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cbslee

SECTION 199A - IN DEPTH ANALYSIS

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The proposed regs have knocked out all of my rental clients except one whose qualification is questionable since he is always juggling multiple business issues

and the probability of him maintaining a  contemporaneous activity log is pretty low.

For those of you with clients who might qualify, here is a step by step in depth analysis https://www.forbes.com/sites/anthonynitti/2019/01/19/irs-publishes-final-guidance-on-the-20-pass-through-deduction-putting-it-all-together/?ss=taxes#55344e92d9f0

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20 minutes ago, mircpa said:

So, CPA practice income is not eligible for 20% QBI ? Looks like doctors, attorneys are also disqualified

Only if you exceed the income thresholds. Small time folks like me can still take the QBI, possibly.

A lengthy read but seems to be the best analysis given to date. 

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I thought CPA, attorneys, doctors are disqualified & not eligible to claim QBI. Am I reading it correctly. Here is where it says

Definitions of Specific Disqualified Fields 

The regulations attempt to leverage off existing regulations under Section 448 and provide further interpretation of the disqualified fields. Let's see who's disqualified and who isn't in each field:

  • Health

     

    • Disqualified: doctors, pharmacists, nurses, dentists, veterinarians, physical therapists, psychologists, and other "similar healthcare professionals." It is important to note, in the proposed regulations, the language included "other similar healthcare professionals who provide medical services directly to a patient." The final regulations removed the italicized section, which likely broadens the scope of the field of health. For example, removal of that language means that someone like a radiologist or technician, who may not meet directly with a patient and thus perhaps previously had an argument that they were NOT in the field of health, will now fit squarely within its definition.
    • In addition, the final regulations responded to a string of public comments by providing examples reflecting that with the right facts, an assisted living facility and a surgery center may NOT be in the field of health.
    • Not disqualified: people who provide services that may improve the health of the recipient, such as the operator of a health club or spa, or the research, testing, and sale of pharmaceuticals or medical devices.
  • Law
    • Disqualified: Lawyers, paralegals, legal arbitrators, and mediators.
    • Not disqualified: Those that provide services not unique to law, like printing, stenography, or delivery services.
  • Accounting
    • Disqualified: Accountants, enrolled agents, return preparers, financial auditors, bookkeepers, and similar. You don't need to be a licensed CPA to fall victim to this rule.
    • Not disqualified: No one. We're all screwed.

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SSTB restrictions kick in at the threshold levels. If they are below the threshold levels the restrictions do not apply. Below taken from IS FAQ regarding section 199A & SSTB's.

8. In 2018, I will report taxable income under $315,000 and file married filing jointly. Do I have to determine if I am in an SSTB in order to take the deduction? Is there any limitation on my deduction?

A8. No, if your 2018 taxable income is below $315,000, if married filing jointly, or $157,500 for all other filing statuses, it doesn’t matter what type of business you are in. You will be able to deduct the lesser of:

     a) Twenty percent (20%) of your QBI, plus 20 percent of your qualified REIT dividends and qualified PTP income, or

     b) Twenty percent (20%) of your taxable income minus your net capital gains.

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In the IRS guidance, one of their examples under SSTB is an attorney and how they will qualify for the deduction. I thought for a long time the fields were an automatic dis-qualifier regardless of income.

 

I'm just going to assume that all of these rules are going to be completely different in 2019 because this is amazingly complex.

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Oh and there was previous argument that a K-1 doesn't include any info on whether the income qualifies - WRONG!

What do I do if the K1 doesn’t have any information in the new QBI codes?

  • If the taxpayer gets a K-1 that does not have any info in the new K1 codes, but you believe it should be a qualifying trade or business, the taxpayer should request a corrected K-1 from the partnership, scorp, or fiduciary. If the QBI info is not recorded in the codes, the IRS will assume it is not a qualifying business, so the taxpayer will not be allowed to take the deduction from the pass-through entity.
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I believe we need to insert respective code on Line 17 of K1 for example Code V for  Section 199A QBI income

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I do see code V on Sch K1 codes list. Don't know how to enter code V onto K1. Its a locked field or some bunny hop will take it there.

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In the Form 1120S, right?  You can enter the Section 199A income, wages, unadjusted basis, etc. on the tab for Ln 17d, Sch K - Oth Items.

There is an equivalent form for QBI entry in the Form 1065 for Line 20.

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After the regs that were issued last Friday, it looks like many of us who took courses on 1099A will have to take them again.  In addition to clarification of whether rentals qualify (covered in other threads), there is a big change in how we calculate QBID.  Before we thought the deduction was the lower of 20% taxable income or 20% of net profit.  Now net profit for this purpose is profit less adjustments calculated on the basis of profits (1/2 SE tax, SE health insurance, retirement contributions).  For those who are single with no other income, there probably is no difference since the adjustments affected taxable income anyway.  For those who have W2 wages or spouses with W2s, it may make a big difference.

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Can someone explain what does this means. I am quoting from taxadviser.com the link cbslee posted

Qualified trades and businesses include all trades and businesses except the trade or business of performing services as an employee and "specified service" trades or businesses: those involving the performance of services in law, accounting, financial services, and several other enumerated fields, or where the business's principal asset is the reputation or skill of one or more owners or employees

 

This is exactly what I asked & TerryD responded with SSTB restrictions kicks in with threshold levels.

This is so much confusing.

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mircpa,

The specified trades or businesses are outlined in the regs.  Law, accounting financial services, etc.   Everyone else who operates from a passthrough entity is qualified, unless you are a business that makes their income from the reputation of the owner (think sole proprietor hair dresser), then you get lumped in with the SSTB crowd.

Example - I operate a house painting business as a S corp.   No one knows I am the owner, I send crews out to do the work & I have a team of sales staff to recruit business.   I am a qualified business.  

Example 2 - I operate "Tom's Best in Modesto House Painting".   Everyone knows me because I do everything from the estimate to the painting to the invoicing to the back office work.   I get almost all my work from referrals.   I don't have employees.   I live off my reputation.   I get lumped in with the SSTB rules. 

The kicker is, under the thresholds, none of this matters.   Everyone in a passthrough (leaving out rentals) gets the deduction if their income is under the thresholds.   SSBTs get treated exactly like every other business until the threshold limits kick in.  I think that is the point Terry was trying to make.

Tom
Modesto, CA

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I think I understand it except when it comes to the rentals.  I'll need to take a closer look when those come into play.  For rentals with a loss, someone mentioned, the loss will have to be netted against any other qualified pass thru income.  And the loss will have to be carried forward to offset a future profit.  Is this true?  Also, if the rental is showing a profit in the current year, do we have to bring forward past year losses to offset the current year profit?

 

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They final regs updated what they meant by "reputation of the owner" - it only applies to those who are using their name and likeness to earn income like endorsements and advertising.  Everyone was worried with the vague proposed regs since reputation of the owner would have applied to most everyone.  But the final regs cleared things up considerably

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34 minutes ago, mircpa said:

So with my tax practice income am I entitled to take 20% deduction for my S corporation ?

Yes as long as your 1040 taxable income does not push you up into threshhold phase out range.

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Thought I would put together a little poem to help me  remember basics when speaking with clients:

Can I take QBI Deduction

Let's see your personal situation

You're an employee, not an owner

Not for you, you're a loner

You have a business

First step in this messiness

Not for C corps, just a big blankness

QBI, SSB, W2s, Qualifying Property, there's an exception under threshold amount

315K and 157.5K is the count

 

I think I'm good to go for now.  

 

 

 

 

 

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1 hour ago, Abby Normal said:

This post should be pinned.

 

I changed the title of the pinned post for QBI and I'm putting a link to this topic for future ease of finding.  Hope this works for everyone, or if not, let me know.

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The rental safe harbor is just that...a SAFE HARBOR. facts & circumstances can also make rentals qualify for the 199A deduction.  Just like 3 years of losses does not automatically make a business a hobby.  You have to look at things like profit motive, experience of the owner, etc.  Not to mention that case law is on the side of trade or business designation.  As someone on another board put it, “when was the last time you put the sale of a rental on Sch. D?”

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