There has been some confusion about what adjustments to business income (Sch C or S Corp with 1 100% s/h) need to be made:
1- Sch C 1/2 SE tax (business portion)
2. Any pension contribs by owner/s or s/holder/s
3. Medical insurance paid by owner/s or s/holder/s
4. Q-adjust for any Sec 179 depreciation to 5 year life?????
5. Q- adjust for any Bonus depreciation?????
Without discussing any other nuances, e.g. business vs hobby, active participation in real estate, qualified business occupations, income limits on qualified occupations, limits on taxable income (where qualified income is greater than taxable income).....etc. I am interested in how to adjust income according to the final regs.
Second question is whether anyone is using the proposed regs of 2018 to avoid deducting # 1-5 above?
Thanks for your thoughts.
Items 1-3 are already adjusted in row E of the QBI Deduction Info worksheet at the bottom of Schedule C and the K1 worksheets (and other forms that generate QBI). I would need an example of what you're talking about regarding 4 & 5.
As far as using the Proposed Regs to avoid backing out SE deductions, the IRS has made very clear that's not permissible. The silence of the proposed regs with respect to SE deductions was not a statement that they should NOT reduce QBI. Even under the proposed regs you had to back out any deductions connected to qualified business income, the final regs merely specified that yes, the SE deductions fall under that category.
4-If the business has used Sec 179 depreciation or 5-bonus depreciation, I thought I heard that there was a provision for adjusting the Net Income on the Sch C or Line 1 of the K-1 for an amount that would be "normal" depreciation, rather than accelerated depreciation.
Happy with your other answer.
Regarding sec 179 or bonus depreciation, anything that's allowable in the current year should generally also be applied to QBI. Since anything allowable in the current year is already in net income of Sch C, and that's the starting point for QBI, you shouldn't need any further adjustments. Unless I'm still not understanding the scenario.
K-1s are a little more complicated b/c of ambiguity in IRS instructions regarding what should be included in the box 17/20 (depending on whether 1120S or 1065 k1) QBI amount. You'll just have to look closely at the K-1 and supporting statements to see how the preparer calculated the QBI amount. If the QBI amount in box 17/20 has already subtracted items like section 179, then you don't need to make further adjustments. (Except in the rare case where the k1 already subtracted 179 expenses, but they're not allowed at the individual level, in which case you'll want to add disallowed 179 expenses back to the QBI amount in box 17/20.) If the box 17/20 QBI amount has NOT accounted for those separately stated items, then you'll need to make entries in the QBI Deduction Info wksht, line E, to account for those items to the extent they're connected to QBI.
As to what deduction is attributable to a qualified trade or business as well as our view on Prop. vs. Final Regs, you may like to refer to this discussion: https://proconnect.intuit.com/community/Discussions-Tax-Reform/Proposed-vs-Final-Regulations/td-p/10...
There is not much science in how the adjustments are made. If an expense is attributabe to multiple qualified trades or businesses, it'd be allocated on a prorata basis (e.g. 1/2 SE tax deduction). If an expense is specifically attributable to one single qualified trade or business, it'd reduce the QBI ony for that particular trade or business.
It's not clear why #5 is relevant for QBI adjustment. QBI has already been reduced by the bonus depreciation. #4 and #5 also do not reduce the UBIA, which is used to compute the applicable limitations.
Still an AllStar