This article is the second in a series discussing the new Internal Revenue Code (IRC) Section 199A Qualified Business Income (QBI) deduction and will discuss the key definitions and terminology contained in the proposed regulations in providing an overview of the mechanics in computing QBI. The first article in this series summarises items contained in each of the IRC Section 199A proposed regulations.
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The proposed regulations provide guidance and plenty of complexity for taxpayers who own multiple trades or businesses. While the final regulations might clarify and change some of the details and definitions that are in the proposed regulations, now is the time to start working with tax advisers to discuss the mechanics of IRC Section 199A and the proposed regulations before the 2018 tax filing season begins in early 2019.
As a recap, IRC Section 199A provides individuals, partnerships, S corporations, trusts and estates engaged in U.S. trades or businesses a 20 percent deduction for QBI which effectively reduces the top federal individual income tax rate from 37 percent to 29.6 percent.
The computation of the QBI deduction is relatively straightforward if your taxable income is below $315,000 if filing a joint return or $157,500 for all other filers. Individuals with income below these thresholds would just need to accumulate the QBI amounts received for each qualified business and combine this with any REIT qualified dividends and income received from qualified publicly traded partnership. The taxpayer would be able to deduct the lesser of 20 percent of the total of this amount or 20 percent of their taxable income in excess of net capital gain.
The vast majority of taxpayers with QBI will have to deal with a more complicated computation. If the individual’s income is above a higher income threshold of ($415,000 if filing a joint return and $207,500 for all other filers), then their share of QBI will not include any income that is from amounts allocated to a specified service trade or business (SSTB).
