20% Business Deduction Explained! (How the 2018 199A Qualified Business Income Deduction Works) Part 1 of 2

The downloadable word doc handout can be found here:https://www.dropbox.com/s/k55x8s0lxfe...


For a complete over view of the business tax law changes please see this video here:    • 2018 Tax Changes For Businesses (2018...  

My complete tax playlist can be found here:

   • Income Taxes Explained  

Time Stamps:

•(What is 199A?) What is the qualified Business Income Deduction: 2:10
•What counts as qualified Business Income : 3:10
• Is rental income qualified business income? 3:41
• What is NOT qualified business income? 4:20
• Do you have to be active in the business to receive the qualified business income deduction? 5:48
• 199A Qualified business income deduction limitations 6:28
• 199A deduction calculation example: 7:25
• What type of businesses qualify for the 20% 199A deduction? : 10:32
• What is a qualified trade or business? : 11:35
• Income limitation phase in explained : 13:08
• What is a specified service trade or business?: 14:35

What is 199A? (How does the QBI Deduction Work)

For the years beginning January 1st 2018 through December 31, 2025
A taxpayer other than a corporation is entitled to a deduction equal to 20% of the taxpayer’s “qualified business income”

What is qualified business income?

The taxpayer should determine their “qualified business income” for each business they own (If multiple businesses are involved)
Qualified business income is defined as the net amount of qualified items of income, gain, deduction and loss with respect to a qualified trade or business that is effectively connected with the conduct of a business within the United States. Short-term and long-term capital gain and losses.

What is not qualified business income?
- Dividend income
- Any interest income
- Net gain from foreign currency transactions
- Income from national principal contracts
- Amounts received from an annuity
- Compensation (Wages)
- Guaranteed payments

199A deduction limitation:
The deduction is limited to 20% of lesser of
- Qualified Business Income
OR
- Taxable income AFTER reduction for any net capital gains, but BEFORE the 199A deduction is taken into account.

Example: MFJ taxpayer has the following:
- $100,000 of QBI (Qualified business income)
- $100,000 in Long-term capital gains
- ($30,000 of tax deductions)
- Net taxable income in this example would be $170,000.

The 199A deduction is limited to the lesser of $20,000 ($100,000 x 20%) or $14,000 (20% of $70,000). The $70,000 is calculated by taking the total net taxable income of $170,000 - $100,000 capital gains) = $70,000

Result: In this example is $14,000 199A deduction. This means $14,000 of this person’s business income is no longer subject to tax.

Businesses and/or taxpayers who do not qualify for the 199A deduction:
- C corporations do not qualify
- Individual employees do not qualify. You have to have ownership interest in the business to qualify.

What is a qualified trade or business?

Every business is a qualified trade or business as defined under section 199A with the exception being.
- The trade or business of performing services as an employee
- A specified service trade or business

Exception of 199A deduction for Specified service business:
The deduction is allowed if the taxpayer claiming the deduction has taxable income of less than $315,000 (if married filing jointly; $157,500 for all other taxpayers).

Because the two W-2-based limitations also do not apply when taxable income is below those same thresholds, a taxpayer in a specified service business with taxable income below the thresholds simply deducts 20% of any qualified business income (subject to the overall limitation).

Where to find more information:
- Irs Notice 2018-64 https://www.irs.gov/pub/irs-drop/n-18...
- IRS 199 Proposed Regs: https://www.irs.gov/pub/irs-drop/reg-...
- IRS FAQ re: 199A: https://www.irs.gov/newsroom/tax-cuts...
- Forbes article written by Tony Nitti: https://www.forbes.com/sites/anthonyn...
- Article on 199A written by KPMG: https://home.kpmg.com/us/en/home/insi...