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Draft IRS Pub. Includes New Schedules to Help Calculate Sec. 199A Deduction

(Parker Tax Publishing January 2019)

The IRS issued a Pub 535 Draft Worksheet for tax year 2018. The publication reviews the computations necessary to calculate a taxpayer's Code Sec. 199A deduction and includes several worksheets to help with such computations, and also lists the additional information that partnerships and S corporations will need to prepare for their partners' and shareholders' 2018 Schedule K-1s.

On December 20, the IRS released Pub 535 Draft Worksheet that, when finalized, can be used by taxpayers to calculate their qualified business income (QBI) deduction under Code Sec. 199A for 2018 tax returns. This draft section of Pub 535, Business Expenses, is 11 pages and includes the following schedules and worksheets to assist taxpayers in calculating the new QBI deduction that is available for tax years beginning after 2017:

(1) Schedule A - Specified Service Trades or Businesses (SSTBs);

(2) Schedule B - Aggregation of Business Operations;

(3) Schedule C - Loss Netting and Carryforward; Worksheet 12-A - Qualified Business Income Deduction Worksheet; and

(4) Schedule D - Special Rules for Patrons of Agricultural or Horticultural Cooperatives (Coop).

The instructions to the draft publication note that a taxpayer will use the Qualified Business Income Deduction - Simplified Worksheet in the Form 1040 instructions instead of the schedules listed above if the taxpayer (1) has QBI, qualified REIT dividends, or qualified PTP income; (2) has taxable income before QBI of $157,500 or less ($315,000 or less if married filing jointly); and (3) is not a patron in a specified agricultural or horticultural cooperative.

Under Code Sec. 199A, individual taxpayers and some trusts and estates may be entitled to a deduction of up to 20 percent of their QBI from a trade or business, including income from a pass-through entity (but not from a C corporation), plus 20 percent of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. The deduction is subject to multiple limitations, such as the type of trade or business, the taxpayer's taxable income, the amount of W-2 wages paid by the trade or business, and the unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business. The deduction can be taken in addition to the standard or itemized deductions.

S corporations and partnership are not eligible for the deduction. Instead, those entities pass through the necessary information to their shareholders or partners so they may calculate their deduction. As a result, S corporations and partnerships will have to report each shareholder or partner's share of the following items, for each qualified trade or business, on Schedule K-1 so that shareholders and partners can calculate their own QBI deduction:

(1) Section 199A QBI

(2) Section 199A W-2 wages

(3) Section 199A UBIA

(4) Section 199A Qualified REIT dividends

(5) Section 199A Qualified PTP income

(6) QBI allocable to qualified payments received from a specified cooperative

(7) Passed-through domestic production activities deduction (DPAD) under Code Sec. 199A(g) from a specified cooperative

Although estates and trusts may compute their own QBI deduction, they must reduce the amounts reported as QBI, W-2 wages, and UBIA to reflect the portion of those amounts that were allocated to beneficiaries.

According to the draft publication instructions, in order to be engaged in a trade or business for purposes of the QBI deduction, a taxpayer must be involved in the activity with continuity and regularity and the taxpayer's primary purpose for engaging in the activity must be for income or profit. If the taxpayer owns an interest in a pass-through entity, the trade or business determination is made at that entity's level. In addition, the ownership and rental of real property doesn't, as a matter of law, constitute a trade or business, and the issue is ultimately one of fact in which the scope of the taxpayer's activities in connection with the property must be so extensive as to give rise to the stature of a trade or business. However the rental or licensing of property to a commonly controlled trade or business is considered a trade or business under Code Sec. 199A.

For a discussion of the calculation of the QBI deduction under Code Sec. 199A, see Parker Tax ¶96,300.

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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