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Understanding qualified business income (QBI) reductions

SOLVEDby IntuitProConnect Tax24Updated July 27, 2021

In ProConnect Tax, your total qualified business income (QBI) may get a reduction for one-half self-employment (SE) tax, SE health insurance, or certain other retirement plan contributions.

How the IRS's Section 199A Regulations affect your QBI

Your total Qualified Business Income is reduced by these amounts based on Section 199A Regs. You can find this information beginning on page 43 in the section labeled 5. Treatment of Other Deductions, which states:

The Treasury Department and the IRS have not adopted these recommendations
because they are inconsistent with the statutory language of section 199A(c).

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

All deductions attributable to a trade or business should be taken into account for purposes of computing QBI except to the extent provided by section 199A and these regulations.

Accordingly, §1.199A-3(b)(1)(vi) provides that, in general, deductions attributable to a trade or business are taken into account for purposes of computing QBI to the extent that the requirements of section 199A and §1.199A-3 are otherwise satisfied.

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.

The Treasury Department and the IRS decline to address whether deductions for unreimbursed partnership expenses, the interest expense to acquire partnership and S corporation interests, and state and local taxes are attributable to a trade or business as such guidance is beyond the scope of these regulations.

This reduction occurs at the entity level when calculating QBI reported on the Individual's Schedule K-1.

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