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What to Deduct For QBI

The Final Regulations indicated that farmers (and other taxpayers) will need to reduce Qualified Business Income (QBI) for certain deductions reported on the tax return that are not specifically paid by the business. These include the deduction for half of the self-employment tax, the self-employed health insurance deduction, and retirement plan contributions. This will likely reduce the possible Section 199A deduction for almost all farmers (in many cases it would not matter if they have no other taxable income since the 20% of ordinary taxable income would limit the deduction anyway).

With regards to the self-employed health insurance deduction, this may only apply to Schedule F farmers. The SE health insurance deduction for partnerships and S corporations is really a component of either shareholder wages or guaranteed payments to the partner, therefore, it may not reduce QBI.

All of these deductions may need to be allocated between QBI and Non-QBI income on a pro-rata basis if they are not specifically allocated to one business. In some cases, this will mitigate the reduction in QBI.

As as example, assume that a farmer earns $150,000 from a Schedule F and also earns $100,000 from consulting on a Schedule C. The percentage of income related to QBI is 60% ($150,000 / $250,000). He is fully over the threshold, therefore, none of the Schedule C income qualifies as QBI since it is treated as a Specified Service Trade or Business (SSTB). The farm paid for his health insurance of $20,000. He also contributed $50,000 into a retirement plan. His QBI is calculated as follows:

  • $150,000 from Schedule F, less
  • $30,000 retirement plan contributions, less
  • $20,000 related to the health insurance (since the farm paid it, it is not pro-rata), less
  • $7,112 for the share of 1/2 of the SE tax deduction ($23,730 of total SE tax times 60% times 50%).

Instead of having QBI of $150,000, the farmer now has QBI of $92,888 or about a 38% reduction.

And we are not going to add in the complication from having any of the farm income being from a cooperative. We are still waiting on guidance for that.

, Farm Leadership, Farm Taxes | 17 Comments »

  • Principal
  • CliftonLarsonAllen
  • Walla Walla, Washington
  • 509-823-2920

Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.

Comments

  • Donna Wade
  • February 5, 2019

So, if I have a partnership with 4 siblings as partners, and the partnership files Form 8825, collects cash rent, pays me to prepare the return, and pays real estate taxes, and that’s about it….I assume it is NOT QBI. Is that correct? Have not been showing the net rental income as subject to SE.

  • Paul Neiffer
  • February 7, 2019

I would agree unless you can show some involvement.

  • Jerry Lucke
  • February 2, 2019

Clarification; No challenge has been presented by anyone that these are Gauranteed Payments which creates SE problems. Shareholders are LTD partners.

  • Jerry Lucke
  • February 2, 2019

Can’t decide on QBI for a limited partner in a “beet partnership”
WE have a coop called ACSC that issued stock years ago each share requiring planting, harvesting and delivering beets from one acre. Shares appreciated. Farmers at retirement did not want to sell and pay tax on gain so they “rented” their share to active farmer to produce the beets, amounts vary but currently might be $200/acre/share. when this started ACSC realized they must deal with patrons only so creation of limited partnerships became the solution. Shareowner got a special allocation of X times shares and as limited partners…no SE has ever been paid, nor to my knowledge challenged as Special Allocations. So payments are not rent but kinda? DPAD and patronage allocation go 100% to Ltd Ptnrship with the operator getting all of the benefit.
Now we have a QBI designation on the K-1s; the shareholder for example gets the 1st $25,000 allocation. Can I, Should I designate this as QBI?

  • Kent Armstrong
  • February 1, 2019

Upon reading the commentary in the final regulations, specifically their response to commenters on “Treatment of Other Deductions”, I see the IRS says the deductions for 1/2 of SE tax, SE health insurance, etc. were required to be included in the calculation of the 199A deduction under the temporary regulations. Apparently they would view the new section explicitly including them is a clarification and not a new provision. That might be arguable, but I now think I understand your answer to V Henke that we could not rely on the proposed regulations to not include these deductions in the calculation of the 199A deduction. It would appear that at least 2 major software vendors (Ultra Tax mentioned above and ProSystem fx we use) did not read the proposed regulations to include these deductions in the calculation, as their software packages have not included them at this point. Thanks for all you do with the blog. It is very helpful.

  • CONNIE J MAAS
  • February 1, 2019

This is a single taxpayer, correct?

  • Kent Armstrong
  • February 1, 2019

Why can’t we rely on the proposed regulations (for 2018 only) in regard to reducing QBI for 1/2 of SE tax, SE health insurance, etc.? At the very beginning the final regulations state, “… taxpayers may rely on the rules set forth … on the proposed regulations under §§1.199A-1 through 1.199A-6 issued on August 16, 2018, in their entirety, for taxable years ending in calendar year 2018.” I get you can’t pick and choose part from the proposed and part from the final. How can we distinguish when we can rely on the proposed regulations (in their entirety) and when we must follow the final regulations (in their entirety)?

  • Jake Franklin
  • January 30, 2019

In your example you are using the net income of the Schedule F and Schedule C to allocate the deduction for 1/2 of the SE tax. In the Final Regulations under §1.199A-3(b)(vi) it says the deductions are taking into account “…on a proportionate basis to the gross income received from the trade or business.” Should we be using the gross farm income vs. the gross income on the Sch C to allocate the reduction to QBI, or is it okay to use the Net Income from each? I didn’t see a reference or further explanation in the Regs as to what the definition of “gross income” was.

  • Paul Neiffer
  • January 31, 2019

In this case, it is really the “net income” associated with each business

  • mary ann savery
  • January 30, 2019

When figuring the 20% deduction for “F” and the farmer is a coop member and the coop decides to take the sec 199A deduction do you still figure the amount to be reduced by gross coop sales X 9% ( the 1099-pat that we are receiving shows no wages )

  • Paul Neiffer
  • January 31, 2019

The wages of the cooperative do not matter. If you receive any payments from a cooperative, you are required to reduce the 20% QBI deduction by the lesser of 9% related to cooperative QBI or wages paid by the farmer on that part of the farm operation.

  • Lori Keller
  • January 30, 2019

Did the regulations say anything more about not including income received from coops in QBI if the income was included in the coops taxable year ending in 2018? Have you come up with any conclusions on that?

  • Paul Neiffer
  • January 31, 2019

The regulations are silent. The IRS indicates in their 8903 instructions to treat similar to old 199. This means, you will reduce the farmer’s QBI by the percentage that these payments are to total receipts.

  • V Henke
  • January 30, 2019

I have not been able to find whether the proposed Regs contained the issue of reducing QBI for 1/2 SE tax, SE health insurance, and retirement plan contributions. IF the final regs was the first indication we needed to make this reduction, can we use the proposed regs (for 2018 only!) and not make this reductions to QBI??

  • Paul Neiffer
  • January 31, 2019

No, you can’t rely on the proposed regulations for this.

  • Andrew Winters
  • January 30, 2019

I believe this only applies for a Schedule F taxpayer that has no other source of income. In the case of a self employed (Sch.C/F) with no other outside sources of income, the QBI deduction should always be 20% of taxable income. Taxable income will always be affected by any deductions above the line. However, if you have a farmer that shows a $50,000 profit and the spouse has a $150,000 W2 job, the QBI deduction should be 20% of $50,000 with no adjustments for “above-the-line” items. This is how our tax software is handling it (Ultra Tax).

  • Paul Neiffer
  • January 31, 2019

The tax software has not been updated. Until the software is updated, I would never rely on tax software. It is our job to interpret the tax code and apply it to our taxpayer’s return. In many cases, the software takes time to get updated. Remember the final regulations are not even two weeks old yet

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