QBI AGAIN

[Marie]

When figuring QBI?  Sch c has a profit of $10000.  pays SE tax, has SEHI, and a $2000 IRA, all shows up on sch 1 as deductions from income.  Is QBI $10000 to put on the 199A worksheet, or $10,000 minus all those deductions of SE, SEHI, and IRA.  Some examples show the deducts, other worksheets don't, and the examples in various pubs, etc only talke about the profit and then figuring 20% of profit or 20% of taxable income, whichever is less.

[G2R]

Assuming the SE Health Insurance & IRA contributions are NOT already included the $10k profit mentioned above, then you'd deduct them from the $10k profit, and you'd deduct 1/2 SE Tax which is calculated (10,000 x .9235) x .0765 = $706.48

So assuming SE Health Insurance was 2k, and IRA contributions were 1k.  Then QBI would be as follows:

QBI Calculation:

Schedule C Profit $10,000,

• less $706.48 1/2 SE Tax
• less $2,000 SEHI
• less $1,000 IRA

= $6.293.52 QBI

So you get 20% of $6,293.52 assuming thresholds and/or SSTB isn't involved. 

[Yardley CPA]

I wonder how strict the IRS will be in enforcing these QBI submissions?  They can't possibly have the resources needed to scrutinize every submission that contains them to the degree that's needed.  Maybe there will be some automated control that spits out blatantly incorrect ones?  I guess time will tell. 

[grandmabee]

Hmmm ....I didn't realize the IRA was deducted.. I thought only pension plans, sep, simple, 401-k etc. 

 

[PaulH]

I'm not convinced anybody really knows.  I read the regs to say that if Schedule C is the only source of earned income that makes an IRA deduction possible, it should be subtracted from QBI.  But I see lots of opinions on the net that say don't subtract an IRA, and workpapers from Drake and Turbotax that apparently don't subtract an IRA.  The IRS says (1040 instructions and Pub 535) subtractions from QBI include but are not limited to SEP, SIMPLE, 401K, but doesn't address traditional IRAs.  ATX seems to be stalling, and I won't be surprised if the worksheet that finally comes out (if it ever does) doesn't address the issue, but instead makes you list the subtractions with no help from them. 

[G2R]

I believe you have to reduce the QBI income only for simple IRAs because these retirement plans are put in place in direct connection with a small business.  Same goes for SEP & Solo 401ks.  Traditional and ROTH IRA contributions can be made by anyone, regardless of self employment status so that's why I don't believe these are part of the QBI equation.  

Many of the regulations use the term "effectively connected income" or "in relation to QBI" so the way I'm applying this is if it's related, connected or stemming from the qualified business income in some capacity, it's probably a factor in determining the QBI amount.  

[Gail in Virginia]

I am inclined to agree with GGRNY.  IRA's will be accounted for in the limitation on taxable income, but not the original calculation of QBI unless somehow connected to the business.  But I could be wrong.

[PaulH]

The regs (page 198) say "deductions such as the deductible portion of the tax on self-employment income under section 164(f), the self-employed health insurance deduction under section 162(l), and the deduction for contributions to qualified retirement plans under section 404 are considered attributable to a trade or business to the extent that the individual’s gross income from the trade or business is taken into account in calculating the allowable deduction, on a proportionate basis to the gross income received from the trade or business."  So if Schedule C is the only earned income, then its gross income is taken into account in calculating the IRA deduction, and it sounds to me like the traditional IRA deduction is "attributable to the trade or business".  Having said that, I probably won't be subtracting IRA deductions from QBI if the commercial software developers don't do it.  So far I haven't had to file one, and I'm hoping for more clarification before I need to decide.

[Terry D EA]

A snip of the worksheet from Drake is attached. This is for a client that has a Sch C business. Line items 6 thru 9 show the deductible items from QBI. I don't see anything here regarding IRA's. So, I agree with PaulH if the commercial software is not deducting IRA deductions then I won't be adjusting them either. Why Drake does provide overriding capability, they do not provide a line with the words other deductions to enter anything. I think we all are way over thinking this at times and are our own world worst enemies. Trust me I'm including myself in the group as this QBI stuff has made me crazy.

[Marie]

You can only put money into an IRA if you make earned income.  So Sch c or F or partnership draws subject to SE have to make a profit for taxpayer to contribute.  How could it not be attributable?

[Terry D EA]

My take is contributions to an IRA reduce gross income from wages and not from business related activities. The income from  any pass thru entities is used to calculated QBI on the 1040 as the starting point. The plans on line 7, 8 & 9 of the worksheet I posted are all items relating to self-employment or from a pass thru. The business income from the partnership is entered on line 6 of the 1040, the IRA contributions are an adjustment to that income. Remember the QBI is a below the line adjustment that is entered after the standard or itemized deduction. The QBI is calculated as I said earlier by deducting the items on the worksheet and then the 20% is deducted from the lesser of taxable income or QBI. 

Better stated, the IRA is a personal contribution not related to business activities which is why it is not included in the QBI calculation. Again, I think we are all way overthinking this process thus leading to additional confusion. I'm not pointing at anyone and am including myself as well. GGRNY made a statement about simple IRA's. They are part of line 8 of the worksheet because they have some connection to the business activity. I hope I have helped here and not added any more confusion.

[Marie]

YES, THANKS