FS-2019-8, April 2019
Many individuals, including owners of businesses operated through sole proprietorships, partnerships, S corporations, trusts and estates may be eligible for a qualified business income deduction, also called the section 199A deduction. Some trusts and estates may also claim the deduction directly.
The deduction allows them to deduct up to 20 percent of their qualified business income (QBI), plus 20 percent of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. Income earned by a C corporation or by providing services as an employee isn't eligible for the deduction.
The deduction is available for tax years beginning after Dec. 31, 2017. Eligible taxpayers can claim it for the first time on their 2018 federal income tax returns filed in 2019.
The deduction has two components.
- QBI component. This component of the deduction equals 20 percent of QBI from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust or estate. Depending on the taxpayer's taxable income, the QBI Component is subject to limitations including:
- The type of trade or business,
- The amount of W-2 wages paid by the qualified trade or business, and
- The unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business.
These limitations do not apply to taxpayers with taxable income at or below a certain threshold. For 2018, the threshold amount is $315,000 for a married couple filing a joint return, and $157,500 for all other taxpayers.
It may also be reduced by the patron reduction if the taxpayer is a patron of an agricultural or horticultural cooperative.
- REIT/PTP component. This component of the deduction equals 20 percent of qualified REIT dividends and qualified PTP income. This component is not limited by W-2 wages or the UBIA of qualified property. Depending on the taxpayer's taxable income, the amount of PTP income that qualifies may be limited if the PTP is engaged in a specified service trade or business.
The deduction is limited to the lesser of the QBI component plus the REIT/PTP component or 20 percent of the taxable income minus net capital gain. The deduction is available regardless of whether an individual itemizes their deductions on Schedule A or takes the standard deduction.
Qualified trade or business
A qualified trade or business is any section 162 trade or business, with three exceptions:
- A trade or business conducted by a C corporation.
- For taxpayers with taxable income that exceeds the threshold amount, specified services trades or business (SSTBs). An SSTB is a trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets or any trade or business principal asset is the reputation or skill of one or more of its employees or owners.
The principal asset of a trade or business is the reputation or skill of its employees or owners if the trade or business consists of the receipt of income from endorsing products or services, the use of an individual's image, likeness, voice or other symbols associated with the individual's identity, or appearance at events or on radio, television and other media outlets.
For 2018, the threshold amount is $315,000 for a married couple filing a joint return, and $157,500 for all other taxpayers. The SSTB limitations don't apply for taxpayers with taxable income at or below the threshold amount. Limitations are phased in for joint filers with taxable income between $315,000 and $415,000, and all other taxpayers with taxable income between $157,500 and $207,500. For later years, the threshold amounts and phase-in range will be adjusted for inflation.
- Performing services as an employee.
For more information on what qualifies as a trade or business, see Determining your qualified trades or businesses in Publication 535.
Rental real estate enterprise safe harbor
Solely for the purposes of 199A, a safe harbor is available to individuals and owners of passthrough entities. Under the safe harbor a rental real estate enterprise will be treated as a trade or business for purposes of the QBI deduction. For more information on the safe harbor see Notice 2019-07.
Taxpayers may still treat rental real estate that doesn't meet the requirements of the safe harbor as a trade or business for purposes of the QBI deduction if it is a section 162 trade or business.
Qualified business income
QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts. These includable items must be effectively connected with the conduct of a trade or business within the United States. Count only items in taxable income. Generally, in computing QBI, account for any deduction attributable to the trade or business. This includes, but is not limited to, the deductible part of self-employment tax, self-employed health insurance, and deductions for contributions to qualified retirement plans (such as SEP, SIMPLE and qualified plan deductions).
QBI doesn't include any of the following.
- Items not properly includible in income, such as losses or deductions disallowed under the basis, at-risk, passive loss or excess business loss rules.
- Investment items such as capital gains or losses, or dividends.
- Interest income not properly allocable to a trade or business.
- Wage income.
- Income not effectively connected with the conduct of business within the U.S. (For more information, go to IRS.gov/ECI).
- Commodities transactions or foreign currency gains or losses.
- Income, loss, or deductions from notional principal contracts.
- Annuities (unless received in connection with the trade or business).
- Amounts received as reasonable compensation from an S corporation.
- Amounts received as guaranteed payments from a partnership.
- Payments received by a partner for services other than in a capacity as a partner.
- Qualified REIT dividends.
- Qualified PTP income.
Information for computing the qualified business income deduction
The Form 1040 Instructions and Publication 535 provide worksheets to compute the deduction. Use the Form 1040 instructions if:
- The taxpayer has QBI, qualified REIT dividends or qualified PTP income;
- 2018 taxable income before QBI deduction isn't more than $157,500 ($315,000 if married filing jointly); and
- The taxpayer isn't a patron in a specified agricultural or horticultural cooperative.
Use Publication 535 if:
- The taxpayer has QBI, qualified REIT dividends or qualified PTP income, and
- 2018 taxable income before QBI deduction is more than $157,500 ($315,000 if married filing jointly); or
- The taxpayer is a patron in a specified agricultural or horticultural cooperative.
Specified agricultural or horticultural cooperatives are allowed a deduction for income attributable to domestic production activities that is similar to the domestic production activities deduction under former section 199. Specified agricultural or horticultural cooperatives are cooperatives, to which Part I of subchapter T applies, that are engaged in the manufacturing, production, growth or extraction in whole or significant part of any agricultural or horticultural product, or in the marketing of agricultural or horticultural products.