s.199A Question

[Snaggletooth]

When I first heard of the 20% QBI deduction, I faced that tax season with visions of grandeur.
I didn't realize at the time how many trap doors existed to disallow it. for example, If there is a business loss which accumulates, eventual profit won't work for QBi unless you first overwhelm all previous losses. Sounds fair enough - however if the business has profit and cannot take QBI for any reason whatsoever, the profit is NOT suspended or available to rollforward to future years. But a loss will.

Then there is the 20% test of otherwise taxable item. So it is disallowed for a fledgling business who doesn't make enough profit to outrun the huge standard deduction.

Then,it phases out at high income levels. And the amount phases out is not rolled forward either. Once it phases out it is dead.

Enough whining about the s.199A deduction which was portrayed by politicians as manna from heaven, and I'll get along with my question:

For purposes of this question, assume husband H has a business loss of $20,000 and wife W has a business profit of $15,000.

1. Is the QBI base -(5000) if there is a joint return? I think so but I am posing the question.
2. Can wife W release her $15,000 profit if files a separate return? I think so, but that could be a heavy price to pay.
3. After MFJ in the year of the example, they decide to file MFS in the succeeding year, does the profit/loss roll forward separately for each spouse, or
does the net loss of $5000 split and (-$2500) roll forward to each spouse for year 2?

I don't ever think I would find the answer in the code or regs.

[FEDUKE404]

Good luck.

And don't forget Sch C income for "accountants" does *NOT* qualify for any QBI benefits.

I can't wait to see what they come up with for the worksheets for making Soc Sec benefits federally nontaxable. Rest assured there will somewhere be a "you have too much income" factor. Maybe even another line on Form 8960 (NIIT)?

FE

[New York Enrolled Agent]

Good luck.

And don't forget Sch C income for "accountants" does *NOT* qualify for any QBI benefits.

FE

Are you sure about that? Isn’t there an income threshold to consider?

[Rapid Robert]

if the business has profit and cannot take QBI for any reason whatsoever, the profit is NOT suspended or available to rollforward to future years. But a loss will.

You're right - just like if someone has a profit, but they end up not paying income tax for any reason, the profit should be rolled forward to a future year where it will be taxable. :-)

Enough whining about the s.199A deduction which was portrayed by politicians as manna from heaven

It was just a warmed over DPAD (Sec 199). Similarly, most of the individual tax changes under TCJA were merely moving AMT rules into the regular tax system. But you know, most people don't really understand how taxes work technically.

[Rapid Robert]

Answers:

1. Yes.

2. Yes. but then the husband has a $20K QBI loss carryforward.

3. QBI is tracked per activity, not per spouse. Form 8995/8995-A and worksheets track that

[kathyc2]

Then,it phases out at high income levels. And the amount phases out is not rolled forward either. Once it phases out it is dead.

Hardly. Only certain professions can't take it. 45% of the deduction dollar amount goes to those with AGI over 1 million. That's 95B in 2022 for the top .5%.

For reference 76% of returns had AGI less than 100K. Total of educator deduction plus half SE deduction plus SEHI deduction plus HSA deduction plus Keogh deduction plus IRA deduction plus student loan interest deduction plus QBI deduction for this group has a grand total of 66B for items listed.

[FEDUKE404]

Are you sure about that? Isn’t there an income threshold to consider?

You are correct on income limits related to QBI restrictions for those involved in "specified service trades or businesses."

I just picked up on the "check the box" for SSTBs and never went too deep into the QBI woods after that. My few clients who have Sch C's were not in the SSTB catergory. The very few who were blew through the income limits. I guess I added 1 + 1 and came up with 3?

Thanks for straightening me out. It is appreciated!

FE

================================

Specified service trades or businesses (SSTBs) are only eligible for the QBI deduction if your income doesn’t exceed a certain threshold. You may also be within the phase-in range, which means you could still be eligible for the QBI deduction.

SSTBs are businesses that perform services in the fields of:

• Health
• Law
• Accounting
• Actuarial science
• Performing arts
• Consulting
• Athletics
• Financial services
• Investing and investment management

[Snaggletooth]

Hardly.

It DOES phase out. You are seldom wrong, so I'm wondering if I am understanding you correctly.

I had a phase out beginning at $191,950. That is high income, but not ridiculously high these days. Of course the taxpayer was filing single, but she was an 88 year-old widow.

[kathyc2]

It DOES phase out. You are seldom wrong, so I'm wondering if I am understanding you correctly.

I had a phase out beginning at $191,950. That is high income, but not ridiculously high these days. Of course the taxpayer was filing single, but she was an 88 year-old widow.

Phaseouts only apply to SSTB.

[Snaggletooth]

Phaseouts only apply to SSTB.

I hate to keep beating this dead horse, but an 88-year old widow with rental property cannot be one of those professions. If you are correct, Drake is possibly in error.

[kathyc2]

I hate to keep beating this dead horse, but an 88-year old widow with rental property cannot be one of those professions. If you are correct, Drake is possibly in error.

Hard to believe Drake would be having an error on this at this time of year. You likely have something clicked on that it is an SSTB if Drake is calculating phaseout. You need to back up a step and determine if the rental activity even qualifies as 199A. https://www.irs.gov/pub/irs-drop/rp-19-38.pdf

[Rapid Robert]

Phaseouts only apply to SSTB.

Not correct. See TheTaxBook. I asked TaxBert (the new AI assistant to the online WebLibrary): what are the phaseouts for QBI deduction for non-SSTB

Here was the answer:

For non-SSTB businesses in 2024, the QBI deduction phaseouts are[1]:

Single, Head of Household, and Qualifying Surviving Spouse:
- Threshold: $191,950
- Phase-in range: $191,951 to $241,950
- Full W-2 wages/property limitation applies: Over $241,950

Married Filing Jointly:
- Threshold: $383,900
- Phase-in range: $383,901 to $483,900
- Full W-2 wages/property limitation applies: Over $483,900

Married Filing Separately:
- Threshold: $191,950
- Phase-in range: $191,951 to $241,950
- Full W-2 wages/property limitation applies: Over $241,950

When income is above the phase-in range, the QBI deduction is limited to the greater of[2]:
- 50% of W-2 wages, or
- 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property

Unlike SSTBs, non-SSTBs can still claim a limited QBI deduction above the phase-in range if they meet the W-2 wages/property tests.

Sources:
[1] - Deluxe & Deluxe Supplement - Business Deductions - (Page 8-16)
[2] - Deluxe & Deluxe Supplement - Business Deductions - (Page 8-15)

[kathyc2]

Not really phased out, they just need to pay employees and/or have investment in equipment to get the full amount.

The fact remains that .5% of tax returns get close to half of the dollar deduction amount.