QBI and IRA

[kathyc2]

If a retirement account is funded on line 28 (SIMPLE, SEP) Pro is correctly using it to reduce QBI income. However, if it's line 32 IRA it does not pick up the amount to reduce QBI even if Sch C is the only earned income on return. This is not correct, is it?

That also brings up the question if a return has both W2 income and Sch C income how are IRA contribution handled in regard to QBI income? If W2 income is higher than IRA, amount contributed is the presumed to be from W2 income? Prorated? What about if one spouse has only W2 income and other spouse has only Sch C income? Is IRA considered a spousal IRA and using W2 income, or it they have their own earned income from C does that take precedence?

[TomJ]

IRA contribution does not reduce QBI, regardless of the earned source of the income on the return. For this reason, a taxpayer with QBI from a business should fund a Traditional IRA (if qualifying for the deduction) prior to a self-employed plan. If there is other income though, there are times when a self-employed plan can be more helpful if it brings the taxpayer's income down below the QBI threshold before limitations apply (SSTB, W-2 wages, unadjusted basis). Hope that helps.

[kamckinley]

Here's a good article on this from Michael Kitces.

How the New QBI Deduction-Reduction Ruins the Value of Pre-Tax Retirement Plans for Small Business Owners

[kathyc2]

Thanks. #10