Items from Other Entities

Question 1

Define: guaranteed payments to partners in partnerships

Answer 1

Since the partner isn’t an employee of the partnership, a guaranteed payment is the compensation they receive for services provided. It is an ordinary business expense to the partnership and is included in the partner’s ordinary income. It is also deemed self-employment income and is subject to the self-employment tax in addition to income tax (this does not apply to partners who are not actively involved)

Question 2

Can an S corporation give a guaranteed payment?

Answer 2

No, because with an S corporation, the shareholder can be an employee. Therefore, they are able to receive a wage/salary

Question 3

Qualified Business Income (QBI) deduction aka Section 199A deduction is available to…

Answer 3

all taxpayers except for C corporation. This deduction is taken “below the line”

Question 4

What is a specified service trade or business (SSTB)?

Answer 4

a trade/business involving direct services in health, law, accounting, actuarial science, consulting, sports, etc (engineering and architectural services are specifically excluded from this)

Question 5

What is a qualified trade or business (QTB)?

Answer 5

any trade/business other than a SSTB

Question 6

What is the QBI deduction calculation?

Answer 6

qualified business income * 20%

Question 7

Two main limitations of the QBI deduction

Answer 7

1) based on income level: $170,050-$220,050 (it’s double for MFJ)

2) based on W-2 wage and property: limited to the greater of 50% of W-2 wages OR 25% of W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition

Question 8

What happens if a taxpayer’s taxable income before the QBI deduction is under the applicable threshold?

Answer 8

the taxpayer is eligible for the full deduction (QBI * 20%); both SSTB and QTB are treated the same

Question 9

What happens if a taxpayer’s taxable income before the QBI deduction is above the applicable threshold?

Answer 9

no QBI deduction is allowed if the taxpayer is a SSTB, but if the taxpayer is a QTB, full W-2 wage and property limitations apply

Question 10

What happens if a taxpayer’s taxable income before the QBI deduction falls in between the applicable threshold?

Answer 10

This is very involved.

If QTB: phase-in of W-2 wage and property limitation (if limitation amount is less than 20% of QBI)

If SSTB: QBI, W-2 wages, and qualified property amounts are reduced, then phase-in of W-2 wage and property limitations using reduced amounts

Question 11

What do you do if there is a negative QBI with multiple QTBs (a taxpayer may have multiple sources of business income eligible for the QBI deduction)?

Answer 11

If one business has a negative QBI, you take the loss and distribute it pro rata across the other businesses with a positive QBI, thus reducing their QBI accordingly

Question 12

What do you do if the QBI as a whole is negative for the tax year?

Answer 12

If the QBI is negative (one source or multiple), then the QBI deduction for that year is zero. The QBI loss is then carried forward and treated as a separate business in the following tax year