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QBI Scenario


Terry D EA

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Working with a partnership that holds 11 properties that are residential real estate. I would like comments on my thoughts here to be I am hitting this right on the mark. The partnership has two partners so which qualifies them for the QBID as a pass thru entity.

1. I feel they should aggregate all properties into one activity per section 199A. Comments? 

2. The total rental net income equals $41,187.00. 

3. Other partnership income equals -$1678.00 ( Parts of this loss is small guaranteed partner payments that don't qualify for QBI correct?)

4. Income for QBI purposes equals $39.509 = $41187.00 - $1678.00 (figures are rounded)

5. Each partner is MFJ with income under the threshold so limitations do not come into play. 

6. No W-2 wages and no depreciation test required.

7. Each partner QBID equal $3,950.90= $19,754.50 x 20% ($19754.50 = $39,509.50/2)

8. Create the statement of either trade or business under sec 162 or safe harbor method

9. Yes, I have to figure the guaranteed payments out of the QBI calculations.

Comments please.

 

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Statement 7 in your scenario shows them getting QBID on the amount eligible from the partnership.  However, it is my understanding that the deduction is also limited to the amount of taxable income, such that other factors may come into play.  In other words if one partner is married and his wife earns more that the standard deduction so that their taxable income is greater than the partnership income, your calculation might be correct assuming no capital gains, or losses or other QBI.  But the other partner could be single, with this as his only source of income.  That partner would have $21432.50 in guaranteed payments, minus half the partnership loss of 839 for gross income of $20593.00.  If the Guaranteed Payments are subject to SE tax, half of that would be subtracted from his income (1514) to get an AGI of 19079.  After the standard deduction of $12,000 for single tp, his taxable income would be $7079.  So his QBID would be limited to 20% of 7079, or $1416.   Not the $3950 you calculated.  So 50/50  partners can wind up with different amounts of QBID on the same income depending on all the facts and circuses.  At least that is my limited understanding at this point in time.  Ask me again tomorrow and I might have a different answer.

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2 hours ago, Terry D said:

8. Create the statement of either trade or business under sec 162 or safe harbor method

 

If I read the Notice 2019-07 correctly, I don't think your client will be able to use the safe harbor.  Please see Section 3 - RULES OF APPLICATION, para .02 where it says the taxpayer must hold a direct interest in the property, or if it is in a passthrough it must be a disregarded entity described in 301.7701-3. 

The way I'm reading that part of para .02 for other than those reporting directly on page 1 of Sch E, it seems that for passthroughs, only an SMLLC would be able to use the safe harbor, and that partnerships, multi-member LLCs and S corps may still qualify for the 199A deduction but that they can't use the safe harbor. The interesting thing is that a H-W partnership in a community property state may be able to since it can be considered a disregarded entity, but don't anyone hold me to that because I've yet to look into that and probably won't since I'm not in one of those states.

I was hoping that the safe harbor would be available to one of my larger real estate clients, but I think his LLC is knocked out because it's owned 50-50 with his wife, and not in a community property state. 

 

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1 hour ago, Gail in Virginia said:

Statement 7 in your scenario shows them getting QBID on the amount eligible from the partnership.  However, it is my understanding that the deduction is also limited to the amount of taxable income, such that other factors may come into play.  In other words if one partner is married and his wife earns more that the standard deduction so that their taxable income is greater than the partnership income, your calculation might be correct assuming no capital gains, or losses or other QBI.  But the other partner could be single, with this as his only source of income.  That partner would have $21432.50 in guaranteed payments, minus half the partnership loss of 839 for gross income of $20593.00.  If the Guaranteed Payments are subject to SE tax, half of that would be subtracted from his income (1514) to get an AGI of 19079.  After the standard deduction of $12,000 for single tp, his taxable income would be $7079.  So his QBID would be limited to 20% of 7079, or $1416.   Not the $3950 you calculated.  So 50/50  partners can wind up with different amounts of QBID on the same income depending on all the facts and circuses.  At least that is my limited understanding at this point in time.  Ask me again tomorrow and I might have a different answer.

I prepare the individual return for one partner. I know the income, investments, cap gains; etc, do not figure into the QBI. I'm confused at your figure for guaranteed payments. The only amounts in my scenario are approximately 279.00 respectively. It looks like you're calling the rental income guaranteed payments. Explain please.  I do not know about the other partner and I can only provide the partnership income he is to claim on his 1040. I agree the QBI final figures are calculated after the deductions on the 1040. The class that I took never mentioned that. Give me resource if you can. 

On item #7 you are correct. I should have noted that this would be the potential deduction before anything else on the 1040.  Sorry about that.

Here is a blurb from the class notes that were handed out:

"What Does This Deduction Do Anyway?

It allows a below the line deduction to taxable income (NOT AGI, SE tax, itemized deductions, or AMTI) for qualified business income (QBI). QBI is defined as the net amount of domestic income, gains, deductions and losses from a qualified trade or business more than long-term capital gains (they get special treatment already) on the individual taxpayer's Form 1040. This is usually going to be the number AFTER the itemized/standard deduction less the long-term capital gains. The deduction is them calculated as the lesser of 20% of QBI or 20% of the taxable income. If the taxable income on the 1040 is below $157,000 or $315,000 for MFJ then the calculation is done at this point. If the taxable income is between the thresholds, you must calculate the limitation to the QBI deduction."

This partnership has no employees and is all rental real estate. Therefore there are no W-2 wages to play into the calculations. Because the one partner that I know of, income will be below the threshold, then the depreciation test is not used either. My client would be looking at either the 20% of QBI or 20% of taxable income.

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My mistake, Terry.  I mis-read your scenario that the guaranteed payments were what caused the income to go into negative numbers.  Since guaranteed payments are disregarded the negative total income would be irrelevant and get you back to the total income for QBI.  I am not sure without looking what effect, if any, having negative income on the partnership that isn't caused by guaranteed payments would have.  I was calculating guaranteed payments by taking 41187 plus the loss of 1678 and dividing it by 2 to get the guaranteed payments.  My main point was to be careful about telling people they will get 20% of their QBI for a deduction, because after all the gyrations and the standard deduction it might be less - even a lot less. 

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2 minutes ago, jklcpa said:

 

If I read the Notice 2019-07 correctly, I don't think your client will be able to use the safe harbor.  Please see Section 3 - RULES OF APPLICATION, para .02 where it says the taxpayer must hold a direct interest in the property, or if it is in a passthrough it must be a disregarded entity described in 301.7701-3. 

The way I'm reading that part of para .02 for other than those reporting directly on page 1 of Sch E, it seems that for passthroughs, only an SMLLC would be able to use the safe harbor, and that partnerships, multi-member LLCs and S corps may still qualify for the 199A deduction but that they can't use the safe harbor. The interesting thing is that a H-W partnership in a community property state may be able to since it can be considered a disregarded entity, but don't anyone hold me to that because I've yet to look into that and probably won't since I'm not in one of those states.

I was hoping that the safe harbor would be available to one of my larger real estate clients, but I think his LLC is knocked out because it's owned 50-50 with his wife, and not in a community property state. 

 

Judy,

I didn't quite catch that part. If they can't use the safe harbor then it would seem to be reasonable they meet the definition of a trade or business according to section 162. I wish there was some definitive answers with this. I am still waiting to hear how one poster said the IRS stated not to rely on section 469 when determining if the RPE rises to a trade or business. I've not seen anything on that. But, section 469 is really clear on what conditions cause rise to a trade of business. The same language is used to determine the 25K loss rule. It appears the more I study and research the more uncertain I am becoming. I'm sure we will be hearing various opinions on this. 

BTW- Were you or are you looking at joining the webinar from Drake explaining how Drake calculates QBI? The timing is terrible for me. I hope they archive that for later viewing.

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5 minutes ago, Gail in Virginia said:

My mistake, Terry.  I mis-read your scenario that the guaranteed payments were what caused the income to go into negative numbers.  Since guaranteed payments are disregarded the negative total income would be irrelevant and get you back to the total income for QBI.  I am not sure without looking what effect, if any, having negative income on the partnership that isn't caused by guaranteed payments would have.  I was calculating guaranteed payments by taking 41187 plus the loss of 1678 and dividing it by 2 to get the guaranteed payments.  My main point was to be careful about telling people they will get 20% of their QBI for a deduction, because after all the gyrations and the standard deduction it might be less - even a lot less. 

Thanks Gail, I can promise you I', not telling my clients anything except that I am not sure until I calculate everything. I learned this numerous years ago after having to find a way to remove my foot from my mouth.  I have several rental property clients that are individuals with one property, two or more properties,  and rental partnerships. I am handling them each individually. The partners that I do not preparer their individual returns will receive instructions from me for the QBI. That will be limited to the statement on the K-1. It will be their preparer's responsibility to calculate the QBI on the 1040 correctly.

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On 1/21/2019 at 1:59 PM, jklcpa said:

 

If I read the Notice 2019-07 correctly, I don't think your client will be able to use the safe harbor.  Please see Section 3 - RULES OF APPLICATION, para .02 where it says the taxpayer must hold a direct interest in the property, or if it is in a passthrough it must be a disregarded entity described in 301.7701-3. 

Judy I believe a partnership is a disregarded entity described in 301.7701-3. 

§ 301.7701-3 Classification of certain business entities.

(a)In general. A business entity that is not classified as a corporation under § 301.7701-2(b)(1), (3), (4), (5), (6), (7), or (8) (an eligible entity) can elect its classification for federal taxpurposes as provided in this section. An eligible entity with at least two members can elect to be classified as either an association (and thus a corporation under § 301.7701-2(b)(2)) or apartnership, and an eligible entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner.

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On 1/21/2019 at 2:11 PM, Terry D said:

I am still waiting to hear how one poster said the IRS stated not to rely on section 469 when determining if the RPE rises to a trade or business. I've not seen anything on that. But, section 469 is really clear on what conditions cause rise to a trade of business.

Terry,   The TCJA BLUE BOOK and the proposed reg specifically stated that sec 162 will be used in defining a trade or business.  

That was clarified by the final reg which specifically states on page 14 that section 469 will not be used.

I would ask your CPE instructor where he came up with his 469 statement.

 

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DANRVAN, I agree that sec 162 is the document to follow. I guess I'm still hung up a bit on the fact the instructor of the course I took referenced sec 469 outlining the same rules used to determine the 8582 losses that defines the conditions that give rise to a trade or business. I don't plan on relying or using the sec 469. Thanks for your input with this.

BTW- I did download the TCJA Blue Book.

Edited by Terry D
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