Qualified property under TrumpTax- let's discuss

[kathyc2]

I have several self employed clients that don't have employees. So, the only way to get them any deduction off of business income would be through "qualified property".

Do others concur with my reading that instead of expensing as de minimus smaller equipment they would be further ahead to count it as depreciable property with a 179?

Obviously, there will be years of Rev Procs on this, but they may not come out before 2017 returns are prepared.

Seems to me, we may be able to influence future years deductions by how we handle 2017 purchases.

Thoughts?

[TaxGuyBill]

I agree, with the exception that 100% Bonus Depreciation is better than Section 179.

Keep in mind that taxpayers with "taxable income" of less than $315,000 (MFJ) or $157,500 (other filing statuses) don't have the limitation for W-2/Qualified Property. so those taxpayers can still use the De Minimis election.

[New York Enrolled Agent]

I agree, with the exception that 100% Bonus Depreciation is better than Section 179.

Keep in mind that taxpayers with "taxable income" of less than $315,000 (MFJ) or $157,500 (other filing statuses) don't have the limitation for W-2/Qualified Property. so those taxpayers can still use the De Minimis election.

TGB - I think this is correct but I'd like you (or others) to confirm. That threshold ALSO applies to the specified business restrictions. In other words, as a hypo - an accountant has Schedule C income of $100K with taxable income of $120K gets the benefit of the 20% deduction on the Schedule C business despite being a business specified in §1202. Correct?

[kathyc2]

I agree, with the exception that 100% Bonus Depreciation is better than Section 179.

Keep in mind that taxpayers with "taxable income" of less than $315,000 (MFJ) or $157,500 (other filing statuses) don't have the limitation for W-2/Qualified Property. so those taxpayers can still use the De Minimis election.

Thank you! I totally misread that in the bill.

Next question: I'm not seeing that we need to reduce the profit by such things as SEHI and deductible part of SE tax to calculate the 20%. Correct?

[kathyc2]

How are you reading this: "Qualified business income does not include any amount paid by an S corporation that is
treated as reasonable compensation of the taxpayer."

Say an S-corp has net income of 10K, after paying a salary of 90K to shareholder. Is the 20% based on the 10K, or the 100K?

[TaxGuyBill]

TGB - I think this is correct but I'd like you (or others) to confirm. That threshold ALSO applies to the specified business restrictions. In other words, as a hypo - an accountant has Schedule C income of $100K with taxable income of $120K gets the benefit of the 20% deduction on the Schedule C business despite being a business specified in §1202. Correct?

Yes, I agree. The difference is that other businesses can keep the 20% reduction when it starts phasing out if there are enough W-2 wages or Qualified Property, but "Specified Service Businesses" lose it regardless of W-2 wages or Qualified Property (after a $100,000/$50,000 phase out).

As a side note, it applies to §1202 jobs except engineering and architecture.

Next question: I'm not seeing that we need to reduce the profit by such things as SEHI and deductible part of SE tax to calculate the 20%. Correct?

That is a bit unclear to me, but I THINK those will be subtracted. It says "the net amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer".

When discussing what "the net amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer" means, part of it says "included or allowed in determining taxable income for the taxable year" (with some exceptions, such as capital gains).

To me, the SEHI and 1/2 SE tax would be a "deduction ... with respect to ... business" and "allowed in determining taxable income". If that is the case, those would be deducted before the 20% reduction is applied.

[TaxGuyBill]

How are you reading this: "Qualified business income does not include any amount paid by an S corporation that is
treated as reasonable compensation of the taxpayer."

Say an S-corp has net income of 10K, after paying a salary of 90K to shareholder. Is the 20% based on the 10K, or the 100K?

I read that as the 20% is based on $10,000.


As a side note that I forgot to mention in my last comment, if the business has a loss in one year, that loss will reduce the amount qualified in the next profitable year.

[TaxGuyBill]

One other thought: Because §199A (the 20% reduction) is partially dependent on W-2 wages and Qualified Property, that must mean that K-1s are going to show that information. Right?

[kathyc2]

I read that as the 20% is based on $10,000.

Seems like CPA Practice Adviser agrees with your reading: "QBI generally excludes income from specified service trades or businesses and amounts treated as reasonable compensation by an S corporation or guaranteed payments by partnerships." http://www.cpapracticeadvisor.com/ne...and-deductions

Seems to me that would mean in some circumstances there would be tax benefit of being SP instead of S-corp.

[kathyc2]

Reply w/ quote not working. TGB: "To me, the SEHI and 1/2 SE tax would be a "deduction ... with respect to ... business" and "allowed in determining taxable income". If that is the case, those would be deducted before the 20% reduction is applied."

So, are you thinking it would also be reduced by deductible retirement funding?

[TaxGuyBill]

Reply w/ quote not working. TGB: "To me, the SEHI and 1/2 SE tax would be a "deduction ... with respect to ... business" and "allowed in determining taxable income". If that is the case, those would be deducted before the 20% reduction is applied."

So, are you thinking it would also be reduced by deductible retirement funding?

I would guess so. Again, I am unsure if these three items would affect it, but that is my guess.

On the other hand, the rest of the section is very specific for what is, and what is not allowed, so I'm surprised it does not mention this. From that perspective, it seems likely that my guesswork is wrong about this.

[kathyc2]

Here's a thought: How about we all call our MoC that voted for this bill and see how many different answers we get.

[New York Enrolled Agent]

I would guess so. Again, I am unsure if these three items would affect it, but that is my guess.

On the other hand, the rest of the section is very specific for what is, and what is not allowed, so I'm surprised it does not mention this. From that perspective, it seems likely that my guesswork is wrong about this.

TGB - this was posted on Drake forum. They agree with your conclusion.

https://www.watsoncpagroup.com/Section199A.pdf

Wilma makes $100,000 in net business income but also deducts $5,000 for self-employed health insurance and $10,000 for a SEP IRA. Her deduction is $100,000 less $15,000 or 20% of $85,000.

[kathyc2]

TGB - this was posted on Drake forum. They agree with your conclusion.

https://www.watsoncpagroup.com/Section199A.pdf

Wilma makes $100,000 in net business income but also deducts $5,000 for self-employed health insurance and $10,000 for a SEP IRA. Her deduction is $100,000 less $15,000 or 20% of $85,000.

If true that would have the effect of the SEP only being 80% deductible. But the SEP would reduce AGI whereas the 20% would not. Simplification??

[iratax]

How will states handle this?

There is still a big unknown which is how will your state handle these changes. Will the conform? Will they conform in some areas and not others?