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IRS Releases Draft 2019 Forms for Section 199A Deduction, Expands 199A FAQ

(Parker Tax Publishing April 2019)

The IRS issued an early release draft of the 2019 Form 8995, Qualified Business Income Deduction Simplified Computation, and the 2019 Form 8995-A, Qualified Business Income Deduction. The IRS has also expanded its FAQ section on the Code Sec. 199A deduction on, providing guidance on several issues that were not specifically addressed in last year's proposed and final regulations. Form 8995; Form 8995-A; Section 199A - IRS FAQ.

Forms 8995 and 8995-A

In early April, the IRS issued drafts of the 2019 forms that taxpayers will have to file when claiming the Code Sec. 199A deduction. The IRS has not yet released drafts of the instructions for these forms.

Compliance Tip: There is no form for reporting the QBI deduction in 2018. However, two worksheets were developed by the IRS to help with computing this deduction. The first worksheet is located in the instructions to Form 1040 and can be used by taxpayers with taxable income (before the QBI deduction) at or below the threshold amount ($315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers) and taxpayers that are not patrons in a horticultural cooperative. For other taxpayers, additional worksheets are located in IRS Publication 535 Draft Worksheet for tax year 2018. Taxpayers are required to retain the worksheets used in calculating their 2018 Code Sec. 199A deduction as documentation for that deduction. While some of the draft 2019 forms are the same as the 2018 worksheets, others have been revised.

Draft Form 8995, Qualified Business Income Deduction Simplified Computation, is a one page form and does not contain any lines for a taxpayer's allocable share of W-2 wages from a trade, business, or aggregation; nor does it include a line for the taxpayer's allocable share of the unadjusted basis immediately after acquisition (UBIA) of all qualified property. Thus, it is to be used by taxpayers that do not have W-2 wages or UBIA.

The draft Form 8995-A, Qualified Business Income Deduction, is six pages and is composed of four parts and four schedules: Part I, Trade, Business, or Aggregation Information; Part II, Determine Your Adjusted Qualified Business Income; Part III, Phased-in Reduction; and Part IV, Determine Your Qualified Business Income Deduction.

Schedule A, Specified Service Trades or Businesses, is composed of two parts, one for non-publicly traded partnership information, and one for publicly traded partnership information. Schedule B, Aggregation of Business Operations, has space for three aggregations of trades or businesses and asks taxpayers to explain the factors that allow aggregation of the taxpayer's businesses in accordance with Reg. Sec. 1.199A-4. Additionally, if a taxpayer holds a direct or indirect interest in a relevant pass-through entity (RPE) that aggregates multiple trades or businesses, the taxpayer is required to attach a copy of the RPE's aggregations. Schedule B also asks taxpayers if there were any changes in aggregations from the prior year and to explain such changes.

Schedule C, Loss Netting and Carryforward, is the same as in the 2018 Schedule C worksheet used for 2018 tax returns. The 2019 draft of Schedule C calculates the qualified business net loss and the carryforward amount for each of the taxpayer's trades or businesses or the aggregation of trades or businesses. Finally, Schedule D, Special Rules for Patrons of Agricultural or Horticultural Cooperatives (COOP), is also the same as the 2018 Schedule D worksheet used for 2018 tax returns. The 2019 draft of Schedule D is to be completed only by a patron of an agricultural or horticultural cooperative and is used to compute the patron reduction used in calculating the qualified business income component.

IRS FAQ on the Code Section 199A Deduction Greatly Expanded

Also in early April, the IRS expanded its website's frequently asked questions (FAQ) section on the Code Sec. 199A deduction. In Q&A-27 through Q&A-33, the IRS discusses the Code Sec. 199A deduction rules with respect to pass-through entities.

One of the question-and-answer items that caught tax practitioners by surprise was Q&A-33, where the IRS states that if an S corporation shareholder takes the self-employed health insurance deduction for health insurance premiums paid by an S corporation for greater-than-2-percent shareholders, that deduction reduces qualified business income (QBI). The IRS notes that the self-employed health insurance deduction under Code Sec. 162(l) is considered attributable to a trade or business for purposes of Code Sec. 199A and will be a deduction in determining QBI. The IRS goes on to say that this "may result in QBI being reduced at both the entity and the shareholder level." Some practitioners are questioning whether this means QBI is reduced twice, while others have questioned whether the IRS merely means that if the deduction doesn't reduce the S corporation's ordinary income, but is instead reported as a separately stated item, it reduces QBI at the individual level.

When preparing 2018 tax returns, the IRS stated that practitioners could rely on the proposed regulations or the final regulations that were issued late in 2018. Because the IRS had not provided for the treatment of self-employed health insurance in the proposed regulations, some practitioners interpreted that to mean that QBI did not have to be reduced for self-employment deductions, as well as Keogh/SEP contributions, that an individual reports on Form 1040. In calculating QBI, however, the final regulations in Reg. Sec. 1.199A-3(b)(1)(vi) provide that deductions such as the deductible portion of the tax on self-employment income under Code Sec. 164(f), the self-employed health insurance deduction under Code Sec. 162(l), and the deduction for contributions to qualified retirement plans under Code Sec. 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. In Q&A-32, the IRS dismissed practitioners' reasoning that they could rely on the proposed regulations to support their position of not reducing QBI for such deductions, saying that the final regulations merely clarify the tax treatment of such items and is not a new position.

Compliance Tip: While the FAQs are not included in the Internal Revenue Bulletin and should not be relied upon as legal authority, the information included in the FAQs can be used to support positions on a return as long as those positions are appropriately disclosed.

Q&A-30 deals with calculating the Code Sec. 199A deduction for fiscal-year pass-through entities. The facts deal with a partnership whose fiscal year ended on March 31, 2018. The IRS notes that the QBI deduction itself is available only to taxpayers whose tax years begin after December 31, 2017. However, any QBI reported to a taxpayer from a related pass-through entity with a tax year beginning in 2017 and ending in 2018 is treated as having been incurred in the owner's tax year in which the pass-through entity's tax year ends. For example, a calendar year partner in a partnership with a fiscal year end of March 31, 2018, will be able to include the partnership's QBI for the entire fiscal year in determining the partner's 2018 QBI deduction. The partner may also use the partnership's W-2 wages and UBIA of qualified property in computing the deduction, if applicable. The IRS notes that, while a pass-through entity's 2017 Schedule K-1 does not have the detail relating to the new QBI deduction, the entity should still provide the necessary detail to the owners as an attachment to the Schedule K-1.

In Q&A-29, the IRS addresses a situation where a taxpayer has income under the threshold amount and only has income from W-2 wages and a partnership interest. The IRS notes that the taxpayer's QBI does not necessarily equal the amount of partnership income reported on Schedule K-1. As the IRS explains, QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business and, to determine the total amount of QBI, the taxpayer must consider deductions not reported on Schedule K-1 that are related to the trade or business. This could include unreimbursed partnership expenses, business interest expense, the deductible part of self-employment tax, the self-employment health insurance deduction, and self-employed SEP, SIMPLE, and qualified plan deductions in addition to other adjustments. Amounts received as guaranteed payments and payments received by a partner for services under Code Sec. 707(a) are not QBI and are not eligible for the deduction.

Q&A-22 deals with calculating QBI for a statutory employee who reports income on a Schedule C. The IRS notes that payments made to statutory employees, as defined in Code Sec. 3121(d)(3), are excluded from the definition of wages considered income from the trade or business of performing services as an employee under Reg. Sec. 1.199A-5(d)(1). Thus, items of income, gain, deduction, and loss from performance of services as a statutory employee are considered QBI and are eligible for the QBI deduction to the extent the requirements of Code Sec. 199A are satisfied.

In Q&A-21, the IRS responds to a question involving a taxpayer who files a joint return and who only has income from W-2 wages and a domestic Schedule C business, and the income is under the threshold amount. According to the IRS, the taxpayer's QBI does not necessarily equal the amount on Schedule C, line 31, Net profit or (loss) because, in addition to the profit or loss from Schedule C, QBI must be adjusted by any other items of gain or deduction related to the business, including but not limited to gains from Form 4797, the deductible part of self-employment tax, self-employed health insurance, self-employed SEP, SIMPLE, and qualified plan deductions. Amounts received as W-2 income, reasonable compensation from an S corporation, guaranteed payments from a partnership, and payments received by a partner for services under Code Sec. 707(a) are not QBI and are not eligible for the deduction.

In Q&A-20, the IRS clarifies that a taxpayer does not have to materially participate in a business to qualify for the Code Sec. 199A deduction. According to the IRS, eligible taxpayers with income from a trade or business may be entitled to the QBI deduction (if they otherwise satisfy the requirements of Code Sec. 199A) regardless of their involvement in the trade or business.

The rules relating to the Code Sec. 199A deduction are discussed in Parker Tax ¶151,100 through ¶157,100.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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