effectively connected (even though they are automatically treated as such)? I think so. But then there’s the “however” and the clear statement that follows. It seems that it’s saying that even if the charitable deduction is effectively connected, it’s not “attributable” to a trade or business. At least that’s one interpretation. This position, which would mean we don’t have a QBI reduction, is bolstered by this sentence in the final regs:

Whether a deduction is attributable to a trade or business must be determined under the section of the Code governing the deduction.

Another interpretation is that the charitable deduction isn’t “effectively connected,” it is simply treated as such under Sec 873(b). If we go that route, it too would mean we don’t have a QBI reduction.

The final Regs say this, unrelated to charitable contributions, per se:

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.

To me, these things have has a definite link to the business income, as per the Code Sections authorizing these deductions. If there is no business income, for a Schedule C filer, for example, we don’t get any of these deductions. That’s not the case with charity.

Tax season is upon us and the new IRS 'QBI Statement A' that goes with the K-1 has it's own line for Charitable Contributions. If we are going exclude donations from the QBI calculation, do we do it here at the entity level on the Statement A or do we present it on this statement and then exclude it on the 1040?

The Charitable Contribution line on Statement A simply reduces the QBI. It still passes through and should be reflected on the 1040. note - Businesses that are 100% owned by a single individual should do charitable contributions at the PERSONAL level and not the business level. This will allow the greatest QBI deduction.

If we are going exclude donations from the QBI calculation, do we do it here at the entity level on the Statement A

That’s what we’ve been doing at our office – exclude at the entity level.

The Charitable Contribution line on Statement A simply reduces the QBI.

If you’d like to provide some analysis to actually support that statement, other than the Form Instructions tell us to, please do so.

Agree with Jeff...there's nothing in IRC Sec 199A nor the related final and proposed regs that says charitable contributions are a part of the calculation.

1/2 SE Tax and SEHI are explicitly mentioned in the "-3" final reg IIRC.

Appears to be at attempt by the IRS to legislate...

Agree with Jeff...there's nothing in IRC Sec 199A nor the related final and proposed regs that says charitable contributions are a part of the calculation.

1/2 SE Tax and SEHI are explicitly mentioned in the "-3" final reg IIRC.

Appears to be at attempt by the IRS to legislate...

No, an attempt by the IRS to interpret the intention of a law with zero committee reports or Congressional record of intent. The House has attempted corrections bills, but they've hit a roadblock in the Senate.