I’ve discussed the new QBI (Qualified Business Income) regulations several times over the past few months.  That’s the new classification that the Tax Cut & Jobs Act has provided to afford pass-through businesses the ability to shield 20% of their profits from income taxes.

But, how one computes that?  For that, we needed some guidance from the IRS, which they finally issued during the furlough. Of course, we can’t be sure these are final until they get printed in the Federal Register- which, given the furlough….

So, most of us tax professionals are going to rely upon the integrity of the IRS and use their proposed final regs as we file.   (If this were another agency of the government, I, for one, would be hard pressed to link “integrity” to it.)

Here’s the gist of what needs to be done.

We have to make sure that we are dealing with a true pass-through business and not a hobby.  And, for each of those entities, we need to determine what is the qualified business income for each.  (Note that reasonable compensation and/or guaranteed payments in a partnership are specifically excluded as QBI.)

In addition, losses in any business create a problem.  Because losses in any business are charged against the positive QBI of other businesses- and are also carried forward for that business where that loss reduces the QBI from that business the following year.  Note that the losses are applied to each business in relationship to the QBI of said business to the total QBI- in other words, the losses are spread equally to all the profitable pass-through businesses.

If there are REIT dividends or publicly traded partnerships (PTP), 20% of those funds are considered to be ‘QBI-potential’ amounts, as well.

Now, we have to take a step back and determine what is the total taxable income for the taxpayer.  If single, we need to ensure that the total is less than $ 157.5K; if married, the limit is twice that at $ 315K.  Below those thresholds, we can proceed.  (If not, we have to find out how much each business pays in salaries [that means examining the W-3 for said business, the summary of all W-2’s issued- 25% or 50% will be the magic numbers] and how much capital equipment [2.5% of the actual value before depreciation] was purchased during the year.  They will afford a means to exceed the threshold limits up to $ 207.5K for singles and $ 415K for marrieds- at which point there is no longer any QBI.)

Oh, wait- we also have to make sure that none of the businesses are in the “red zone”. If the business is not in the red zone, we are allowed to aggregate the businesses- otherwise we have to use the ‘netting’ rules for QBI losses.

Who is in the “red zone”?  Those businesses that are in a specified service, trade, or business (SSTB) that precludes the ability to benefit from QBI.  (SSTB’s are entities involved in the practice of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees.)

Now, if you read the last phrase, you might fear that almost anyone will be excluded with that catch-all.  But, the IRS decided to use a very narrow definition for those terms.  They chose to limit the definition to businesses that earn money from endorsing products or services; benefits from the user’s image, likeness, voice, trademark or symbols; or for appearing at an event or in some sort of media format (radio, tv, etc.).

Whew!  We  passed a bullet with those definitions.

 

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