2020 national income tax workbook 2021...may offset sandra’s salary income. qualified business...

2020 NATIONAL INCOME TAX WORKBOOK

CHAPTER 3: QUALIFIED BUSINESS

INCOME DEDUCTION ISSUES

Chapter 3 Intro & objectives p. 73

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)

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

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

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

Reasonable Compensation to S Corp Shareholders p. 75

S Corp

Shareholder

Distribution Salary(does not reduce (reduces QBID)

If salary not reasonable, IRS can recharaterize,

up to reasonable compensation

Guaranteed payments to partners p. 75

Partnership

Partner

Distribution Guaranteed

(does not Payment(reduce QBID) (reduces QBID)

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

Other Deductions reduce QBI? p. 76

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!

AFTERNOON SESSION – POLLING QUESTION 1

The deductible portion of SE tax

reduces the QBI deduction.

The deductible portion of SE tax

reduces the QBI deduction.

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

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

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)

2020 Phasein Ranges p. 77

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

Example 3.6

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

75,000 x 20% = 15,000275,000 x 20% = 55,000

Example 3.6 - above phase in

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

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

If you are an SSTB and your taxable

income is 400,000, on a joint return,

you get no QBI deduction.

If you are an SSTB and your taxable

income is 400,000, on a joint return,

you get no QBI deduction.

Definition of SSTB –IRC 199A(d)(2) from IRC 1202 p. 81

HealthLaw

Accounting

ActuarialPerforming

Consulting

Athletics

Financial

BrokeragePrinciple asset-

Reputation

Definition of SSTB – IRC 199A(d)(2)B added and subtracted:

Investing

Trading

EngineersArchitecture

Investment

Management

Dealing in securities, partnership

interests or commodities

Specified Service T or B Limitation (using joint)p. 81

Below 326,600 Above 426,600

No limitation

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

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

90% 95%

Services or Property provided to SSTB –Antiabuse rule

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

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

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

Pays rent

Income from leasing the building to the coffee

shop is NOT SSTB income

Coffee

Dentist

Office

Dental

Practice

Issue #2 Aggregation of Activities p. 88

High QBI

Low Wages &

Low QBI

High Wages/

UBIAAggregate to

maximize W-2

limitation

(also look for loss entities with wages)

Entity #1 Entity #2

Use 8995-A to decide when aggregating will helpp. 88

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

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

Common Ownership p. 89

Business #1 Business #2

#1 #2 #3

>50% >50%others others

> ½ tax year

Example 3.18 Aggregation to increase QBID

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

QBI Loss – below the threshold

QBI income

150,000

(10,000)

140,000

28,000

Wages 40,000

20,000

restaurant

QBI income

150,000

(10,000)

140,000

28,000

Wages 30,000

15,000

furniture

QBI loss

(20,000)

allocate

Based on QBI

Wages 20,000

p. 93Example 3.19 – T.I. above the threshold

Lesser 35,000 or TI 417,800 x 20% = 83,560 +

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.

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

QBID 8,000

Previously disallowed losses

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

Loss tracking worksheet p. 94

Instructions for 8995

Example 3.21 Suspended losses

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

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

• 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

REPORTING p. 96

1065 K-1

Z STMT A

W-2 wages

Whether SSTB

Also, statements

for pass thru info

from RPEs and

aggregations

REPORTING p. 96

1120S K-1

Z STMT A

W-2 wages

Whether SSTB

V STMT A

Also, statements

for pass thru info

from RPEs and

aggregations

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!

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

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.

tenant can be an

individual or RPE

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

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

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

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

Performed by owner,

employees and

independent

contractors

NO – hours spent in capacity as investor

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

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

For the rental real estate safe

harbor, the 250 hours must be

performed by the owner.

For the rental real estate safe

harbor, the 250 hours must be

performed by the owner.

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

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

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

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

A partner’s tax basis capital account

always equals the partner’s outside

basis in the partnership.

A partner’s tax basis capital account

always equals the partner’s outside

basis in the partnership.

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

All 4!Schedule B, 1065 Question #4

Next slide!

EXCEPTION TO ITEM L 1065 REPORTINGP. 197

Any one Must file M-3

May have to report:

Must report:

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

May have to report:

Must report:

REPORTING BUILT-IN GAINP. 199

Fill out

IRS can

Description

Amount gain

PP. 197

2020 REPORTING REQUIREMENTS

May have to report:

Must report:

1. Unrecognized 704(c) (built in gains)

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

P. 200

MyrtleGet Away

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?

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