The new Qualified Business Income (QBI) deduction, created by the 2017 tax reform law known as the Tax Cuts and Jobs Act (TCJA), allows many statutory employees, owners of sole proprietorships, partnerships, S corporations, trusts, or estates to deduct up to 20 percent of their qualified business income. Eligible taxpayers can also deduct up to 20 percent of their qualified real estate investment trust (REIT) dividends and publicly-traded partnership income.
The QBI deduction is available in tax years beginning after December 31, 2017, meaning eligible taxpayers can claim it for the first time on their 2018 Form 1040.
The recent guidance includes:
- A set of regulations finalizing proposed regulations issued last summer.
- A new set of proposed regulations providing guidance on several aspects of the QBI deduction, including qualified REIT dividends received by regulated investment companies.
- A revenue procedure providing guidance on determining W-2 wages for QBI deduction purposes.
- A notice on a proposed revenue procedure providing a safe harbor for certain real estate enterprises that may be treated as a trade or business for purposes of the QBI deduction.
The proposed revenue procedure, included in IRS Notice 2019-07, allows individuals and entities who own rental real estate directly or through a disregarded entity to treat a rental real estate enterprise as a trade or business for purposes of the QBI deduction if certain requirements are met. Taxpayers can rely on this safe harbor until a final revenue procedure is issued. The guidance includes limitations on triple net leases.
The QBI deduction is generally available to eligible taxpayers with 2018 taxable income at or below $315,000 for joint returns and $157,500 for other filers. Those with incomes above these levels, are still eligible for the deduction but are subject to limitations, such as the type of trade or business (specified service businesses have separate limitations), the amount of W-2 wages paid in the trade or business and the unadjusted basis immediately after acquisition of qualified property. These limitations are described in the final regulations.
The QBI deduction is not available for wage income of employees or business income earned by a C corporation.
As with many IRS provisions, the rules and guidance are very complex. Be sure to contact us to see how they apply to your specific situation.