2020 national income tax workbook 2021...may offset sandra’s salary income. qualified business...
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2020 NATIONAL INCOME TAX WORKBOOK
CHAPTER 3: QUALIFIED BUSINESS
INCOME DEDUCTION ISSUES
1
Chapter 3 Intro & objectives p. 73
2
5. Real Estate – qualify for QBI?
1. Calculating – The basics
2. Aggregating – Why? When? How?
3. QBI Losses – what now?
4. Partnerships and S corps –
allocating and reporting
Taxable Income Limit: p. 74
QBI Taxable
Income
x 20% x 20%
Lesser
(W-2 Limit and SSTB Limit discussed later)
3
Definition of QBI p. 74
QBI, generally:Qualified item of income, gain, deduction and loss
with respect to any qualified trade or business
Trade or business: Reference to IRC 162 and certain self-rentals
“Effectively connected” with US trade or business
4
Excluded from QBI p. 74
QBI excludes:
Dividends
Interest Income (unless allocated to T or B)
Capital Gains and Losses
Foreign personal holding companies
Annuities
5
REITs and PTPs – Separate! p. 75
*QBI component REITs and PTPsSchedule C 20,000 REIT #1 4,000
Schedule E 30,000 REIT #2 (2,000)
Partnership (8,000) PTP #1 1,000 Net 42,000 Net 3,000
combined 45,000, as long as both profitable
but if one is a loss don’t offset
*If above threshold, QBI component calculated on each T or B separately, with W-2 and SSTB limits
6
Reasonable Compensation to S Corp Shareholders p. 75
S Corp
Shareholder
Distribution Salary(does not reduce (reduces QBID)
QBID)
If salary not reasonable, IRS can recharaterize,
up to reasonable compensation
7
Guaranteed payments to partners p. 75
Partnership
Partner
Distribution Guaranteed
(does not Payment(reduce QBID) (reduces QBID)
8
as
partnernot as
partner
Other Deductions reduce QBI? p. 76
The following other deductions reduce QBI:
• Deductible portion of SE tax
• Self Employment Health Insurance
• Contribution to qualified 404 retirement plans
If the individual’s gross income from the trade
or business is taken into account in calculating
the allowable QBI deduction
9
Other Deductions reduce QBI? p. 76
10
NOT IN BOOKWhat about:
• Unreimbursed partnership expenses incurred by
partners?
• Interest expense on purchase of equity?
• Deductible portion of SE Tax and self employment
health insurance related to guaranteed payments
(not in QBI)?
S Corp Shareholders p. 76
S Corp
>2% S/H
Paid S/H health ins
premiumsIncluded
in S/H W-2 QBI flow thru reduced
by the deduction
FAQ 33 states self employed health
insurance will still be deducted from QBI, so
it may actually reduce QBI at both levels!
11
AFTERNOON SESSION – POLLING QUESTION 1
12
The deductible portion of SE tax
reduces the QBI deduction.
True
False
13
The deductible portion of SE tax
reduces the QBI deduction.
True
False
AFTERNOON SESSION – POLLING QUESTION 1
Limitations on QBI p. 76
QBI x 20% = preliminary QBI deduction
limitations:
Everyone:Taxable income limit
Above the Threshold:W-2 wage and capital limit
SSTB limit
14
Taxable income limit p. 76
Taxable Income, before QBI deduction
Less: Net Capital Gains
= Adjusted Taxable income x 20% = limitation
Net capital gains includes:
• Unrecaptured 1250 gain
• Collectibles gain
• 1202 gain
• Qualified dividends
15
W-2 and Capital Limit p. 76
1. QBI x 20%
2. Taxable Income x 20%
NOW a 3rd limit, if above threshold:
3. W-2 and Capital Limit:
Greater of:
50% of W-2 wages, or
25% of W-2 wages, plus 2.5% of the UBIA
(W-2 wages? UBIA? Last year = pages 17-23)
16
2020 Phasein Ranges p. 77
17
Single, MFS Joint
163,300
213,300
326,600
426,600
50,000 100,000
No W-2 Limit
Full W-2 Limit
Partial W-2
Limit
Example 3.6
18
p. 77
Facts: Single, Wages paid 15,000, UBIA 10,000
Other Income? 112,400
Wages 100,000
S Corp – QBI 75,000
Standard deduc (12,400)
Taxable income 275,000
What is the upper
limit for single?
15,000 x 50% = 7,500 or 15,000 x 25% = 3,750
+10,000 x 2.5% = 250
4,000
75,000 x 20% = 15,000275,000 x 20% = 55,000
Example 3.6 - above phase in
19
p. 77
Facts: Single, Wages paid 15,000, UBIA 10,000
Other Income? 112,400
Wages 100,000
S Corp – QBI 75,000
Standard deduc (12,400)
Taxable income 275,000
What is the upper
limit for single?
15,000 x 50% = 7,500 or 15,000 x 25% = 3,750
+10,000 x 2.5% = 250
4,000
75,000 x 20% = 15,000275,000 x 20% = 55,000
Taxable income within the phasein range p. 78
326,600 394,600 426,600Taxable Income
68,000
How far thru the phasein range?
100,000 68%20
Specified Service T or B Limitation (using joint)
3 different calculations, depending on income:
426,600 No QBI deduction
Phase in period:
Partial W-2 and Specified Service
Limitations
326,600 Only limit is Taxable Income
p. 81
21
AFTERNOON SESSION – POLLING QUESTION 2
22
If you are an SSTB and your taxable
income is 400,000, on a joint return,
you get no QBI deduction.
True
False
23
If you are an SSTB and your taxable
income is 400,000, on a joint return,
you get no QBI deduction.
True
False
AFTERNOON SESSION – POLLING QUESTION 2
Definition of SSTB –IRC 199A(d)(2) from IRC 1202 p. 81
HealthLaw
Accounting
ActuarialPerforming
Arts
Consulting
Athletics
Financial
BrokeragePrinciple asset-
Reputation
24
Definition of SSTB – IRC 199A(d)(2)B added and subtracted:
Investing
Trading
EngineersArchitecture
p. 81
Investment
Management
Dealing in securities, partnership
interests or commodities
25
Specified Service T or B Limitation (using joint)p. 81
26
Below 326,600 Above 426,600
EASY!
No limitation
EASY!
No deduction
In phase in range
NOT SO EASY! The
farther you are thru
the phase in range,
the less deduction
you get!
Taxable income within thephasein range – Applicable % p. 82
326,600 394,600 426,600Taxable Income
68% 32%used for W-2 used for SSTB
limitation limitation
27
De Minimis Rule – Not treated as an SSTB p. 86
Gross Receipts
under 25,000,000
10% SSTB income
Not SSTB
income
Gross Receipts
over 25,000,000
SSTB income5%
Not SSTB
income
28
90% 95%
Services or Property provided to SSTB –Antiabuse rule
SSTB
T or B
products > 50%
or services ownership
Portion provided to SSTB must be treated as a
separate SSTB. Portion not provided to SSTB, eligible
for 199A
p. 87
29
Other Customers
Not SSTB
Example 3.12 – leasing to SSTBp. 87
Patterson Dental – Owns a building in which it
conducts a dental practice
Pays rent
Income from leasing the building to the dental
practice is SSTB income
Dental
Practice Building
30
Example 3.13 – leasing to SSTB and Non-SSTBp. 87
Patterson Dental – Owns a building in which it
conducts a dental practice and rents to a coffee
shop
Pays rent
Income from leasing the building to the coffee
shop is NOT SSTB income
Coffee
shop
Dentist
Office
Dental
Practice
31
Issue #2 Aggregation of Activities p. 88
High QBI
Low Wages &
UBIA
Low QBI
High Wages/
UBIAAggregate to
maximize W-2
limitation
32
(also look for loss entities with wages)
Entity #1 Entity #2
33
Use 8995-A to decide when aggregating will helpp. 88
LOOK
34
8995-A Schedule B
Aggregation of Activitiesp. 88
Combine as 1
Aggregation Requirements p. 88
• NOT an SSTB
• Business Relationship
• Common Ownership
See flow chart on page 89
35
Business Relationship p. 89
Business #1 Business #2Need
connection2 of 3 required:
1. Provide products, property or services that are the
same or customarily offered together
2. Share facility or business function: personnel,
accounting, legal, manufacturing, etc..
3. Coordination or interdependence between
businesses
36
Common Ownership p. 89
Business #1 Business #2
#1 #2 #3
>50% >50%others others
37
> ½ tax year
Example 3.18 Aggregation to increase QBID
38
p. 91
Wanda Howard AggregateNet Income 1,000,000 1,000,000 2,000,000
W-2 wages 600,000 150,000 750,000
UBIA 3,000,000 0 3,000,000
Tentative 200,000 200,000 400,000
problem! lesser
50% W-2 300,000 75,000 375,000
25% W-2 +
2.5% UBIA 225,000 37,500 262,500
greater
consistency and reporting p. 92
2019 All future years
Aggregate consistent
T or B #1
T or B #2T or B #3+
Significant change in fact, no
longer aggregate a T or B
Newly created or newly acquired
T or B can be added, if all test met
39
40
p. 92
QBI Loss – below the threshold
41
p. 93
farm
QBI income
150,000
(10,000)
140,000
x 20%
28,000
Wages 40,000
x 50%
20,000
restaurant
QBI income
150,000
(10,000)
140,000
x 20%
28,000
Wages 30,000
x 50%
15,000
furniture
QBI loss
(20,000)
allocate
Based on QBI
Wages 20,000
lost!
p. 93Example 3.19 – T.I. above the threshold
Lesser 35,000 or TI 417,800 x 20% = 83,560 +
42
farm
QBI income
150,000
restaurant
QBI income
150,000
furniture
QBI loss
(400,000)
p. 94Example 3.20 – QBI loss carryover
The (100,000) is carried forward and treated as a
separate trade of business for purposes of computing
199A deduction in subsequent year.
43
Net QBI loss (100,000)
NOTE: for income tax purposes, the (100,000) loss
may offset Sandra’s salary income.
Qualified Business Loss carryover p. 94
2020 2021
Business A QBI 20,000 Business A QBI 20,000
Business B QBI loss (50,000) Business B QBI 50,000
______ loss carryover (30,000)
carryover to 2021 (30,000)
net 40,000
No 199A Deduction
x 20%
QBID 8,000
44
Previously disallowed losses
45
p. 94
2017 2018 2019
N/A Loss disallowed, Loss allowed (FIFO):
suspended, or if a loss from 2018
reduced: or later reduces
At risk taxable income then
Basis is a qualified item of
Passive deduction or loss
does not affect does reduce QBI
QBI in 2018 in 2019 or later
46
Loss tracking worksheet p. 94
Instructions for 8995
Example 3.21 Suspended losses
47
p. 94
Rental
Property162 trade or
business
2019 2020
Passive loss
suspended
(20,000)
Can use the loss
against taxable income.
Treated as a QBI loss
carryover from a
separate trade or business
.
ISSUE #4 PARTNERSHIPS AND S CORPS
48
p. 95
4 steps:
1. One or more trades or businesses?
2. QBI for each trade or business?
3. W-2 wages and UBIA for each trade or business
4. REIT dividends & PTP income
ALLOCATING QBI ITEMS - PARTNERSHIPS
49
p. 95
• Each partner’s share is determined by the
partnership agreement
• 704 gives some discretion
• Special allocations must have substantial
economic effect
• If partnership agreement silent, use partner’s
interest in the partnership.
ALLOCATION OF QBI ITEMS – S CORPORATIONSp. 96
• More rigid than partnerships
• Pro-rata share of each qualified item of:
• Income, loss, deduction, credit
• One class of stock
• Allocate based on number of shares owned,
on a daily basis
50
51
REPORTING p. 96
1065 K-1
Z STMT A
QBI
W-2 wages
UBIA
Whether SSTB
Also, statements
for pass thru info
from RPEs and
aggregations
52
REPORTING p. 96
1120S K-1
Z STMT A
QBI
W-2 wages
UBIA
Whether SSTB
V STMT A
Also, statements
for pass thru info
from RPEs and
aggregations
53
FAILURE TO REPORT QBI ITEMS ON K-1p. 96
If QBI, W-2 wages and UBIA are not
determined and reported separately
for each trade or business, they are
presumed to be zero.
Warning!
54
ISSUE #5 QBI DEDUCTION FOR REAL ESTATE RENTALS p. 97
Is a rental activity a trade or business under 162?
Factors:
1. Type of property – commercial vs residential
2. Number of properties
3. Owners day to day involvement
4. Other services provided
5. Type of lease:
Net lease vs traditional lease
short term vs long term
55
SELF RENTALSp. 97
“solely for purposes of section 199A, the rental or
licensing of tangible or intangible property to a
related trade or business is treated as a trade or
business..”
SELF RENTALS
Rental
Property
Trade or
Business
(Not C corp)
Rents to
Commonly Controlled
Solely for 199A, treated as a trade
or business gain / loss QBI.
p. 97
tenant can be an
individual or RPE
56
57
SAFE HARBOR p. 97
Rev Proc 2019-38
Safe harbor under which a “rental real estate
enterprise” may be treated as a trade or
business solely for purposes of 199A
A real estate rental enterprise may consist of
an interest in multiple properties
58
SAFE HARBOR p. 97 & 98
Real Estate Enterprise
1 2 3or or Etc..
Similar (commercial / residential not similar)
Special rules for mixed use property
Same from year to year
No vacation homes or triple net leases
59
TRIPLE NET LEASES - CONFUSING p. 98
Requires tenant or lessee to pay taxes, fees,
insurance, maintenance, utilities, etc..
Does not generally If otherwise treated as a
give rise to a T or B as a T or B?
Excluded from the Triple net lease that is a
Safe Harbor self rental?
NO QBI May qualify for QBI
60
SAFE HARBOR TEST p. 98
In existence less
than 4 years:
250 hours of
service performed
each year
In existence for at
least 4 years:
250 hours of
service performed
per year for 3 out
of 5 years
SAFE HARBOR TEST – SERVICES INCLUDE: p. 98
• Advertising• Executing leases• Verifying information• Collecting rent• Daily operations• Management • Supervision
61
Performed by owner,
employees and
independent
contractors
NO – hours spent in capacity as investor
62
RECORDKEEPING p. 99
• Separate books and records for each enterprise
• Contemporaneous records: time reports, logs:
• Hours of service
• Description of services
• Dates
• Who performed services
NOTE: Contemporaneous record requirement will
not apply to tax years beginning before 1/1/20
63
REPORTING p. 99
If using the Safe Harbor, the taxpayer or RPE must
include a statement:
• Must include:
• Description of properties in enterprise
• Address
• Rental category
• Properties acquired or disposed of during year
• A representation that requirements of the
revenue procedures have been met
64
AFTERNOON SESSION – POLLING QUESTION 3
For the rental real estate safe
harbor, the 250 hours must be
performed by the owner.
True
False
65
AFTERNOON SESSION – POLLING QUESTION 3
For the rental real estate safe
harbor, the 250 hours must be
performed by the owner.
True
False
66
SE TAX p. 99
Rental Real Estate
Schedule E Schedule C
Normal rental, If substantial services
even if trade or performed (boarding
business for 199A house, hotel, motel, B and B)
NOT subject to SE tax Subject to SE tax
2020 NATIONAL INCOME TAX WORKBOOK
CHAPTER 6: BUSINESS ENTITY ISSUES
BUSINESS ENTITY ISSUES & LEARNING OBJECTIVES
1.Partnership Reporting Requirements
2.Social Clubs
3.Fraternal Societies
4.Tax-Exempt Entities Update
PP. 193
PARTNERSHIP REPORTING REQUIREMENTSP. 194
2019 1065 & K-1s 2019 8865 & K-1s
New reporting requirements
Deferred from 2019 to 2020
Notice
2019-66
1. Built in Gains
2. Capital accounts on tax basis
3. Multiple 465 at risk activities
CAPITAL ACCOUNTSP. 194
Capital Accounts options:Book Value
FMV
Tax Basis
Must maintain for “special
allocations”
If required to report
capital accounts, must
use on Form 1065 after
1/1/20
TAX BASIS CAPITAL ACCOUNTP. 195
= Equity using “tax principles”
NOT GAAP, FMV, 704(b), etc..
May be needed for 2020 1065
returns!!
PRACTITIONER NOTE – BASIS OF PARTNERSHIP INTERESTP. 196
Tax basis
Capital Accounts Partner’s basis in
the partnership
Increased by
partner’s share of
partnership liabilities
under 752
NOT
May be negative May not be negative
SAFE HARBORP. 196
Can use outside basis to calculate partner’s
capital account to see if partnership must
report negative basis capital account info:
If elected, attach statement
Partner’s outside basis xxx,xxx
Partner’s share of liabilities (xx,xxx)
Partner’s tax basis capital account xxx,xxx
BUILT-IN GAINS AND LOSSES- 704(C)P. 197
Partner Partnership
FMV xxx,xxx
Adjusted tax basis (xx,xxx)
Built in gains xx,xxx
Property contributed
Special allocations to eliminate
any book-tax differences
P. 197
MyrtleGet Away
LLC
EX. 6.3 ALLOCATE GAINS TO MYRTLE
Joshua
Property FMV 1,000,000
Tax basis 400,000
Property FMV 500,000
Tax basis 500,000&
Cash 500,000Special allocation of 600,000 in gains
contributed
AFTERNOON SESSION – POLLING QUESTION 4
A partner’s tax basis capital account
always equals the partner’s outside
basis in the partnership.
True
False
A partner’s tax basis capital account
always equals the partner’s outside
basis in the partnership.
True
False
AFTERNOON SESSION – POLLING QUESTION 4
2020 REPORTING REQUIREMENTSP. 197
May have to report:
1. Partner’s share of partnership capital on the tax
basis method – item L, schedule K-1
2. Negative tax basis capital account
Must report:
1. Unrecognized 704(c) gain (built in gains)
2. Multiple Section 465 at-risk activities
EXCEPTION TO ITEM L 1065 REPORTINGP. 197
K-1
EXCEPTION TO ITEM L 1065 REPORTINGP. 197
All 4!Schedule B, 1065 Question #4
Next slide!
EXCEPTION TO ITEM L 1065 REPORTINGP. 197
Any one Must file M-3
2020 REPORTING REQUIREMENTSP. 199
May have to report:
1. Partner’s share of partnership capital on the tax
basis method – item L, schedule K-1
2. Negative tax basis capital account
Must report:
1. Unrecognized 704(c) gain (built in gains)
2. Section 465 at-risk activities
REPORTING NEGATIVE TAX BASIS CAPITAL ACCOUNTSP. 199
2019 2020
Negative at beginning or
end of year:
• Report tax basis
capital in item L (if
required)
• No reporting on line
20, with code AH
If reported other than tax
basis capital accounts in
item L, and tax basis
capital would be
negative, must report on
line 20, code AH,
beginning and ending
tax basis capital
2020 REPORTING REQUIREMENTSP. 199
May have to report:
1. Partner’s share of partnership capital on the tax
basis method – item L, schedule K-1
2. Negative tax basis capital account
Must report:
1. Unrecognized 704(c) gain (built in gains)
2. Section 465 at-risk activities
REPORTING BUILT-IN GAINP. 199
Fill out
Fill out
IRS can
now
track
K-1:
Description
Date
Amount gain
PP. 197
2020 REPORTING REQUIREMENTS
May have to report:
1. Partner’s share of partnership capital on the tax
basis method – item L, schedule K-1
2. Negative tax basis capital account
Must report:
1. Unrecognized 704(c) (built in gains)
2. Section 465 at-risk activities
AT-RISK ACTIVITY REPORTINGPP. 199-200
Details of each activity:
• Income, loss, deduction
• Liabilities
• Distributions and partner loans
Plus give details to partners for Form 6198
K-1
P. 200
MyrtleGet Away
LLC
EX. 6.4 GAIN ON CONTRIBUTED PROPERTY
Joshua
Property FMV 1,000,000
Tax basis 400,000
Property FMV 500,000
Tax basis 500,000&
Cash 500,000
Remember?
Subdivided & sold a
lot for 50,000, with
basis of 20,000
EX. 6.4 GAIN ON CONTRIBUTED PROPERTYPP. 200-201
QUESTIONS?
90