BRIAN WOZNIAK: So, let's get started. Our presenters for today's webinar are Sherry Saucerman and Richard Furlong. Sherry and Richard are Senior Stakeholder Liaisons in the Communications and Liaison Division. And there's no time like the present to get things started. Sherry, I'm going to turn it over to you. SHERRY SAUCERMAN: OK. Thank you so much, Brian. And hello, everyone. Welcome to today's webinar, Tax Reform Basics for the Qualified Business Income Deduction under 199A. So today, we're going to discuss the qualified business income deduction. This is also known as the passthrough deduction or sometimes the Section 199A deduction. Now, this deduction is available for tax years ending after December 31, 2017. And we anticipate that it might affect nearly 40 million taxpayers. So, in today's discussion, we're going to, we're going to cover the basics of the qualified business income deduction. We'll talk about who is eligible for the deduction. We'll provide an overview of the deduction and will include information and clarity that was provided by the final regulation. We're going to be defining some new terms such as what constitutes qualified business income and what is meant by qualified trade or business. And as Brian mentioned, we are going to be using a bunch of acronyms. So, I do recommend that you have those - that resource document open cause it does list what those docs, and we're going to try to use them as little as possible. But you'll have that as resource, little cheat sheet to figure out, OK, what did she mean by QBI. So, I will also explain how the general deduction is computed and we're going to work a few examples. We'll wrap the whole thing up by discussing available resources and information and where you can find them. OK. Let's start with discussing eligibility and go over an overview of the deductions and get into defining some terms. So, who is eligible to take the qualified business income deduction? Taxpayers; other than C corporations, that includes individuals in certain trust and estate who have qualified business income from tax years ending after December 31, 2017 and that income comes from a qualified trade or business or a qualified publicly-traded partnership. We'll be referring to that as PTP. So, PTP, if they have PTP income or if they have Section 199A real estate investment trust dividends, we'll be referring to that as REIT dividends or R-E-I-T dividend. To have that kind of income, they may be able to claim the qualified business income deduction, which you'll see abbreviated as QBID. Now, partnerships and S corporations don't determine the deduction at the entity level, but they will passthrough the information necessary for their partners and shareholders can claim the deduction on their tax return. Individuals and certain trust and estate may be entitled to a qualified business income deduction, again, you'll see that QBID, of up to 20 percent of their qualified net business income from qualified trades or businesses conducted directly or through passthrough entities plus there's a 20 percent of their Section 199A REIT dividends, that's the real estate investment trust dividends and qualified publicly-traded partnership income, that's the PTP income. Now, certain income from cooperative is also eligible for the deduction. This qualified business income deduction can be taken in addition to the standard or itemized deduction. Now, what you see on the slide here, this is the basic definition. Now, for all taxpayers, the deduction is limited to the lesser of these amounts or taxable income less net capital gain. So, depending on taxable, taxpayer's taxable income, the deduction may be subject to other limitations, which depend on things like the type of trade or business, uh, the amount of W-2 wages paid with respect to that trade or business, and the unadjusted basis immediately after acquisition. That's a really long term, we really, we generally refer to it as UBIA. So, it's the unadjusted basis immediately after acquisition of qualified property held by the trade or business. OK, Richard can you discuss what is and what is not Qualified Business Income. RICHARD FURLONG: Certainly, Sherry. And good day, everyone. So, let's discuss what is qualified business income and as we know now that the acronym is QBI. Basically, QBI is the net amount of qualified items of income, gain deduction and loss for many qualified trade or business. Now, only those items that are included in taxable income are counted. So, for example, if you have a current year business loss, or losses, that are limited by the passive activity loss limitations, only the losses from the businesses that are allowed to be claimed on the current years' Form 1040 would be included in the QBI computation.

In addition, the items must be effectively connected with the United States trade or business.

Now, the businesses that may generate QBI would include those conducted through sole proprietorships, sub-chapter S corporations, partnerships, trusts and estates. But remember, that income earned through a C corporation is not eligible for the deduction. Now, please keep in mind that certain items reflected on the 1040 reduce QBI. QBI is reduced by any item, any deductions attributable to the trade or business including, but not limited to, the deductible portion of self-employment tax, self-employed health insurance, and contributions to qualified retirement plans. Also, it means that QBI is reduced by any interest expenses that are generated by borrowing funds to, let's say, purchase an interest in either a partnership or an S corporation. And QBI is also reduced by any unreimbursed partnership-related expenses that are deducted on a separate line item on Schedule E. Now, there, there are a number of items that are not included in QBI. So, on this screen, we see some of them, items that are not properly included in taxable income for the year. Investment items such as capital gains or losses or dividends are not QBI nor are interest and any other income that is not properly allocable to a trade or business. Wage income is not QBI. And just to reinforce the point about U.S. trades or businesses, any income that is not effectively connected with the conduct of a business within the United States is not QBI. Also, as we see here continuing on, commodity transactions or foreign currency gains or losses are not QBI, nor are certain dividends and payments in lieu of dividends. Income loss or deductions from activities in notional principal contracts are not QBI and neither are annuities unless those annuities are received in connection with the trade or business. And, moving on, some other items that are not included in QBI would include amounts received as reasonable compensation that are received from an S corporation; amounts received as guaranteed payments received from a partnership; and any payments received by a partner for services other than in a capacity as a partner. Um. Those are referred to as Section 707(a) payments for services. Now, the S corporation or partnership deduction that is association with these payments, that will reduce QBI if it is attributable to the trade or business and otherwise allowed. So, with all of that, Brian, I think it's time for our first of our four polling questions. WOZNIAK: You are correct, Richard. OK. Our first polling question, it's coming up on the slide here. Who may not take the qualified business income deduction? Is the answer a) individuals, b) certain trust and estates, c) C corporation?

OK, audience, take a look at the question and the possible answers again, and then, go ahead, click in the radio button you believe correctly answers the question. And we'll give everyone a few more seconds to response to uh show that you are participating in today's webinar. OK. Let's stop the polling now and see the correct response on the next slide. The answer is C or C corporation. And let's see how you did. We're always shooting for 100 percent in terms of correct responses from our audience. It looks like we're at about 84 percent. So, um, Richard, we've been receiving quite a few questions already and I was hoping you could address a few issues before we move on. FURLONG: I'd be happy to, Brian. WOZNIAK: OK, I also want to state, by the way, that there are a set of Frequently Asked Questions that have been recently updated and posted on the IRS.gov web site and that, throughout today's webinar, we will be incorporating some of these 33 Frequently Asked Questions into the presentation itself and this will allow participants to access those FAQs, those Frequently Asked Questions for future reference. So, OK, Richard, here is our first question. Can you explain in more detail how losses that are limited by basis, at risk or passive activity rules affect the deduction? FURLONG: OK, Brian. And that is certainly a question that Sherry and I have heard previously. So, the first point I want to reinforce is very important and that is that items not included in taxable income, these are not qualified items of income gain, deduction or loss and they would not be current year QBI. So, for example, if a taxpayer has a suspended loss that is allowed against current year taxable income, whether the loss reduces QBI depends on whether that loss was limited before or after January 1st, 2018 because that's when 199A became effective. So, if the loss was disallowed before 2018, then that means that that loss, lets say it's a passive activity loss, is never taken into account for purposes of computing QBI, never taken into account. So, what this is going to mean is that the taxpayer now must keep track of pre-2018 disallowed losses so that they can be excluded from QBI in the year that that loss is allowed in the future. Now, contrast that with a loss that's generated after, on or after 2018. That is included in QBI if it is a qualified business income deduction or otherwise loss that would otherwise be included in QBI. However, but it would not be included QBI until the year that it, that it is included or allowed in taxable income for that year. And one final point on this question, Brian, disallowed, limited or suspended losses, those have to be used in the, in the order from the oldest to the most recent or, as the accountants call it, a FIFO or first-in first-out basis for using those losses. WOZNIAK: OK. Thanks, Rich. And let's go on. We'll do one more frequently asked question before we move along here. I'll just read it verbatim. My client received a Schedule K-1 allocating a publicly-traded partnership loss. The loss is not currently allowable due to the passive activity rules. Is it used in computing the REIT/PTP component? FURLONG OK. So, first, let's just remind everyone that REIT stands for real estate investment trust and PTP stands for publicly-traded partnership. And we refer to the REIT/PTP component which we'll discuss in a bit more depth later in the presentation. So, the question is, if a loss coming through from a publicly-traded partnership on a Schedule A, K-1, excuse me, if that's loss is not currently allowable on the taxpayers return because it is due to the passive activity rules and not allowable for the year, is that loss used in computing the REIT/PTP component of the qualified business income deduction? And the short answer is no. Since the loss, again, is not included in taxable income for 2018, it is not used in computing the qualified business income deduction in 2018. In a later taxable year, when perhaps that loss is allowable, then, that loss generated in 2018 will be used in computing that REIT/PTP component in a future year, Brian. WOZNIAK: OK. Thanks, Richard. I'm going to turn it over to Sherry and ask, uh, Sherry, could you explain what is meant by a qualified trade or business please? SAUCERMAN: Yes. (Laughter) Thank you, Brian. I'm having a little trouble, little technical difficulty here. I hope everybody else is working fine. OK. So, a qualified trade or business is basically any U.S.

trade or business that qualifies as a trade or business under Section 162 and is, therefore, allowed a deduction for ordinary and necessary business expenses. And this includes, uh, trades or businesses other than the trade or business of just being an employee. Now, depending on the taxable income of the taxpayer, certain specified service, trades or businesses, and you'll, we refer to those as SSTB, they are not eligible for the deduction. OK. What's an SSTB? Well, that's going to include a trade or business that provides services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, or any other trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners. And SSTB also includes any trade or business that involves the performance of services that consist of investing in investment management, trading or dealing in securities, partnership interest or commodities. Now, the SSTB exception is only going to apply if the, taxpay, taxpayer's taxable income before the taking the qualified business income deduction exceeds the threshold amount and, for 2018, the threshold amounts are $315,000 for a married couple filing a joint return; or $157,500 for all other taxpayers. And those amounts are adjusted annually for inflation. Now, unfortunately, a detailed discussion of SSTB is beyond the scope of this presentation. But you will be able to find it in the final regulations. There's a detailed description of it, questions and answers and all of that. Also, I want you to remember that businesses conducted through a C corporation are also excluded from a qualified trade or business. Now, to be engaged in a trade or business, the taxpayer must be actively involved in the activity with continuity and regularity and the primary purpose for engaging in the activity must be for income or profit. Now, this is a standard. It's, it's higher than just investing and it clearly excludes a mere hobby. Now, for interests that are owned in a passthrough entity, the trade or business determination is made at the entity level. Therefore, if a passthrough entity is bound to be engaged in a trade or business, an owner of that entity can claim the deduction even if the owner is passive or does not materially participate in the trade or business. OK. Rentals.

We get a lot of questions about rentals. And rentals will qualify for QBID, qualified business income deduction, if the rental activity rises to the level of a Section 162 trade or business.

Hey, that means that the taxpayer is actively involved in the rental activity with continuity and regularity and the primary purpose for engaging in the activity is for income or profit. Also, the rental reg, uh, we have a safe harbor, you find it in Notice 2019 dash 7 is the proposed revenue procedure, and in, if the rental real estate enterprise meets that safe harbor that's in that notice, then it would qualify as a trade or business, qualified trade or business. All right. So, what's a rental real estate enterprise? Well, that's an interest in real property held for the production rent and the interest must be held directly or through a disregarded entity by the individual or entity that's relying on the safe harbor. Multiple properties can be treated as a single enterprise as long as all similar properties are treated as part of that same enterprise.

Commercial and residential real estate may not be part of the same enterprise. So, how do you qualify under the safe harbor? Well, first of all, the rental real estate enterprise must keep separate books and records for each rental real estate enterprise and they must perform at least 250 hours or rental services annually, 250 or more. Now, these hours can be performed by the owner of the property or by employees, by agents and independent contractors of the owner. Rental services include things like advertising to rent or lease the real estate, negotiating and executing leases, verifying the information that's on the prospective tenant application, collecting rent, daily operation maintenance and repair of the property is management of the real estate, purchase of materials and supervision of employees and independent contractors. So, there's a lot of things that can go into accumulating these 250 or more hours. Now, there's one other category that will qualify rental property for, uh, as a qualified trade or business and that's if the rental or licensing of property is to a commonly-controlled trade or business operated by an individual or passthrough entity And sometimes you'll hear that referred to as a self-rental. Now, I need you to keep in mind, as we get this question a lot, just because the enterprise doesn't meet the requirements for the safe harbor, they may still be a trade or business, qualified trade or business, for purposes of 199A if the, if what's in item one or item three, you know, it meets the 162, uh, standard, 162 standard or it's a self-rental. Additionally, it's important to remember that material participation is not a requirement to be eligible for the deduction. The determination of whether a business or rental is considered a Section 162 trade or business is made without consideration of whether the owner or investor materially participates.

All right. Moving on to the next slide. To compute QBID, the qualified business income deduction, we also have to be able to define a qualified REIT dividend and the qualified PTP income. OK.

Qualified REIT dividends those are dividends that are received from a real estate investment trust, uh, and they are any of the dividends that are not considered capital gain dividends or qualified dividends and you can see the code sections there are on the slide. Qualified PTP income is going to include qualified items of income, gain, deduction and loss from a publicly-traded partnership and it could also include gain or loss recognized on the disposition of your PTP interest if it's not or is being treated as a capital gain or loss. However, you get PTP income and it's generated by an SSTB; specified service trade or business; then, it could be limited to the applicable percentage if the taxpayer's taxable income is within the phase-in range or it could be completely excluded, the PTP income, if the taxpayer's taxable income is above the phase-in range. Also, keep in mind that the qualified REIT and PTP items are combined for making the QBID computation. So, if the PTP generates a deductible loss, it will offset the qualified REIT dividends and qualified PTP income from other PTPs. If the qualified amount of, if the combined amount, excuse me, the combined amount of qualified REIT dividends and qualified PTP income is less than zero, then, the portion of the individual deduction related to the REIT dividends and PTP income is zero for the taxable year. That loss doesn't offset any QBI, any other QBI the taxpayer may have. That negative amount gets carried forward to offset future year REIT dividends and PTP income. OK. Now, what about passthrough entities. Now, passthrough entities are not permitted to claim the deduction, but the income they generate may be QBI, qualified business income. This includes income earned through a passthrough entity with a fiscal year beginning in 2017 and ending in 2018. So, as a result S corporations and partnerships must provide the necessary, income, information to their eligible shareholders or partners and they'll put it on a Schedule K-1 and it needs to be itemized for each qualified trade or business so that the shareholder or the partner can compute their deduction. Now, estates and trusts, on the other hand, they could either claim the deduction or passthrough information to their beneficiaries so the beneficiaries could do their deduction. So, therefore, the estate or trust has to split QBI items between the estate and the trust, or trust, and its eligible beneficiaries, and then, they report the necessary passthrough information to the beneficiaries on the Schedule K-1. To the extent that the estate or trust retains the QBI, then, the estate or trust can claim the deduction. OK. So, they have, the passthrough entities have to report to the eligible shareholders, partners, beneficiaries all the information that they need so they can compute their own QBID based on their tax return. So, this includes reporting each owner's share of qualified business income items and that would include any separately stated items that are attributable to the trade or business.

They need to report whether the trade or business, uh, is conducted by the entity is an SSTB. They need to report the W-2 wages and UBIA of qualified property, uh, from the trade or business They need to report any qualified REIT dividends and qualified PTP income coming through and also any domestic production activity deductions that passthrough from that agricultural or horticultural cooperative, so the owners may determine their deduction OK, Brian, I think this is a great time for another polling question. WOZNIAK: That's right, Sherry. It is time for our second polling question and this is a true or false statement. Everyone, ready? Here it goes Rentals only qualify for the qualified business income deduction, QBID, if they meet the safe harbor provisions in Notice 2019-07? Is the correct response a) true, or b) false? So again, please click on the radio button that you believe correctly answers this question. And I want you to look at the question again on the slide, mull it over, click on the radio button for the one that you believe is the correct response and we'll give everyone a few more seconds to respond. And, just as a reminder, if you do not get that pop-up box for responding, please timely enter your response in the, Ask Question, feature, so that we can track your participation. And, with that, um, let's stop the polling now and show the correct response on the next slide. And the correct response is B, false. Let's see how you did on this one. We'll tally the results. As always, we are always shooting for 100 percent and the results are calculating now. OK. We might need to uh get some additional clarification on this one, Sherry. Sixty-five percent of the respondents answered correctly. Could you give just a little bit of elaboration on that, please? SAUCERMAN: Yeah, you know, a lot of people get caught up in that, in the safe harbor provisions in Notice 2019-07. Uh, however, failing to meet that safe harbor doesn't automatically disqualify rental activity. The rental real estate enterprise could still be treated as a trade or business for purposes of QBID if the, rental real estate, rental enterprise rises to the level of a Section 162 trade or business or if the rental or licensing of the property is to a commonly-controlled trade or business that's operated by an individual or passthrough entity that, in other words, that it needs the self-rental exception that's in the regulation. So, don't get too hang up on the safe harbor.

That's only if it's a, rises to the 162 trade or business, it will still qualify. And, Brian, I do believe, um, we've been having a few technical issues. It wasn't just me.(laughter) So, we're hoping that they've been corrected, and we do want to apologize if we've been having any problems.

WOZNIAK: Uh, yes. More technology issues. Um, Sherry, while we're on this topic, do you think you could take a couple more questions before we move on? SAUCERMAN: Sure, sure. WOZNIAK: OK.

Excellent. We'll start again with the frequently asked question that practitioners want to know.

And the question is, my client is a partner in several partnerships. How do I know what qualifies for the deduction? SAUCERMAN: And that is a very good question. Now, the Schedule K-1 were revised for 2018, so they have new codes for the QBI deduction items. And the partnership needs to provide each partner with their share of what, what is, uh, qualified business income, what is their share of the W-2 wages, the QBIA of qualified property, and any other information that those partners need in order to compute the deduction for their tax return. And that same rule is going to apply for S corporations. Now, another question that we do get is what if the partnership or S corporation failed to provide that information. Well, the final regulations provide that each unreported income of positive QBI, W-2 wages or UBIA of qualified property, ah, will, if they don't report it, it is presumed to be zero. And that means that the partner or the shareholder may be unable to claim the QBI deduction, uh, if the entity fails to report the information to them.

So, if that happens, we're recommending that the taxpayer needs to follow up with the passthrough entity to make sure that there wasn't some information that they should have provided them.

WOZNIAK: OK. Thanks, Sherry. And I have two items, by the way, just a separate administrative note. I do want to acknowledge that we are aware that there have been some technical issues with the webinar itself and we believe everything has been corrected. So, hopefully, all of our participants are able to see the slides and follow along. The second item is another question for you, Sherry, and here it goes. If the passthrough entity has one business, is it only required to provide one-dollar amount for the QBI? SAUCERMAN: OK. Now, the passthrough entity may have to provide the owner's QBI information. That's QBI information that the owners, so the owners can compute their deduction. Now, if the entity only has ordinary income from a single trade or business, well, it might be appropriate to reflect one QBI amount. But, remember, items from a passthrough entity that are required to be separately stated maybe because there's a potential of unique treatment on one or more the owners return, they do need to be separately stated. Items not included in the current year taxable income would not be included in that taxpayer's QBI. So, additional details need to be provided for the owners for, for example. In addition to ordinary income, the owner is allocated (clearing throat) a Section 179 deduction and, since that 179 deduction could be limited, that detail needs to be, the, the owner needs that detail in order to properly determine their current year QBI. And also, the rule to separately state items from each activity for the application of at-risk rules and passive activity loss limitation rules do still apply even when passthrough entity chooses to aggregate a trade or business for purposes of 199A.

I hope that helps. WOZNIAK: OK. Thanks, Sherry. That's great information. Uh, we'll turn it over to Richard and ask, Richard, what can you tell us about the computation? FURLONG: Well, thank you, Brian. So, let's talk about the computation. Now, Section 199A, it provides for a deduction of up to 20 percent of cumulative QBI or qualified business income and that 20 percent of cumulative QBI is referred to as the QBI component, as you can see on your slide, plus 20 percent of the sum of the, any qualified REIT dividends and any qualified publicly-traded partnership income and that is referred to as that REIT/PTP component which we've mentioned previously. Now, remember though that this deduction is limited to, no more than 20 percent of taxable income calculated before the qualified business income deduction minus any net capital gain. And that net capital gain, by the way, would include qualified dividends, so the lesser of the QBI component or 20 percent of taxable income minus net capital gain. Remember, as was mentioned earlier, the qualified business income deduction can be taken in addition to the standard or itemized deduction, so it's a separate line item on the 1040. Now, what you're looking at now on the screen is the fundamental calculation of the qualified business income deduction. However, it's important to keep in mind that there are many intricacies to this law and I think that's why we have such a large attendance today. And those intricacies can complicate the calculation for some taxpayers. Specifically, the items that are included in calculating the QBI component, that's the first line of the formula on your screen, these can differ significantly depending upon the taxpayer's situation. So, let's dive in a little bit deeper into the QBI component. Calculation of that QBI component, as I mentioned, varies depending upon the taxpayer's taxable income, again, before the calculation of any qualified business income deduction. Now, those, for those taxpayers who are at or below the threshold, and remember, for 2018, that threshold is $157,500 for any filing status other than married filing joint. For taxpayers filing jointly, it's $315,000. That's the threshold. The QBI component simply equals 20 percent times QBI minus any patron reduction. So, remember, that's it if you're below, at or below the threshold. For taxpayers above the threshold, but within the phase-in range, then it gets a little more complicated because the QBI computation, that's the QBI times 20 percent, that must be adjusted as follows: QBI, qualified business income; W-2 wages; and that UBIA, unadjusted basis immediately after acquisition of qualified property, each of those are reduced by the applicable percentage if that trade or business is a specified service trade or business. If, uh, on the other hand, 20 percent of QBI for each trade or business that is not an SSTB, that is limited by the W-2 wages of that, attributable or allocable to that business and the allocable UBIA of qualified property. So, those limitations are phased in. Those are referred to as the W-2/UBIA limitations for, when you're in the phase-in range. And finally, as you can see in item number three on the slide, the QBI component is reduced by the cooperative patron reduction if there is any. Now, moving on to situations where the taxpayers are both above the threshold and completely above the phase-in range. Now, there are different adjustments. So, the important point to keep in mind for a specified service, trade or business, the SSTBs, they are completely excluded from being considered a qualified trade or business and that's because the SSTB, specified service trade or business, is not considered to be a qualified trade or business for taxpayers who are above the threshold and the phase-in range. So, as a result, no QBI, no W-2 wages nor any UBIA of qualified property for an SSTB with the taxpayers above the phase-in range.

Those will not be considered, uh, in determining the qualified business income deduction for taxpayers who are above the threshold. On the other hand, 20 percent of qualified business income for each trade or business that is not an SSTB is limited by the W-2 wages and UBIA of qualified property limitations, again, as the slide notes at the top, when the taxpayers are above the threshold and the phase-in range. And then, finally, the QBI component is reduced again by any patron reduction, if any. Now, we've been talking a bit about the patron reduction, so maybe it's time for me to, uh, give you a little bit more information about what that reduction is all about.

So, generally, patrons of agricultural or horticultural cooperatives, they are required to reduce the QBI component by the lesser of 9 percent of the qualified business income from the trade or business, again, that is a cooperative, that is allocable to qualified payments or 50 percent, one-half of W-2 wages from the trade or business again allocable to qualified payments. So, you're reducing your QBI component by the lesser of those two uh numbers. Now, these qualified payments, these will be reported to the patrons by the cooperative for use in calculating the patron reduction. So, they will get information from the cooperative to take those qualified payments into the calculation of any qualified business income deduction on their return, Now, I should note though that further discussion of the patron reduction really is outside the scope of today's presentation. But I want to remind you that the key takeaway here is that the patron reduction is applicable to patrons of those agricultural or horticultural cooperatives and only those patrons.

Taxpayers who are not patrons of these specified cooperatives, they will not need to apply the patron reduction. And additional guidance on this topic is pending, uh, for those to which it does apply. So, stay tuned perhaps to e-News for Tax Professionals and other sources for any upcoming guidance from the service, So, Sherry, moving on, what, what can you tell us about the computation of the qualified business income deduction? SAUCERMAN: OK. Thank you. Now, as you mentioned, Richard, the, the threshold amount is the taxable amount of $157,500 for taxable year 2018 unless the taxpayer is married and filing a joint return, in which case the threshold amount is $315,000. And again, this amount gets adjusted annually for inflation. You'll find it in the, reg proc, which is all the inflation adjustments. Now, the phase-in range is determined by taking that threshold amount and adding $50,000 or adding $100,000 if you're married filing jointly. So, for 2018, taxpayers within the threshold of the phase-in range would be those with taxable income more than $157,500 up to $207,500 or more than $315,000 up to $415,000 if they're married filing jointly. Now, that taxable income amount is going to be determined prior to taking the qualified business income deduction. So, to determine the, the threshold amount looking at the tax return, generally, you're going to take the adjusted gross income, which is line 7 on the 2018 return and you subtract out the taxpayer's standard or itemized deduction which, which would be on line 8.

Now, as we mentioned earlier, QBID, qualified business income deduction, is limited to 20 percent of taxable income, again, it's calculated before taking that deduction, less the net capital gain.

And net capital gain includes qualified dividend. So, that's going to be your qualified dividends.

You, you usually find those on Form 1040 line 3a and your long-term capital gains less short-term capital gains. But you don't take it below zero, the, if there's an overall loss. You don't, you don't add that back in. OK. Now, determining a taxpayer's QBI component moving to the next slide.

Determining a taxpayer's QBI component for the year, we must consider a loss netting rule. So, if a taxpayer's qualified trade or business, that's the QTB there, if they generate a negative QBI for the, the QBI for the year and that's generally because the trade or business generated a net loss, well then, that negative QBI has to be netted against any other income of other QTBs in proportion to their net QBI. So, based on what their qualified business income is, you'll split up that loss and net it against the other QTBs, qualified trades or business. Now, if the overall combined qualified business income, QBI, ends up being less than zero, then, the QBI component for the year is zero and that negative amount gets carried over to the next year to offset QBI. The W-2 wages and UBIA of qualified property from those qualified trades or businesses that produce a negative QBI, they are not taken into account in the taxable year and that information does not carry over. Deductible losses from a publicly-traded partnership must be combined with the qualified income from other PTPs and with the REIT dividend. If that combined amount of qualified REIT dividends and qualified PTP income is less than zero, then, the negative combined amount must be carried forward and used to offset the combined amount of qualified REIT dividends, qualified PTP income in the subsequent taxable year. It doesn't offset QBI from a trade or business in the current or even in subsequent years. So, you keep those two components separate. OK, Brian.

WOZNIAK: OK. Uh, yeah, pardon me a second, Sherry. I did want to ask that, before we move on, um, to take some more specific examples, could you just address a few more of these Frequently Asked Questions for us? SAUCERMAN: Sure, sure. WOZNIAK: OK, first one. If the taxpayer has net income from one qualified business and a net loss from another qualified business, is the loss from the second business carried forward and applied against the same business in the future or is it netted against the income from the first business when calculating the deduction? And, building on that, what if the losses are greater than the income? Does that mean they will not get a deduction?

SAUCERMAN: OK. Yeah, that's, that's a good question. OK. If there's a loss, you're going to, you're going to have to, even if there's a gain, you net your QBI, and that includes your losses, if you have multiple trades or businesses. So, a negative QBI, you have a negative QBI from one business, first it's going to offset positive QBI from other trades or business. Now, remember, when you net it, you have to split that loss up so that, it, it nets against the other QBI from the other trades or business in proportion to the net income of those trades or business, the ones with positive income. Now, if the total QBI from all trades or business ends up being less than zero, then the taxpayer has the QBI component of zero. And the negative amount gets carried forward to the next taxable year. Now, in the next taxable year, that carried forward negative QBI is treated as if it was negative QBI from a totally separate trade or business for purposes of determining the QBI component in the next taxable year. So, you don't have to, if it generates a total net loss, you, it's not like you have to figure out what you're going to set it up against.

It's just a negative QBI carry forward. I hope that's clear. (Laughter) WOZNIAK: Excellent.

Thanks, Sherry. And another question for you. Does a net or QBI component loss reduce the REIT/PTP component? SAUCERMAN: No. A net loss in the QBI component doesn't affect the calculation of the deduction with respect to the REIT/PTP component and vice versa. However, if the qualified PTP income is a loss, then it does get netted against qualified REIT dividends and that's a separate netting calculation from the loss netting of the QBI component. And because you have these separately netted, you could actually, it could actually result in two separate loss carry forward, one for the QBI component and one for the REIT/PTP component. WOZNIAK: Thanks, Sherry.

And I also have a couple of questions for you, Richard, if you have a minute. FURLONG: I certainly do, Brian. WOZNIAK: OK. For the 2018 tax year, the taxpayer reports taxable income between $157,500 and $207,500 and they file a single. So, with regard to QBI, does it matter if it is from an SSTB? FURLONG: OK. Very good question. So, we have a specified service, trade or business and the taxpayer has taxable income within the phase-in range. As a single taxpayer, that would be, for 2018, $157,500 to $207,500. So, it does indeed matter that this is a specified service, trade or business, uh because, the taxpayer's taxable income is above the threshold, and the threshold again is $157,500, but within the phase-in range. Then, the qualified business income deduction with respect to a SSTB, that will be limited, Brian. However, because they are within that phase-in range, they're going to get probably some qualified business income deduction with respect to the SSTB. In addition though, for taxpayers above the threshold amount, the 20 percent of qualified business income with respect to any trade or business, so that would include any qualified trade or business including an SSTB, that may be limited, again, by the amount of W-2 wages paid by the trade or business and the unadjusted basis immediately after acquisition of qualified property, again, that's the UBI of qualified property, that is held by that trade or business. Now, in two sections of the regulation, there's additional information and you may want to write down these sections of the regulation and you can reference them on IRS.gov on the Tax Reform page. Specifically, Sections 1.199A-1 and Treasury Regulation 1.199A-2, these two sections of the final regulations have additional information on this adjustment when you're in the phase-in range, Brian. WOZNIAK: OK. Thanks, Richard. And we do have one last question for you. In 2018, a single taxpayer reports taxable income over the $207,500 threshold. Their only income is from an SSTB. Are they entitled to the deduction with respect to the SSTB? FURLONG: I'm afraid the short answer, Brian, is no because, again, because the only income is from a specified service, trade or business and that, that taxpayer who is single in 2018 had taxable income over the phase-in range, meaning over $207,500, then that, they will not be entitled to any deduction, Brian, for the uh income from that specified service, trade or business. And that would also be true for a married couple whose income exceeds $415,000, so, for a married couple, uh, the phase-in ends at $415,000, Brian. WOZNIAK: OK. Thanks, Richard. I'll turn it back to you and Sherry. I believe you have a few, uh, couple of examples to work for us. FURLONG: Actually, we do.

And I hope the audience finds these useful. I have found these examples to be very useful in reinforcing these concepts. So, let's start off with a fairly simple straightforward computation for a situation where the taxpayer has taxable income before the qualified business income deduction at or below the threshold. And it never hurts to remind you that that threshold is $157,500 or $315,000 for couples filing jointly in 2018. So, for these taxpayers, the qualified business income deduction is limited to the lesser of the qualified business income component, which is 20 percent of qualified business income, plus 20 percent of the sum of any qualified REIT dividends and any qualified publicly-traded partnership income. And you compare that to 20 percent of taxable income, again, calculated before the qualified business income deduction minus any net capital gain. So, that's the general computation that you want to keep in mind as we will look at the example in a moment. Now, for taxpayers, um, that would, who, excuse me, where the QBI component for taxpayers with taxable income before the qualified business income deduction, again, is at or below the threshold, that equals 20 percent less any cooperative patron reduction. And we've touched on the cooperative patron reduction earlier. Please note though, and this is an important point for specified service, trades or businesses, the SSTB exclusion does not apply when you are at or below the threshold. So, in other words, a qualified business income that is attributable to a specified service, trade or business, that is included in the QBI component if the taxpayer's taxable income is at or below the threshold. For these taxpayers, then that specified service, trade or business is, indeed, a qualified trade or business. And also note that the limitations based on wages and UBIA of qualified property, these do not apply to taxpayers at or below the threshold. So, this is why we, we refer to this as a simpler calculation. But keep in mind though that income from providing services as an employee, these are not eligible for the deduction. So now, Brian, I think we're ready to tee up an example - our first example. And this may look familiar to any of you who attended the webinar that we gave in December. And we have Abel. Abel is an unmarried individual. Abel operates a bakery as a sole proprietorship. So, in 2018, Abel's business generated $100,000 of qualified business income. Now, Abel has 700, excuse me, 7,000 in net capital gain that he'll report on his 1040. After the allowable deductions not related to the business, Abel's total taxable income, again prior to the calculation of the qualified business income deduction, Abel's total taxable income is $81,000. Keep in mind that that is below, well below the threshold of $157,500. So, Abel's qualified business income deduction is $14,800. And as we'll see on the next slide we'll see how that is computed. So, remember again the general computation formula. Abel's qualified business income deduction will equal the lesser of 20 percent of his qualified business income or 20 percent of his taxable income before the QBID minus any net capital gain. So, when you look at the numbers here, we have 20 percent of the $100,000 from the bakery, net income from the bakery, that's the qualified business income. That's $20,000. And then, we have 20 percent of his $81,000 of taxable income minus, remember those net capital gains. And that figure is the $14,800. So, the results again is that Abel's qualified business income deduction, that would be on line 9 of the 2018 1040, that would be limited to the lesser of those two numbers, so it's obviously, the lesser is $14,800.

Now, for taxpayers at or below the threshold who are not patrons of an agricultural or horticultural cooperative, they can use a very simplified worksheet that, that you could use to calculate these numbers and that actually, as you may know, was in the instructions this year for the Form 1040. So, we refer to that, Brian, as the simplified worksheet, And with that example completed, I think we're ready for our next polling question for our attendees. WOZNIAK: That's right, Richard, it is time for our third polling question and it is another true or false statement. Here it goes. Net capital gain for Section 199A includes qualified dividend. Is the correct response a) true, or b) false? OK. And by now, all of you know how this works. Take another look at the question, and the possible answers. Make your selection and remember to click on the, Submit, button. We'll give everyone a few more seconds and, again, if you do not get that pop-up box for responding, just enter your response in the, Ask Question, feature. I'd give everyone another moment or two. OK. Let's take a look at the results. And the correct response is A, true. And, as we tally the results for your responses, we'll see how you did on this one. As always, we're shooting for 100 percent. We're adding them up now. Looks like we're right at about 83 percent. So, way to go. We're in there. Sherry, I'll turn it over to you. Can you work another example for us? SAUCERMAN: Sure, Brian. Thank you. All right. Now, let's look at a more in-depth example, so we can look at the, how multiple items of QBI interact. All right. In this example, we have Pat and Jessie. They're a married couple and they're filing jointly. So, in 2018, their only income is from two Schedule Cs. Pat has a start-up construction business and he had a tough year and he ended up with a $20,000 loss. Jessie is a doctor and her sole proprietorship resulted in a $200,000 net income. All of the reported items from Pat and Jessie's Schedule C businesses are considered qualified items of income gain deduction and loss for purposes of Section 199A in this example. Of course, now, unlike the facts in this example, there could be some Schedule C items that are not qualified items for purposes of Section 199A. But based on the net income of $200,000, Jessie's going to owe self-employment tax of $21,278. That's going to generate an available self-employment tax deduction of $10,639. And you can see the calculation on the Schedule C that we have a picture of up here on the screen. And, additionally, Jessie is entitled to a self-employed health insurance deduction of $5,000. So, the results of these items of income and deduction they get reported on the Form 1040 Schedule 1 and that's what's on the screen right here. The amount on line 12, business income or loss would be the net of the construction business loss of $20,000 and the doctor's income of $200,000. The deductible portions of self-employment tax and self-employed health insurance would be included as adjustments to income on lines 27 and 29, respectively. Then, these amounts get carried over to the Form 1040, page two, as seen here. So, your resulting adjusted gross income ends up being $164,361 and the taxpayers are also entitled to a $24,000 standard deduction. That means that Pat and Jessie's taxable income before taking the qualified business income deduction is $140,361. That's the AGI less their standard deduction. OK. That taxable income is below the 2018 threshold for married filing jointly of $315,000. Now, this is important because, remember, a doctor's office, like the one operated by Jessie, is a specified service, trade or business it's in the field of health. And so, therefore, it, that QBI would be subject to limitation or exclusion from QBI were their income above the threshold. But because the taxable income is at or below the threshold, that SSTB limitation does not apply. So, a doctor's office gets accounted as a qualified trade or business for Jessie and Jessie is entitled to use all of the otherwise qualified items as income gain, loss and deduction from the practice in computing qualified business income. Now, you've heard us talk about the W-2 wage and unadjusted basis immediately after acquisition, the UBIA limitations. OK.

Those don't come into play until the taxpayer's taxable income before QBID is above the threshold.

So, we don't need to worry about those in this example. So, back to our example. You need to determine QBI for each business. OK, remember, QBI is going to be the qualified items, income, gain, deduction, and loss for each trade or business. So, for Pat's construction business, QBI is the Schedule C loss of $20,000. He had no other items, so he has a negative QBI. For Jessie's business, it's the Schedule C income of $200,000 less the self-employment tax, SE tax deduction of $10,639 and SE health insurance deduction of $5,000. So, she has a qualified QBI of $184,361. QBI from the doctor's office gets reduced by the negative QBI from the construction business. So, in determining the joint QBI of Pat and Jessie's QBI, you get $20,000 negative from the construction business. It's going to net against the QBI income from the doctor's office of $184,361 for a net QBI of $164,361. Now, in this case, the QBI component is going to be $32,872, which is 20 percent of that QBI. Now, we have to compare that amount to the overall limitation because that's applicable to all taxpayers and that's 20 percent of taxable income less net capital gain. Now, since Pat and Jessie didn't have any qualified dividends or capital gains in this example for 2018, the taxable income limitation is $28,072. That's 20 percent of $140,361. Remember, the deduction allowed is always going to be the lesser of QBI component or the taxable income limitation. So, the, in this case, taxable income limitation is $28,072. Uh, and it's less than the QBI component of $32,872, so they get a QBI deduction of $28,072. WOZNIAK: Hey, Sherry, um, if I could interrupt. We have a couple more questions SAUCERMAN: Sure. WOZNIAK: That relate specifically to this computation, so here's your first one. A practitioner says he was told that he could rely on the rules in the proposed regulations to calculate qualified business income for 2018 returns. The proposed regulation did not specifically identify adjustments for items such as the deductible portion of self-employment tax, self-employed health insurance deduction or the self-employed retirement deduction. So, does this mean he does not have to make these adjustments when calculating their QBI in 2018? SAUCERMAN: You know, Brian, I do frequently hear that question, and, for the complete response, I do want to just refer everyone to question 32 on the qualified business income deduction FAQs. There is no inconsistency between the proposed and final regulations on the issue, so QBI does have to be adjusted for these items in 2018. WOZNIAK: OK. Thanks for that clarification. And here is another frequently asked question, same topic, uh.

Health insurance premiums paid by an S corporation or greater than 2 percent shareholder reduced qualified business income at the entity level by reducing the ordinary income used to compute allocable QBI. So, if I take the self-employed health insurance deduction for these premiums on my individual tax return, do I also have to include this deduction when calculating my QBI from the S corporation? SAUCERMAN: Generally, the self-employed health insurance deduction under section, this is under Section 162(l), it's considered attributable to a trade or business for purposes of Section 199A and it would be a deduction in determining QBI. And, and it could result in QBI being reduced at both the entity and the shareholder level. WOZNIAK: OK. Thanks, Sherry. I'll turn it over to Richard. I think you have a couple more examples or additional applications for us. FURLONG: I do, Brian. And thank you. So, why don't we explore now briefly what happens when we change some of the figures from example two that Sherry just walked through, and we'll add a little more complexity to Pat and Jessie's qualified business income deduction. So, beginning again with the information from example two, let's modify the numbers and say that, in addition to the start-up construction business that's run by Pat, and remember that was a loss, Pat also worked as an employee in a completely unrelated business. So, Pat would receive a W-2 and, for 2018, he had wages of $240,000 as you see on the screen. Also, Pat and Jessie earned interest on their personal investments of $40,000 for the year. So, when we add this additional income to Pat and Jessie's 2018 tax return, this changes their taxable income, obviously. So, the taxable income before the qualified business income deduction is all the way up to $420,361. So, because Pat and Jessie now have taxable income above the 2018 threshold and completely above the phase-in range, and remember that phase-in range was from $315,000 which was the threshold up to $415,000, because they're above that, the specified service, trade or business limitation applies in full and Jessie's doctor's office is no longer considered a qualified trade or business for purposes of Section 199A.

So, that means that no items from the doctor's office will be included in calculating the qualified business income deduction. Now, this means that, for 2018, all of the qualified items from the doctor's office that we previously considered in example two that Sherry discussed, these are no longer considered qualified, again, because they are completely above the phase-in range.

So, the income and associated self-employment tax, health insurance deductions, these are excluded from any qualified business income deduction calculations, And furthermore, any W-2 wages or UBIA from the doctor's office, they also would be excluded from the qualified business income deduction calculations or QBID calculations. Now, because the only qualified trade or business in this extended example is Pat's construction business and, as we know, Pat generated a net loss for the year and there are no other qualified items to consider, the result is that Pat and Jessie will have zero dollars of qualified business income deduction for 2018. And additionally, this is an important point, the loss from the construction business, that becomes a net loss carry forward for purposes of 199A to be applied in later years. Now, although it did not happen for Pat in 2018, it's a good place, good place for me to note here that, if the construction business had reported net income, in other words, it had not had a loss; and it had net positive qualified business income, then the QBI component for that construction business, that would have been subject to the full impact of the W-2 wage and UBIA limitation, again, since Pat and Jessie's taxable income was over the threshold and phase-in range in example 2a. So, now let's move on, take it one step further with this example 2b. Working from the last scenario, let's reduce Pat's W-2 wage income to, let's say, $200,000. Now, the result of this is it's going to put Pat and Jessie's taxable income as a couple before the qualified business income deduction, while it's above the 2018 threshold, which again, is $315,000 for couples filing jointly, it is within the applicable $100,000 phase-in range. So, although the specific calculations are beyond the scope of the time we have in today's presentation, there are a couple of important points I want to remind you about Pat and Jessie's calculation of their QBI deduction if we were looking at these numbers in example 2b. So, here, because they are within the phase-in range, what happens to Jessie's doctor office is that that would now revert to becoming a qualified trade or business because they're below, um, the ceiling for the phase-in range. However, Pat and Jessie will need to reduce all of the items from the doctor's office before calculating the deduction. Jessie would be entitled to the applicable percentage of QBI, W-2 wages and UBIA off 2018. Again, Jessie has a doctor's office.

The applicable percentage is based on the proportion of the phase-in amount in excess of taxable income and that is calculated either on your software or on Schedule A of what we have justifiable called a complex worksheet and you can find that in a very important chapter of IRS Publication 535. Publication 535 is entitled Business Expenses. I would point you to chapter 12 where we have the complex worksheet where you could run these numbers and do it by hand. Also, finally, speaking of the W-2 wages and UBIA, if these limits reduce the qualified business income amount from the doctor's office, then, the applicable percentage to qualified business income would be phased in for a partial application to the taxpayer. The phase-in limitation is also dependent on the proportion of the phase-in range used by the taxable income again over the threshold and that is, again, calculated in part three of that complex worksheet I just mentioned which again is in Publication 535. So, with that, Brian, I think we can take a breather here and, uh, push out our final polling question to our audience. WOZNIAK: That's right, Richard. OK, everyone, it is time for our fourth and final polling question, which, what do you know, it's another true or false statement. Here it goes. A specified service, trade, or business, SSTB, is treated as a qualified trade or business for taxpayers with taxable income before QBID at or below the threshold. So, is this statement a) true or b) false? And again, you're pros by now. You know what to do. Review the question, make your selection, uh, Make sure you click, Submit, if for some reason you don't get the pop-up box or some other technical difficulty, just enter your response in the, Ask Question, feature and we'll give everyone just a few more seconds here, get their responses in. I want to make sure everyone has an opportunity to participate. And I will ask that we stop the polling, And the correct response is listed on the next slide. And the correct answer is A, true. A specified service, trade, or business, SSTB, is treated as a qualified trade or business for taxpayers with taxable income before QBID at or below the threshold. So, the results, this is great. Uh, we do strive for 100 percent, but we're at exactly 90 percent, so great job, everyone, um. Richard, do you have some resources you can share with our audience today. FURLONG: I certainly do. And, you know, everyone who's attended one of our webinars know how important the resources can be and they're particularly important for this, um, complicated topic. So, on the business tax reform page of IRS.gov, we have many links to helpful pages that include FAQs and we've mentioned the FAQs at points in today's webinar in additional, in addition to the technical guidance and that would include the Treasury Regulations 1.199A, um. That Notice 2019-07 that Sherry discussed is extremely important and as a short notice, uh, for discussing that safe harbor for certain real estate, uh, enterprises. So, I highly recommend reviewing that closely. Also, as we mentioned earlier, the instructions to the Form 1040 have the simplified worksheet and for the more complex situations that I just gave examples of, I would point you to Chapter 12 of Publication 535. Uh, and then, one takeaway is that, for next year, for 2019, the service is in the process of developing both simple and complex calculations on new tax forms for next year, so you want to pay attention to those forms when they're issued later in the year, Brian. WOZNIAK: OK. That's great. So, with those resources, we're going to move ahead to our Question and Answer session. Again, my name is Brian Wozniak and I will also be moderating the Q&;A session. Now, before we start, um, going through specific questions and answers, number one, I do want to thank everyone for attending today's presentation on tax reform basics for the qualified business income deduction again, Section 199A. We do have three subject matter experts joining us to help answer your questions. First, Gillian Dalton and Anne Ronholm are with our Small Business and Self-employed Division. And we also have Racheal Jaeckel who is with our Large Business and International Division. Before we begin the session, I also want to mention that we may not have time to answer all the questions submitted during today's webinar, however, let me assure you that we will answer as many as time allows. Also, if you're participating to earn a certificate and related continuing education credit, you will qualify for two credits by participating for at least 100 minutes from the official start time of the webinar, which means that first five minutes of chatting we engaged in before the top of the hour does not count towards the 100 minutes. So, sorry about that. But as long as you meet the 100-minute threshold, you're not required to stay on for the entire Q&;A portion, but we certainly hope you will. And if you stay on for at least 50 minutes from the official start time of the webinar, um, you will qualify for one credit. Now, a couple of items we have. Number one, I do want to mention that we have extended our Q&;A session and we expect to go over the 100-minute, um, mark that, you know, as we advertise the webinar. And we're doing this because we, we really do want to get to as many questions as we can. The other item is, if you were on the webinar for at least 100 minutes from the official start time, you will qualify for the credit. And the final item, I do, I've mentioned earlier that we did have some technical difficulties specifically with server issues during today's webinar. We recognize it may affect the time that you were on the webinar and we will add the time that the server was down to the total time that you were signed on and in attendance and that's how we're going to determine your eligibility for the CE credit. So, your total time must add up to at least 50 minutes for CE and 100 minutes for two CE credits. And again, we'll make that adjustment for the downtime. So, a lot of information there. Um, we do have a lot of questions received probably due to the topic, ah, that we're discussing. So again, we're going to extend it a little bit. I've introduced Gillian, Anne, and Racheal. I hope you're ready because, again, we've got a lot of questions. I'm going to start off with a question for Anne. Are you ready, Anne? ANNE RONHOLM: Yes, I am. WOZNIAK: OK. How does someone meet the rental real estate enterprise safe harbor if a management company does not provide contemporaneous records for the hours and description of services performed? RONHOLM: Um, the safe harbor for rental real estate that was discussed earlier requires the maintenance of contemporaneous records including time reports, logs, or similar documents regarding the hours of all services performed, description of the services performed, dates on what the services were performed and who performed these services. Note that the contemporaneous records requirement applies to taxable years beginning January 1, 2019. Now, failure to meet this contemporaneous records requirement will result in the safe harbor not being met. However, the rental real estate enterprise may still be treated as a trade or business for purposes of the qualified business income deduction if the rental real estate enterprise otherwise rises to the level of a Section 162 trade or business or meets the self-rental exception. And whether rental real estate rises to the level of a trade or business under Section 162 will depend on all the facts and circumstances. WOZNIAK: OK. Thanks, Anne. Facts and circumstance. I'm going to continue with Anne here and ask a second question. Anne, if a rental real estate is treated as a trade or business for purposes of the qualified business income deduction, do I report the rental real estate on Schedule C? RONHOLM: That's a good question. Um, in general, no. You, you do not report rental real estate on a Schedule C. Rental real estate is usually reported on Schedule E Part 1. Note that how rental real estate is reported on the Form 1040 has not changed due to the qualified business income deduction. Even if the rental rises to the level of a Section 162 trade or business, the rental real estate will generally be reported on Schedule E Part 1 because rental real estate is generally not subject to self-employment tax. So, even if the rental rises to the level of a Section 162 trade or business, rental real estate is generally excluded from self-employment taxable income under Section 1402 and, therefore, rental real estate is usually reported on the Schedule E Part 1. However, some rental real estate is subject to self-employment tax. For example, boarding house, hotel or motel, bed and breakfast where substantial services are rendered for the convenience of the occupants, those are going to be subject to self-employment tax. So rental real estate subject to self-employment tax is reported on Schedule C. So, to kind of recap, rental real estate is usually, usually going to be reported on Schedule E Part 1. However, rental real estate subject to self-employment tax is going to be reported on Schedule C. WOZNIAK: Thanks a bunch, Anne. That's great. And just one more final question for you before we move along. Does the qualified business income deduction affect the calculation of self-employment tax? RONHOLM: Um, the answer to that is no, it does not affect the calculation of the self-employment tax. Uh, the qualified business income deduction does not reduce net earnings from self-employment under Section 1402. Um, similarly, the deduction does not reduce net investment income under Section 1411, which is reported on Form 8960, Net Investment Income. So, no, no, it does not affect the calculation of SE tax. WOZNIAK: OK. Great. Thanks, Anne. Gillian, I have a question for you. Um, I assume your audio is on. Are you ready? GILLIAN DALTON: I'm ready, Brian. WOZNIAK: OK. If a third-party payer pays and reports wages on behalf of an individual or relevant passthrough entity, RPE, for employment by the individual or the RPE, would those wages be available to the individual or RPE to use when determining the W-2 wage limitation? DALTON: So that's a, that's a good question. Um, generally speaking, yes. Uh, when determining the W-2 wages, an individual or an RPE may consider any W-2 wages paid and reported by a third party payer on Form W-2 if those wages were paid to common law employee or S corporation officers for employment by the individual or the RPE. So, under those circumstances though, it's important to know that the third-party payer, the payer organization is not allowed to take those same wages into account when determining their own W-2 wage limitation. They can only be used once. WOZNIAK: OK. That's a good point. And, Gillian, another question for you. DALTON: Sure.

WOZNIAK: How do net capital losses affect the QBID computation? DALTON: Uh, that question is a little bit more substantial than it would, than it would seem. So, as noted in the webinar, the qualified business income deduction, it's limited to the lesser of 20 percent of QBI plus 20 percent of REIT dividend and PTP income or 20 percent of taxable income less net capital gain. So, to answer that question, we really do have to ask if capital losses affect either of these two computations, so we've got two sides to consider. So, for the QBI and the REIT/PTP component side, Section 1.199A-3 of the regulation, that excludes capital gains and losses, or any item treated as such under any provision of the code from QBI and PTP income. So, capital losses would not reduce QBI or PTP income eligible for the deduction. So, for that part of, of the calculation, uh, capital losses are not taken into consideration. Now, for the taxable income limitation, the other side of the house, the taxable income amount already includes deductible capital losses, right. So these losses would be included up to that extent. Those capital losses would not be added back to taxable income through application of that taxable income less net capital gain equation that we are supposed to be applying here. For purposes of Section 199A, the definition of net capital gain, that's qualified dividend, if you remember from the webinar, qualified dividends plus net long-term gain reduced, but not below zero, by net short-term losses. So, in other words, no net losses will be added back to taxable income for this limitation. But if there is a capital loss that happens to be included inside of a net gain already, then, that capital loss is includable.

So, it's a little confusing. (laughter) I know, and I apologize. We're going round and round on that. But I would strongly suggest that you look at the instructions in Pub 535, uh. They do a really good job there of explaining exactly what numbers are on the return to be used in making that computation. WOZNIAK: Thanks, Gillian. And that Publication 535 is a very valuable resource.

We have, uh, one more question for you, Gillian. DALTON: Sure. WOZNIAK: What threshold amount applies to estates and trusts, and how do you report a qualified business income deduction on Form 1041? DALTON: OK, um. So, as you heard, as Sherry and Rich talked us through, or you may have known previously, estate and trust can either claim the deduction themselves or passthrough QBI information to their beneficiaries, so that the beneficiaries can then claim the deduction. So, once the estate or trust determines which QBI items are includable in their calculation, it will calculate the deduction just like any other taxpayer would using the available worksheet or, like Brian mentioned, for 2019 or later, the forms that are being developed to help guide through the computation. The threshold amount applicable to single taxpayers is what we are going to be applying to be estate and trust. So, for 2018, the threshold amount will be $157,500. If the estate or trust taxable income before the QBID is over this amount, the estate and trust will be subject to the SSTB, the W-2 wage and the UBIA limitation. For 2018, where we're going to be taking this deduction, it's uh, it's going to be taken on the 1041 as part of other deductions reported on line 15a. But for 2019 and beyond, we do anticipate that there will be a devoted line on the 1041 to, to take the QBID there. WOZNIAK: OK. Thanks, Gillian. We'll look forward to that slightly-revised 2019 version of the form. GILLIAN: Thank you. WOZNIAK: I'm going to transition over to Racheal now. Racheal, I have several questions for you. Are you ready? RACHEAL JAECKEL: Yes, I am. WOZNIAK: OK. First question, how does a partnership or S corporation determine the amount of QBI reportable to the partner or shareholder if they have a Section 1231 gain? JAECKEL: All right. So, we've gotten a ton of questions on the 1231 gain. So, let me just first start off by explaining what the issue is for those that may not be very familiar with that. So, for a passive entity, it's required to separate, or separately state its Section 1231 gains and losses.

And they have to do that because the character of that gain is determined at the investor level.

So, for example, an investor with a Section 1231 gain treats that gain as a capital; whereas a taxpayer that has a net Section 1231 loss treats that loss as an ordinary loss. So, the investor has to actually take all of his Section 1231 gains and losses and add them together before he can determine if he actually has a net capital gain or a capital loss. Um, so, if the amount is ordinary, it's includable in QBI. But if the amount is capital, then, it's excluded from QBI. So, at that point, the question really becomes is, should the partnership or the S corporation include the 1231 item in the QBI number that it's reporting to its investors? And what we've come up with is the answer, for right now, that answer is no. Um, this information really should be separately listed for each of those owner/investors. The passthrough entity should only include items and its QBI number that it can determine at its level should be included in QBI. All of the other potential QBI items should be separately stated or separately listed and reported to those investors on an attached statement so that the investor can actually make that determination as to whether or not it's an item includable in QBI. And um, like I had mentioned, we're, we're getting this question a ton and we are anticipating making some changes to the passthrough instructions for 2019, but we can clarify exactly how that 1231 should be reported. WOZNIAK: OK. That's great, Racheal. Uh, another question. Does the 199A deduction affect the partner's basis in the partnership interest? JAECKEL: So, the 199A deduction does not affect the partner's basis in its partnership interest. Partnership items are going to increase or decrease the partner's basis. So, for example, if you have ordinary income at the partnership that's allocated to the partnership and it's going to increase that partner's basis and, of course, your ordinary losses of the partnership will also be allocated to each partner and that's going to decrease the basis. So, these same things, including the other items of deduction, go into calculate, into the calculation of QBI. But the actual QBI deduction itself is not a partnership-level item, and so, that's not going to affect the partnership basis and the partnership interest, or sorry, the partner's basis and the partnership interest. WOZNIAK: OK. Thanks for that clarification. And one more question for you, Racheal. Here goes. Is the QBI deduction calculated by the RPE for the taxpayer who receives the K1 or is it something the taxpayer or its tax return preparer needs to calculate?

JAECKEL: Yeah, so um, the passthrough entity provided in the K1 really can't calculate the investor's QBI deduction or the partner's QBI deduction. It has to be computed at the investor level. So, the taxpayer or the taxpayer's preparer is going to actually have to calculate it. The partnership or the passthrough entity is just going to have to provide the information to its investors, but it has the information necessary to make that calculation. But the calculation is actually done at the investor level. WOZNIAK: OK. That's great., um, Anne, I have a question for you. Here it goes. RONHOLM: OK. WOZNIAK: Do I have to materially participate in a business to qualify for the deduction? RONHOLM: Ah, No. You do not have to materially participate in a business to qualify for the deduction. Material participation under Section 469 is not required for the qualified business income deduction. Eligible taxpayers with income from a qualified trade or business may be entitled to the deduction regardless of their level of involvement in the trade or business. Again, no, material participation is not required. WOZNIAK: OK. Thanks for that clarification. And, Gillian, another question for you. DALTON: Sure. WOZNIAK: After I total, after I total all the QBI items, excuse me, QBI items I had during the year for my business, including the self-employed health insurance deduction and the deductible portion of SE tax, I end up with a negative amount. What does that mean? DALTON: (Laughter) Well, it, it can mean a few things, actually, uh, assuming that you have no other trades or businesses, it means that you have negative qualified business income carry forward which would be applied against your qualified business income in later years. The negative QBI that's carried forward will be treated as a separate trade or business. Um, unless you have any qualified REIT dividends or qualified PTP income, it also means that you're not eligible for the deduction in this year. So, it, like I said, it does mean a couple of things depending on your other facts and circumstances. WOZNIAK: OK.

Thank you. And, Racheal, another question for you. Here goes. I don't understand whether the QBI deduction is entered or noted on the partnership or S corporation return or whether that is up to the recipient of the K-1 to determine. JAECKEL: So, I'm not, not entirely sure what's being asked here, um. But remember that a partnership is an S corporation. They don't get to compute the deduction. It's instead to give the necessary information to their investors so that they may figure their QBI deduction. And, of course, that information is going to be reported on the Schedule K-1 or an attachment to the Schedule K-1. The QBI deductions then calculated at the partner or at the shareholder level and that's entered into the taxpayer's return. So, I'm not sure if that answered the question, but I hope so. WOZNIAK: OK. Thank you. And back to Gillian.

Another question, uh, for your expertise. Do cooperatives compute the QBID, the qualified business income deduction? DALTON: No, um. We, you know, we've gotten a lot of questions when it comes to cooperatives. And, and so, the clean answer to this is, is no. Cooperatives are C corporations for federal income tax purposes. And, and, as such, they are just not eligible to take a qualified business income deduction, um. It is good to know, however, that certain cooperatives, specified agricultural and horticultural cooperatives may be eligible to claim a domestic production activities deduction, or DPAD, under Section 199A little g. This is different than, uh, a QBID deduction. Specified agricultural and horticultural cooperatives compute the DPAD, which they can either retain themselves within the cooperative or passthrough to their patron. And again, so this is different than the actual QBID itself. WOZNIAK: OK. Thanks, Gillian. You know, we'll take, let's say we'll take two more questions. Gillian, another question for you. Do Form 4797 losses affect the QBI deduction? DALTON: That's another good one that we have received a few, a few times already. Um, so, if the losses are ordinary and they're from the sale of business property allocable to a qualified trade or business, then, yes. Remember, they are ordinary losses attributable to a qualified trade or business. Then, yes, the loss will be part of the qualified business income for that trade or business. Remember, QBI includes the net amount of qualified items of income, gain, deduction and loss, which I'm sure we've all heard a million times already, with respect to a qualified trade or business. So, uh, Form 4797 losses are treated as ordinary and, as such, are generally considered qualified items unlike capital losses which are specifically excluded by the statute. WOZNIAK: OK. Thanks, Gillian. And I will direct our final question to Racheal. It's a little bit of an open-ended one, so feel free to elaborate. Would you please discuss the rules for aggregating the trades or businesses of RPEs? JAECKEL: Yes. I would say that's pretty open ended. That's a pretty long answer. (Laughter) So, our aggregation rules for REPs, our passthroughs. They're really similar to the rules for individuals. REPs, passthroughs or individuals that engage in more than one trade or business, they can choose to aggregate those trade or business into a single trade or business for purposes of determining their QBI and applying the limitations. But, in order to do that, they have to meet specific certain requirements. So, let me just kind of, pulling out my little paper now to make sure I don't miss any of these, um. So, the first requirement they have to meet is there has to be a person or a group of person that directly or indirectly owns 50 percent or more of each trade or business. They have to own that for a majority of the tax year and that has to be included the last day of that tax year. And then, all those trade or businesses must also use the same tax yearend. So, that's the first requirement. The second requirement is that none of the trade or businesses can be specified for service trade or businesses. And then, the third requirement is that they have to meet at least one of two factors that are specifically listed in the regulation.

And those three factors are, um, the trade or businesses have to provide products, property or services that are the same or that are customarily offered together, or they can share facilities or share significant centralized business elements. Or finally, they can operate or, in accordance with or reliance upon one or more of the businesses that are already in the aggregated group. Now, remember that if you've chosen to aggregate, or if a taxpayer chooses to aggregate, they are required to report this aggregation to the shareholders or to their investors by attaching a statement to the Schedule K-1. So, if the passthrough entity aggregates, they have to provide that aggregation information to each of their investors. That statement has to provide a ton of necessary information so that each individual or each partner or shareholder can separately decide what to do with each of those aggregations. Once that, let me understand, making sure I haven't missed anything, once that partnership or passthrough entity has aggregated, they're required to report consistently that same aggregation from year to year unless there's a significant change in facts and circumstances. Um, and then, I guess, the only other thing to really mention on this section would be, if you have a passthrough that owns another passthrough, they've got tiered entities, the top-level entity has to report all of the aggregations of all of the entities underneath it. So, if your bottom tier one makes an aggregation, your next tier also has to report that same aggregation and that next tier can either add to that aggregation, but it can't subtract from it. So, each tier up has to report the aggregation to the entity below it. So, when you get to the 1040 or the ultimate owner level, if there's multiple aggregations that kind of build up to it, it's got to report and attach those aggregations all the way up that chain. So, hopefully, that answers the question. It's kind of a long answer, but hopefully, that gave you enough detail.

And all of this information, of course, is in the regulation. WOZNIAK: OK. Thanks, Racheal.

And, you know, we're going to wrap it up there. That's really all the time we have for questions.

And I do want to thank Gillian, Anne and Racheal for sharing their knowledge and expertise in answering these questions. Uh, I'm going to turn it back over to Rich and Sherry before we close out the Q&;A session if you could just address the most important points you would want to share with the attendees, uh, to remember from today's web conference. Richard, go ahead. You go first.

FURLONG: Thank you, Brian. So, my first most important point is that, remember, the general computation, as you see on the slide, is 20 percent of qualified business income. And however, that is subject to the limitations depending on the taxpayer's taxable income plus 20 percent of the sum of any qualified REIT dividends and/or qualified publicly-traded partnership income But remember, that, this deduction can never exceed 20 percent of the taxable income minus net capital gain. And my final point is that QBI, qualified business income, only includes net amounts of those qualified items of income, gain, deduction and loss from a qualified trade or business that are included or allowed in taxable income for the year. And, Sherry, let me turn the microphone to you for your most important points. SAUCERMAN: OK Thank you, Richard. First of all, I want to, remember that the, remind everyone that the passthrough entities need to provide all of the necessary information to their shareholders, beneficiaries and partners that they put it on the K-1 so that those recipients can calculate their own deduction. Uh, and also, don't forget the threshold amount. That's very important. The threshold amount for 2018 is $157,500. For those that are filing, married filing jointly, it's $315,000. And that amount does get indexed annually for inflation. And the final point that I want to, to stress is that don't forget that the, the qualified business income does have additional limitations once the taxpayer reaches that threshold or exceeds the threshold. First of all, if it's a specified service, trade or business, it's going to, you're going to have to apply the applicable percentage. And then, you, and then, you also have to apply any wage and basis limitations to determine your deduction. Back to you, Brian. WOZNIAK OK Thanks, Sherry. And thank you, Richard. Thank you to our subject matter experts. I'm going to start to wind down today's webinar, a few administrative items.

First, we hope that you will look to your local stakeholder liaison for information about the policies, practices and procedures that the IRS uses to ensure compliance with the tax laws. We did not talk about our Issue Management Resolution System sometimes referred to as IMRS However, we want to know that we do elevate issues that significantly affect tax administration using the IMRS platform. Also, we are planning additional webinars throughout the rest of the year. So, to register for any upcoming IRS webinars, please visit IRS.gov and use the keyword, webinars, and then you can select from the Webinars for Practitioners link or the Webinars for Small Businesses link et cetera. And, yes, we will be offering certificates and CE credit for other upcoming webinars. You can also visit the IRS video portal That www.irsvideos.gov is listed on the bottom of this slide there And the IRS video portal contains video and audio presentations on topics of interest that could be to small businesses, individuals, tax professionals et cetera And it includes video clips on tax topics, archived versions of live webinars like this one et cetera. And again, a big thanks to our presenters and our subject matter experts for a great webinar. And I also want to thank you, our attendees, for attending today's webinar; taking the time out of your busy schedules to participate in this. We do appreciate our partnership with the practitioner community, so thanks for attending today's webinar, Tax Reform Basics for the Qualified Business Income Deduction Section 199A.