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How to enter and calculate the qualified business income deduction, section 199A, in Lacerte

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How to enter and calculate the qualified business income deduction, section 199A, in Lacerte

The qualified business income deduction (QBI) is intended to reduce the tax rate on qualified business income to a rate that is closer to the new corporate tax rate. There are two ways to calculate the QBI deduction: using Form 8995 or Form 8995-A. Don’t worry about which form your return needs to use. After you complete the required steps, Lacerte will generate the correct forms for your return. All the information you need to help Lacerte calculate the QBI deduction for you is contained in this article.

First, follow the steps for each of the relevant schedules listed below for your client’s return.

  1. Enter the income and expenses for the activities following your normal workflow.
    • Screen 16: Business Income (Sch C)
    • Screen 19: Farm Income (Sch F)
  2. For each activity, scroll down to the Qualified Business Income Deduction section.
  3. Check the Specified service trade or business (SSTB) box, if applicable.
    • For more information relating to SSTBs, click here.
  4. Enter any amounts related to cooperatives that may apply:
    • DPAD received from a specified cooperative
    • QBI allocable to qualified payments received from cooperative
    • W-2 wages allocable to qualified payments received from cooperative
  5. Enter an Aggregate business number, if you are aggregating this activity with others on the return.
    • Use the same Aggregate business number for each income activity you want to be aggregated together.
    • Enter a Description of aggregated businesses and explanation of how they are allowed to be aggregated, if applicable. You only need to enter this explanation on one activity in the aggregation.
    • Enter Explanation of change in aggregation from prior year, if applicable.

Lacerte doesn’t automatically include most Schedule E rentals in QBI calculations due to the guidance in IRS Publication 535. However, Lacerte will calculate QBI for Schedule E activities marked as land, self-rentals, real estate professionals, or as claiming safe harbor.

  1. Enter the income and expenses on screen 18 following your normal workflow.
  2. Scroll down to the Qualified Business Income Deduction section.
  3. Check the Specified service trade or business (SSTB) box, if applicable.
    • For more information relating to SSTBs, click here.
  4. Enter a number in Rental real estate enterprise number if claiming safe harbor, if applicable. This entry is required to generate the Section 199A Rental Real Estate Safe Harbor statement.
    • If you want to combine multiple Schedule E properties on one safe harbor statement, enter the same rental real estate enterprise number on each.
  5. Enter any amounts related to specified cooperatives that may apply.
  6. Enter an Aggregate business number, if you are aggregating this activity with others on the return.
    • Use the same Aggregate business number for each income activity you want aggregated together.
    • Enter a Description of aggregated businesses and explanation of how they are allowed to be aggregated, if applicable. You only need to enter this explanation on one activity in the aggregation.
    • Enter Explanation of change in aggregation from prior year, if applicable.
All rentals: You will need to enter a 1 in Business is a qualified trade or business: 1=yes, 2=no [O] to force the QBI calculation.

  1. Enter K-1 information for the applicable activity following your normal workflow.
  2. Go to the QBI section for your activity:
    • Partnership K-1 - Line 20
    • S-Corp K-1 - Line 17
    • Estate or Trust K-1 - Line 14
  3. Fill in the Section 199A grid with the information provided on your K-1.
    • If you don’t see the field you’re looking for, scroll to the right.

These input fields are not overrides. The program assumes this activity qualifies when entries are made within this input section.

Where to see your results

Once you’ve completed the steps in each of the relevant schedules for your client’s return, you’re done. Lacerte will automatically generate Form 8995 or Form 8995-A based on what’s required for your client’s return. The QBI deduction will flow to line 10 of Form 1040 or 1040-SR, or line 38 of Form 1040-NR.

You’ll see Form 8995-A and accompanying schedules if:

  • you have QBI, qualified REIT dividends, or qualified PTP income or loss; and
  • your 2019 taxable income before your QBI deduction is more than $160,700 ($160,725 if married filing separately or a married nonresident alien; $321,400 if married filing jointly); or
  • you’re a patron in a specified agricultural or horticultural cooperative.

If you don't meet those requirements to file Form 8995-A, your deduction is figured on Form 8995 instead. Form 8995-A and its supporting schedules, like Schedule B Aggregation of Business Operations, won't be completed since they aren't required to file the return. See the IRS Instructions for more detail.

Lacerte will automatically calculate and carryforward any unallowed QBI amounts to the following year, however, if you are entering a new return you may need to enter the carryover from the prior year.

Where you enter this depends on if it is a passive QBI carryover or if has already been allowed by the 8582:

For QBI loss carryovers that are still limited by passive activity limitations: 

  1. Open the business activity screen that is associated with the QBI Loss.
    • Screen 20.1 for Partnership K-1s
    • Screen 20.2 for S Corporation K-1s
    • Screen 20.3 Estate and Trust K-1s
    • Screen 18 for Rental and Royalty Income
  2. From the Sections on the left choose Prior Year Unallowed Passive Losses.
  3. Enter the carryover amounts in the correct field:
    • For Screen 20: 20YY QBI unallowed passive loss (where YY is the prior year).
    • For Screen 18: 20YY QBI Operating (where YY is the prior year)

For non-passive QBI carryovers and QBI losses that are no longer limited by passive activity limitation:

  1. Go to Screen 15 Net Operating Loss Deduction.
  2. Click on the Current Year NOL button.
  3. From the Sections on the left choose Qualified Business Loss Carryovers.
  4. Enter the carryover amounts in Qualified business loss carryover.

This occurs when an asset is past its depreciable life. Per Publication 535, such an asset is not included in the calculation of unadjusted basis immediately after acquisition (UBIA), which then feeds into QBI.

Per Section 199A regulations, QBI is to be reduced by these amounts.

For QBI reported on a K-1, Lacerte assumes the entity issuing the K-1 has already reduced the QBI appropriately. If you feel QBI was misrepresented on your K-1, you can check the box Reduce QBI by self-employed health insurance deduction to reduce QBI as needed.

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