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ProConnect Tax Online Complex Worksheet Section 199A - Qualified Business Income Deduction

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ProConnect Tax Online Complex Worksheet Section 199A - Qualified Business Income Deduction

The Tax Cuts and Jobs Act created a new deduction for non-corporate taxpayers with qualified business income. The deduction reduces taxable income, and is generally 20% of a taxpayer's qualified business income (QBI) from a partnership, S-corporation, or sole proprietorship, defined as the net amount of items of income, gain(s), deduction(s), and loss with respect to the trade or business. Certain types of investment-related items are excluded from QBI, such as capital gains or losses, dividends, and interest income (unless the interest is properly allocable to the business).

Taxpayers whose taxable income exceeds the threshold amount of $157,500 (or $315,000 for MFJ filers) are subject to limitations based on their W-2 wages and their unadjusted basis in acquired qualified property. For specified service related businesses, there is a separate phase-out if taxable income exceeds the threshold amount.

Partnerships and S-corporations take this deduction at the partner and shareholder level. Trusts and estates are eligible for the deduction. W-2 wages and the unadjusted basis in acquired qualified property are apportioned between the trust or estate and the beneficiaries. Specified agricultural or horticultural cooperatives are also eligible for the deduction under special rules. Qualified business income includes only income effectively connected with a U.S. trade or business (or Puerto Rico if all the income is subject to US tax).

The deduction is intended to reduce the tax rate on qualified business income to a rate that is closer to the new corporate tax rate.

Complex Calculation:

An additional consideration for the complex calculation is the concept of a specified service business.  This designation becomes important if the taxpayer's taxable income exceeds the threshold.  A specified service trade or business is generally excluded from the definition of 'qualified trade or business income'.  Therefore no QBI, W-2 wages, or unadjusted basis immediately after acquisition (UBIA) of the qualified property from the specified service trade or business are taken into account in figuring the QBI deduction.

If the specified service trade or business is conducted by a pass-through entity, the same limitation applies to the pass-through items regardless of whether the taxpayer is a passive owner or materially participates in the business. See Qualified Business Income 199A - Specified Service Trade or Business (SSTB) for additional information.

Complex Worksheet:

The images included below are draft copies of the Qualified Business Income Deduction Worksheet. This is the main worksheet for computing QBI that flows to the main return form. There are additional schedules referenced in draft Publication 535 that may need to be completed before completing Part I of the Worksheet.  Each of the specific purposes is captured in general below.

  • Schedule A – When trade or business is a specified service trade or business and your taxable income is more than $157,500 but not more than $207,500 ($315,000 - 415,000 if married filing jointly).
  • ​​Schedule B – If there are multiple trades or businesses, then there is an option to aggregate these into a single trade or business for the purpose of applying limitations.
  • Schedule C – If any trade or business has a net loss for the current year or a qualified business net loss carryforward from prior years, this schedule will offset the trade or business net losses against net income from other trades or businesses.
  • Schedule D – Patrons of agricultural or horticultural cooperatives have special rules and use this schedule.

These schedules are generated based on answers to the questions in the Deduction for Qualified Business Income section for Business Income, Farm Income, Rent/Royalty Income (as shown in Figure 2) or Pass-Through Income (referenced in Figure 3).  How these are generated are discussed in the sections that cover the schedules individually later in the document.

After these schedules are completed as applicable, then the Qualified Business Income Deduction Worksheet is used to calculate the qualified business income deduction.  When the taxable income is more than $157,500 but not more than $207,500 ($315,000 and $415,000 if married filing jointly), the computed 20% deduction amount will be partially limited to the higher of 50% of wages paid by the business, or 25% of the wages paid plus 2.5% of the unadjusted basis of qualified property. If the business has no wages paid and no qualified property, a partial deduction will be allowed.

When the taxpayer's income is above the taxable income threshold and above the maximum phase-out range of $207,500 (or $415,000 if MFJ).  In determining the limitations, wage and property limits are fully considered. The computed 20% deduction amount will be limited to the higher of 50% of wages paid by the business, or 25% of the wages paid plus 2.5% of the unadjusted basis of qualified property. If the business has no wages paid, and no qualified property, then no deduction is allowed at all.

QBI Complex Worksheet

QBI Complex Worksheet

Example in the Business Income (Schedule C) screen: Operationally the data will need to be entered into the Schedule C screen. In order to implement the QBI considerations a new section labeled Deduction for Qualified Business Income has been added. How the QBI rules are applied will depend on the data entered in this section.

Schedule C Input Screen

If the checkbox for ‘Specified service business’ is marked then the rules for the specified service business will come into effect.  Graphically represented below, this type of business will have different limitation factors if the taxable income is above the threshold of more than $157,500 ($315,000 if married filing jointly) and may be completely disqualified if the taxable income is above $207,500 ($415,000 if married filing jointly).

Schedule A

If there are multiple trades or businesses, there is an option to aggregate these into a single trade or business for the purposes of applying the limitations.  According to the draft instructions, each trade or business should be considered separately for purposes of applying the W-2 wage limitation and the UBIA limitation. However, a preparer may choose to aggregate multiple trades or businesses into a single trade or business for purposes of applying the limitations.

In ProConnect Tax Online, a mechanism is available to associate the businesses. Trade or business activities that have the same ‘Aggregate business number’ will be consolidated for the purposes of QBI.  These aggregated businesses will be represented on this worksheet based on the information entered for the income to be considered.

Schedule B

Requirements to aggregate:

  1. A person or a group of persons directly or indirectly own 50% or more of each trade or business for a majority of the tax year and all trades or businesses use the same tax year end,
  2. None of the trades or businesses are specified service trades or business, and
  3. The trades or business meet at least two of the following factors.
    1. They provide products or services that are the same or that are customarily offered together.
    2. They share facilities or share significant centralized business elements such as personnel, accounting, legal, manufacturing, purchasing, human resources, or information technology resources.
    3. They are operated in coordination with, or reliance upon, one or more of the businesses in the aggregated group.

If any of the trades or businesses have a net loss for the current year or have a qualified business net loss carryforward from prior years; this schedule will calculate the offsets of the trade or business net losses against net income from the other trades or businesses.  The loss must be apportioned among all trades and businesses with net income in proportion to their net income.

Schedule C

Patrons of agricultural or horticultural cooperatives have special rules and use this schedule.  Once an amount is entered in the ‘Qualified Cooperative Dividends’ data entry, then this schedule will be produced.  With this type of trade or business, the activities can be aggregated.  If there is also an ‘Aggregate business number’ entered, then the values for this type will be consolidated for the purposes of QBI.

Schedule D

Detailed Scenarios and Calculation Flowchart:

To view detailed scenarios including a calculation flowchart, see Tax Reform - Qualified Business Income (QBI) Deduction

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