The Deductions Aren’t in the Proposed Regulations
We got the following comment on the blog and several similar emails:
Are you going to rely on the proposed regs. when it comes to reducing QBI by these items (SE tax and health insurance deduction and retirement plan contributions)?
The reader is stating that the proposed regulation did not address having to reduce QBI by these deductions. Therefore, since they did not address the deduction specifically the reader is indicating that we can ignore deducting those items and rely on the proposed regulations.
The direct answer is No. The proposed regulations did not specifically cover this part of the Code Section. However, the Code is very specific that you have to reduce QBI by all related business expenses. The final regulations simply told us that these expenses include the above three items. Also, we know that in the farm income averaging provisions that SE tax deduction is already a reduction in farm income, therefore, the IRS has already told us in previous instructions that these would be deductions.
We had hoped that the IRS might rule these as being de minimis and thus would not have to reduce QBI by these amounts. But this did not happen and the final regulations specifically indicate they are deducted. In this case you can’t rely on the proposed regulations since they did not address it at all.
Plus, it is likely that partners with unreimbursed partnership expenses; interest expense to purchase a partnership or S corporation investment; and state income taxes allocated to QBI will also reduce QBI. The final regulations indicated this was beyond the scope of those regulations, but likely we will get guidance in the future indicating these will be deducted against QBI.
The changes to common ownership in the proposed regulations were not part of the Code. Therefore, when the final regulations were issued, the IRS indicated that you could use either the proposed regulations or the final regulations.
For tax professionals that elect to ignore these deductions, just be prepared for your clients to get some IRS notices at a later date indicating the QBI deduction was over stated.
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.
Wondering then if you have a Sch F with coop sales so that part of the ‘F’ is QBI (Qualified Business Income) and the remainder is non-QBI, are you allowed to allocate the SE tax and health insurance deduction and retirement plan contributions between QBI and non-QBI as well?
Thanks,