PHILIP YAMALIS: Ladies and gentlemen, I see it's the top of the hour. For those of you just joining, welcome to today's webinar, "Section 199A, The Qualified Business Income Deduction or the QBID, Over-Threshold Taxpayers. We're glad you're joining us today. My name is Philip Yamalis. I'm a Stakeholder Liaison with the Internal Revenue Service. I will be your moderator for today's webinar, which is slated for approximately 120 minutes, two hours. Before we begin, if there is anyone in the audience that is joining us with the media, please, please send us an email to the address that you see on the slide. Be sure when you send us that email to include your contact information, as well as the news publication that you're with. Our media relations team and our Stakeholder Liaison staff will assist you and, of course, answer any questions that you might have today. As a reminder, this webinar will be recorded and posted to the IRS Video Portal in a few weeks. The portal is located at www.irsvideos.gov. That's irsvideos.gov.

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What I'm happy for is that Rich is my colleague here in Pennsylvania. He works with tax professionals and small business owners, and he provides outreach and education while identifying ways that the agency can be more responsive to customers' needs. In sunny Florida today, well, not so sunny, I understand, we have Gillian Dalton. Gillian is a Senior Program Analyst in the Small Business/Self-Employed Division and she's a subject matter expert on the Qualified Business Income Deduction. Two of our finest speakers here at the Internal Revenue Service, ladies and gentlemen, let me introduce you to our speakers, let me turn it over to Richard to begin today's presentation. RICHARD FURLONG: Thank you very much, Philip. And good day, everyone. Thank you for joining us on today's webinar. So, let's begin with the objectives.

Today, Gillian and I are going to discuss Internal Revenue Code Section 199A over the qualified business income deduction specifically with respect to those whose taxable income is over the Section 199A threshold amounts. We will address the limitations that apply to taxpayers when their income is over the threshold. We'll also discuss what constitutes a specified service trade or business, we'll discuss qualified W-2 wages for purposes of 199A, and the concept of unadjusted basis immediately after acquisition or UBIA of qualified property. We will also go over the application of the limitations when income is over the threshold, but within what is referred to as the phase-in range. And then, we'll wrap it up with the concept of aggregation as it applies to 199A. And then, at the end of our webinar, you're going to have a treat.

Gillian will walk you through an extremely comprehensive example that brings all of these examples together, so you'll want to stay with us for that example. So, let's start with some acronyms here. Before we get going, I'd like to introduce a few acronyms on the slide that we'll be using today. Now, many of you, I recognize, are probably already familiar with these acronyms. But, just in case, we want to make sure you're on the same page. And if we can go back, there we are. So, QBI stands for Qualified Business Income. QBID, sometimes pronounced QBID stands for Qualified Business Income Deduction. QTB refers to Qualified Trade or Business.

A REIT is a Real Estate Investment Trust. PTP is Publicly Traded Partnership. SSTB, Specified Service Trade or Business. And then, finally, you've got UBIA, Unadjusted Basis Immediately After Acquisition. So, now, let's begin with a brief QBID overview. Who exactly is eligible for the qualified business income deduction? Generally, the qualified business income deduction or QBID is only available to individuals and certain trusts and estates who have qualified business income, QBI, from a qualified trade or business, from a QTP, QTB, excuse me, or qualified real estate investment trust dividends, REIT dividends, and/or qualified publicly-traded partnership income or PTP income. Now, C corporations cannot take the deduction and neither can passthrough entities. However, information from qualified items that are generated by a trade or business that is operated by a passthrough entity, that information should be provided to the partners, the shareholders or the beneficiaries on the Schedule K-1 so that those partners, shareholders, or beneficiaries have the information they need to calculate their QBID. And with that, Gillian, let me turn the microphone over to you. GILLIAN DALTON: Thank you so much, Richard. Now, let's shift gears a little bit here and talk about how we calculate the QBID. Fundamentally, the calculation itself is relatively simple. The deduction is the lesser of the QBI component plus the REIT and PTP component, or the taxable income limitation, whereas the QBI component is 20 percent of QBI from qualified trades or businesses. The REIT and PTP component is 20 percent of qualified REIT dividends and PTP income, and the taxable income limitation, well, that's 20 percent of taxable income less net capital gain. Now, personally, I'm a visual learner. So, whenever I start talking about those basic QBID calculations, I always picture a seesaw with the two components in a little basket on one side, and the taxable income limitation in a basket on the other. Whichever one of those is less, that's our QBID. Now, we see here that the first piece of the equation is the QBI component, which I just mentioned is generally 20 percent of QBI. But what is QBI? Well, QBI is the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business. Now, a qualified trade or business is generally any domestic trade or business under Section 162 other than C corporations and the trade or business of being an employee. And please note that, depending on the taxable income of the taxpayer, SSTBs may not be qualified either. It's something we'll talk about more a little bit later. As such, QBI may be generated by Sole Proprietorships, S corporations, Partnerships, Trusts and Estates. QBI for each trade or business must be reduced by any deduction attributable to that 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. And remember, QBI is the net of qualified items of income, gain, deduction, and loss from each trade or business, meaning that QBI might very well end up being a loss amount. Now, there seems to be some considerable uncertainty with respect to the treatment of rental real estate under Section 199A. There are three ways in which rental real estate can be qualified for purposes of Section 199A. It can be a self-rental under Treasury Regulation 1.199A-1(b)(14). It can be eligible for and rely on use of the safe harbor. And it could rise to the level of a Section 162 trade or business. And note that none of these have anything to do with material participation under Section 469, the passive activity loss and credit limitation. So, let's talk about each of these just a little bit. For self-rental, self-rented property under Section 199A is property that is rented to a commonly controlled trade or business, where the same person or group of persons owns 50 percent or more of each trade or business rental. This is going to result in the rental being treated as a trade or business for purposes of Section 199A regardless of whether it would have risen to the level of a Section 162 trade or business otherwise. Now, when we move on to the safe harbor, we introduce a new term here, the rental real estate enterprise. A rental real estate enterprise is an interest in real property held for the production of rents. The interest must be held directly or through a disregarded entity by the individual or entity relying on that safe harbor. Now, multiple properties can be treated as a single enterprise as long as all similar properties are treated as part of that same enterprise.

So, commercial and residential real estate, well, they can't be part of the same enterprise unless, of course, it's a single mixed-use property which can be its own enterprise. Now, the type and use of the rental real estate must be considered when determining which properties are able to be included in a rental real estate enterprise. Additionally, there are various requirements that must be met to qualify for use of the safe harbor, including but not limited to separate maintenance of books and records, the performance of at least 250 hours of rental real estate services provided by the owners or their agents annually, and the provision of the statement attached to the tax returns for each year the safe harbor is jshtiondz being relied upon. And please note that the safe harbor only addresses the question of whether a rental real estate enterprise is a qualified trade or business for purposes of Section 199A. Once that determination has been made, the enterprise is still subject to the same 199A rules and regulations just like any other trade or business. Lastly, moving on to our third method, we have it if it rises into the level of the Section 162 trade or business. Now, for real estate rental to rise to the level of a Section 162 trade or business, one must be actively involved with continuity and regularity with the primary purpose being for income or profit. Whether rental real estate rises to the level of a trade or business under Section 162, well, that really depends on all the facts and circumstances of that particular rental. Now, remember I said a moment ago that none of these possibilities have anything to do with material participation under Section 469. Well, that holds true even here when we're talking about the application of Section 162. Passive or non-passive is generally not relevant for determination of whether rental real estate rises to the level of a Section 162 trade of business. Instead, as I mentioned, a taxpayer must engage in the activity on a regular and continuous basis with the intention of earning a profit. Now, any more thorough discussion of each of these three ways that a rental real estate can qualify for purposes of 199A is well beyond the scope of today's webinar. But for more information regarding self-rental, we're going to point you to reference Treasury Regulation 1.199A-1(b)(14). For more information regarding the safe harbor, please reference revenue procedure 2019-38. And although there's no statutory or regulatory definition of the Section 162 trade or business, the definition of a trade or business under Section 162 is derived from a large body of existing case law and administrative guidance which should be referenced for additional information. All right. Now that we have spent some time talking about what may be included in QBI, I'm going to pass it back to Richard here to introduce some items that just aren't going to be included. Richard? FURLONG: Thank you, Gillian. So, QBI looks like a pretty big bucket, but there are some items that are not included in QBI, and those include the ones you see on your screen. Capital gains or losses are not qualified business income; interest income not allocable to a trade or business; wage income, and that, including reasonable compensation from an S corporation or guaranteed payments from a partnership are not QBI; items not effectively connected with the conduct of a business within the United States; and finally, items not included in taxable income. So, what do we mean by that? Well, for instance, if you have current-year losses that were subject to basis limitations, the portion of those losses suspended or disallowed would not be included in the year incurred, but would instead be applied later in the year allowed for taxable income purposes. Now, we just spoke of suspended losses and deductions and how they are not included in QBI in the year suspended. But what about losses that are included or allowed in the calculation of taxable income in the current year, and, as such, as included in current-year QBI? How are those handled? Well, when determining a taxpayer's QBI, we must consider what we refer to as the loss netting rule. If a taxpayer's qualified trade or business generates negative QBI for the year, and that would generally be because the trade or business generated a net loss, that negative QBI must be netted against any income from other qualified trades or businesses in proportion to their net qualified business income. This netting does take place before the application of the W-2 wage, and UBIA of qualified property limitations are applied. Now, if the overall combined QBI is positive, then the taxpayer must apply the W-2 wage and UBIA of basis limitations to the trades or businesses that produced positive QBI using the adjusted QBI amounts and we'll look at examples later. If the overall combined QBI is less than zero, then the QBI component for the year is zero and that negative amount is carried over to the next year to offset QBI, very important concept. Now, however, the W-2 wages and UBIA of qualified property from qualified trades or businesses that produce negative QBI, those W-2 wages and UBIA of qualified property, are not taken into account in the taxable year, and they are not carried over to a subsequent year. So, with all of that, Philip, I think it's time to tee up our first polling question.

YAMALIS: OK, Richard. Thank you. I believe you're correct. It is time to tee up our first polling question. Audience here it is. It's not a question, but a true/false statement. Which of the following statements is true, which of the following statements is true. Is it a)

negative QBI is never carried forward, b) negative QBI that is carried forward will offset positive QBI from other qualified trades or businesses in the subsequent year. Is it c) negative QBI does not impact the QBID calculation. Or is it d) negative QBI is carried back for two years. Just think about what Richard shared with us about negative QBI Take a moment, click the radio button that best answers the questions or click on the button of the statement that is true. Let me give you just a few more seconds to answer this. OK. Why don't we go ahead and stop the polling now on this polling question and let's share the correct answer on the next slide. And the correct response is B, negative QBI that is carried forward will offset positive QBI from other qualified trades or businesses in the subsequent year. So, I see that 83 percent of you responded correctly. OK, that's a B plus. That's not bad. That's a good accuracy rate.

So, with that, Richard, let me go ahead and turn it back over to you and you can start discussing limitations that might apply. FURLONG: Well, thank you, Philip. So, depending on the taxpayer's taxable income, there are generally two limitations that may apply, and they're in the bottom half of the screen that you're looking at. The first is the Specified Service Trade or Business limitation, also known as the SSTB limitation. And the second is the W-2 wage and UBIA of qualified property limitation. Now, for taxpayers with income at or below the threshold, the QBI component equals 20 percent of QBI less any patron reduction and neither of these two potential limitations mentioned above impact these taxpayers because today's focus is on those over the threshold. But for taxpayers above the threshold, but within the phased-in range, these limitations will be phased in as you'll see later with our examples when applicable. Now, for taxpayers above the threshold and above the phased-in range, the limitations would be in full effect when applicable. Now, what you're looking at here are the thresholds for the 2019 tax year. Keep in mind that these thresholds are indexed for inflation and they do change annually.

The phased-in amounts on the upper right-hand side there, though, they are fixed, and all these will be $50,000 or $100,000 for those whose return status is married filing jointly. Now, the first limitation is a very important limitation for a specified service, trade or business. By statute, under 199A, SSTBs are not qualified trades or businesses. This general rule will exclude these business types from generating qualified business income. However, and a very important however, as we mentioned a moment ago, there is an exception to that general rule for taxpayers whose taxable income is at or below the threshold amount for the year. For these taxpayers, whose income, taxable income before the deduction is at or below the threshold amounts, the SSTBs are qualified trades or businesses that may generate qualified business income. Taxpayers income exceeds the thresholds, on the other hand, they are impacted by this general rule for SSTBs. The amount. of qualified items of income gain, deduction and loss from calculation later. And eventually, that deduction will be phased out completely once income SSTBs for these taxpayers is limited to an applicable percentage and we'll show you that exceeds the threshold and the phased-in range. So, you want to watch closely when we look the examples. Now, the determination of whether a trade or business is or is not an SSTB, that is based strictly on facts and circumstances specific to that trade or business. So, what is a specified service, trade or business under 199A? And our next slide gives you the categories.

And I suspect that for many attendees today, you have some familiarity with these categories.

It, a specified service, trade or business is any trade or business involving the performance of services in the field listed here on the slide that we have up right now. Now, I would refer you to Treasury Regulation 1.199A-5. That does a fantastic job of providing multiple scenarios to consider when trying to determine if a particular trade or business is a specified service, trade or business. Again, that regulation is 1.199A-5. And you can access the final full set of 199A regulations by simply going to irs.gov and entering Q-B-I-D or QBID in the search bar.

Also, I want to take a moment to discuss the final bullet there because we do receive questions on that concept of a trade or business where the principal asset is the reputation or skill of one or more of its employees or owners. So, the regulations provide that trades or businesses, again, where the principal asset is the reputation or skill of one or more of its employees or owners. That means any trade or business that receives fees, compensation or other income for endorsing products or services, or using an individuals image, likeness, name, signature, or voice, trademark, or similar symbols associated with that individuals identity or if that individual appears in an event or perhaps on a radio, television, or other media. Now, I'm not talking about the best hairdresser in town or the most amazing plumbing company around. I believe service providers may be known in their communities for their reputation or skill.

Instead, this concept of SSTB applies to trade or businesses where someone is receiving fees or compensation for services, again, such as the use of their name or image, perhaps a personal appearance, an event, or the endorsement of a product. Consider as an example a famous Chef that you might see on, let's say, one of the television stations, who has a line, and there's a line of cookware that's manufactured that pays that chef for the use of that chef's name and likeness on the product packaging for that product. Now, the manufacturer of the cookware itself, that would not be a specified service, trade or business. But the trade or business receiving fees for the use of the Chef's likeness, that would be SSTB income. Now, all of these details, along with many more that are covering each of the fields listed on the slide, these are all available in the Treasury regulations. And although a detailed discussion is, of each of these categories is well beyond the scope of today's webinar, we do encourage each and every one of you to use these regulations to help when assessing whether a particular trade or business is or is not an SSTB. And, with that, Gillian, let me turn the microphone back over to you. DALTON: Thank you so much, Richard. And I'm going to second the point that you just made about the regulations, which really offer a fantastic resource for assessing whether or not a trade or business is an SSTB.

And, on that note, I've actually heard from the folks manning our webinar here that there are a lot of questions coming in regarding the code sections and references given with regard to the rental. So, I'm going to take a quick moment, circle back to that, and just let you guys know of all those sites that I mentioned. So, as I had provided, for more information regarding self-rental, you're going to reference Treasury Regulation Section 1.199A-1(b)(14). And then, for more information regarding the safe harbor, we're going to reference Revenue Procedure 2019-38. Again, there was no formal regs or site given for Section 162 except to speak to the large body of existing case law and administrative guidance out there that can be referenced with respect to whether a rental rises to the level of a 162 trade or business. All right. So, I hope all of you got that. And now, we're going to go right back and shift into what Richard had been talking about before with our SSTBs. So, Richard was talking about when you have a trade or business that falls into that classification of a specified service, trade or business. But what about a business that offers multiple services or products and services together? Well, there's a de minimis rule that prevents a trade or business from being treated as an SSTB if the trade or business involves only a small amount of specified service activity. So, if a trade or business' gross receipts are $25 million or less, and less than 10 percent are from a specified service activity, or those gross receipts are over $25 million, and less than 5 percent are from a specified service activity, then the trade or business will not be considered an SSTB. The trade or business may be qualified, and it might generate income eligible for the QBID. So, for example, let's consider a lawn maintenance company that also offers landscape consulting services, right, as Richard defined on the, on the previous slide that our list of SSTBs consulting services is over there. So, if the total gross receipts for the entire company are $350,000, and the consulting services generated only $28,000, which is 8 percent, then the trade or business as a whole is not going to be considered an SSTB because the gross receipts of the specified service activity were less 10 percent of the total. If, on the other hand, the consulting services generated $42,000, which goes up to 12 percent of the total gross receipts, well, then, the entire trade or business is considered an SSTB. And, with that, Philip, I think it's time for another polling question. YAMALIS: Gillian, I have to agree with you. So, audience, our second polling question is a domestic specified service, trade or business, otherwise known as an SSTB, may not be treated as a qualified trade or business when taxpayer's taxable income before the QBID is a) at or below the threshold, b) over the threshold but within the phased-in range, c) over the threshold and phased-in range, or is it d) both a and b? OK, folks, you know how this works. Take a moment, click on the radio button that best answers this question for us. I will give you a few more seconds to make a selection, so please do so now.

OK. With that, let's go ahead and stop the polling now, please. We'll share the correct answer on the next slide. And the correct response is C, over the threshold and phased-in range. All right. I got a little bit of bad news here. I got 39 percent of you responded correctly. So, we're either a) having some technical issues or b) we're not paying attention. But I bet you it's technical issues. But, anyway, let's bring in Gillian or Rich. I want one of you to clarify this and share with us some clarity, that might be most appreciated at this point.

FURLONG: Sure, Philip. So, and this is a very important point to understand why C is the correct answer. Now, remember the threshold, which is adjusted for inflation annually and that was back on slide 29. That's dependent on the filing status. So, for example, a single taxpayer, the threshold is $160,700 and the phased-in range is $50,000. So, when you are over, over the threshold and over the phased-in range, as an SSTB, then, you are not going to get qualified business income from that trade or business. In other words, an SSTB where the taxable income of the taxpayer before any deduction is over the threshold and over the phased-in range. So, for example, for a single taxpayer, that would be, if I do my math right here, $210,700 for 2019. Then, their SSTB would not qualify. It's only when you're under, completely under the threshold or under the threshold and in the phased-in range and then you'll do an allocable amount and calculations that you'll look at later. So, I'd also refer you back to the FAQs at irs.gov that do a good job on much of what we're discussing today. YAMALIS: So, we want to see that taxpayer's income below the threshold and below the phased-in range … FURLONG: If it is a SSTB. YAMALIS: Yes. Thank you, Rich, for that clarification. I certainly appreciate that.

So, with that then, I think it's time to move on. Gillian, why don't you go ahead and come back in and I don't even know what you were going to talk about now, so I'm going to turn it over to you. DALTON: Well, thanks, Philip. I'm going to talk about our second limitation because I've already talked about our SSTBs, and that was our first limitation applicable to our over-threshold taxpayers. YAMALIS: Right. DALTON: Well, now, we're going to talk about the W-2 wage and the UBIA of qualified property limitation. So, this limitation, YAMALIS: Thanks.

DALTON: No problem. No problem. So, this limitation provides that the QBI for each qualified trade or business is limited to the lesser of that 20 percent of QBI from that trade or business or the greater of 50 percent of W-2 wages paid by the qualified trade or business, or 25 percent of those W-2 wages plus 2.5 percent of the UBIA of qualified property held for use in that qualified trade or business. Now, just like we just talked about with the SSTB limitation, this limitation is phased in for taxpayers whose taxable income exceeds the threshold amount until the excess income is beyond the phased-in range, at which point the limitation is applied in full.

And again, just like with those SSTBs limitations, the W-2 wage and basis limitation does not apply to taxpayers whose income is at or below the threshold. So, let's briefly talk about some of the terms we use here to have a better handle on what exactly we are talking about. So, W-2 wages include all amounts paid to employees for the performance of services plus elective deferrals, such as contributions to 401(k) plan, deferred compensation and Roth IRA contributions. And I think we're about one slide back, and I'm going to wait for our slides to catch up, so that we are all on the same page. All right. I am not seeing those slides advance.

FURLONG: That's right, Gillian. Sometimes those slides don't advance as quickly as we do, so let's just, let's just proceed. DALTON: All right. So, again, W-2 wages include all amounts paid to employees for the performance of services plus those elective deferrals, 401(k) plans, deferred compensation, and Roth IRA contribution. Now, if there is more than one trade or business being conducted, the W-2 wages must be allocated among the various trades or businesses to the business that generated the wage. And it's important to note that the, only the W-2 wages that are properly allocable to QBI are includable in the calculation of this limitation. Once W-2 wages for each trade or business have been determined, the amount of W-2 wages properly allocable to the QBI for each trade or business or aggregated trade or business must then be identified. W-2 wages are properly allocable to QBI if the associated wage expense is taken into account when computing the trade or business' QBI. Makes sense, right? So, Revenue Procedure 2019-11, again, that's Rev Proc 2019-11, well there you're going to find guidance on methods for determining W-2 wages as applied here and it really is a very good resource to lean on. Moving on to the second half of this limitation, the unadjusted basis immediately after acquisition, generally means the asset basis on the place and service date. The UBIA of qualified property is not adjusted as the property has depreciated or otherwise adjusted. The UBIA of the property remains unadjusted as the name would imply, right. Now, qualified property includes all tangible properties subject to depreciation under Section 167 that is held and use for the production of QBI by the trade or business on the last day of the taxable year for which the depreciable period has not ended. The depreciable period ends on the later of 10 years after the property is placed in service or on the last day of the full year for the applicable recovery period under Section 168. And another important point to note here, additional first-year depreciation, such as bonus depreciation, well, that's not going to affect the applicable recovery period. So, let's think about an example for a second here. If you have a vehicle and it's got a recovery period of five years under Section 168, the depreciable period for purposes of the UBIA of qualified property, well, that's going to be 10 years even if you were able to expense the entire vehicle in that first year. On the other hand, if you have a residential rental with a recovery period of 27.5 years, well, the depreciable period for that property under Section 199A, well, that's going to 27.5 years because it's the greater of the depreciable recovery period or 10 years. Now, please note, there are special considerations for UBIA of qualified property when there are improvements to property, a like-kind exchange, non-recognition transaction or an acquisition within 60 days of the yearend. And again, I'm going to throw another site out there. Treasury Regulation 1.199A-2 offers more information on these instances, as well as the determination of the UBIA as a whole when needed. Now, I know that's an awful lot to consider. But soon we're going to be bringing all together with some examples, so hang in there, OK. Richard, can you take us over to our next topic, please? FURLONG: I'd be happy to, Gillian. So, now, let's look back at our general QBID calculation. I must make sure the slide comes up. So, Philip, can you see the slide "How is the QBID calculated"? YAMALIS: Yes, Richard. Please continue. They are coming on the live presentation. FURLONG: OK. Thank you. So, looking back at the general QBID calculation, which you should be somewhat familiar with at this point, we recall that the deduction is the lesser of the QBI component. Now, remember, that is 20 percent of qualified business income from qualified trades or businesses conducted either directly or through a passthrough entity, plus the REIT/PTP component, and that is 20 percent of qualified REIT dividends and qualified publicly traded partnership income. So, that's one-half of the seesaw that Gillian referenced before. The other half is 20 percent taxable income determined before the QBID less net capital gain. Now, we just covered what was and what is not QBI, the possible limitations to QBI component, and when those limitations come into play. So, with the QBI component pieces behind us, now, let me transition a bit and look at the next piece of the equation seen here, which is the REIT/PTP component. Qualified REIT dividends are any dividends received from a real estate investment trust that are not capital gain dividends under Internal Revenue Code Section 857(b)(3) and are not a qualified dividend under Section 1(h)(11). Now, I know, based on my outreach last year and speaking with many practitioners, you saw these qualified REIT dividends reported on some of your clients' Forms 1099 DIV in box 5. Now, qualified publicly traded partnership income, that includes items of income, gain, deduction, and loss from a publicly traded partnership. It's essentially the same as QBI, but here it is from a PTP, a publicly traded partnership, instead of a QTB, a qualified trade or business. Now, qualified PTP income may also include gain or loss recognized on the disposition of your PTP interest that is not treated as a capital gain or loss. And I should also note here that although W-2 wages and UBIA of qualified property limitations do not apply to REIT dividend or PTP income, the SSTB limitation that we've been discussing previously, that may apply to PTP income if the publicly-traded partnership itself is a specified service, trade or business. Now, let's look at losses. Deductible losses from a publicly traded partnership must be combined with any qualified income from other publicly traded partnerships and other REIT dividends. If the combined amount of qualified REIT dividends and qualified publicly traded partnership income is less than zero, that negative combined amount must be carried forward and it's used to offset the combined amount of qualified REIT dividends and qualified publicly traded partnership income in the subsequent taxable year. But that negative combined amount of REIT dividends and qualified PTP income, they do not offset qualified business income from a trade or business in either the current year or in subsequent years. So, with that, Gillian, let me turn it back over to you.

DALTON: Fantastic. Thank you, Richard. So, once again, we find ourselves back to our general calculation, remembering that our QBID is the lesser of the QBI component, plus the REIT and PTP component, one side of the seesaw, or the taxable income limitation. Now, we can move on because we've just talked about the QBI component in extraordinary detail. Rich gave us a great presentation on the REIT and PTP component. We're going to move forward now and look at the last limitation, the one limitation that does apply to everyone, the taxable income limitation, the other side of our seesaw. So, here we see the computation. Twenty percent of taxable income less net capital gain, but just like much of Section 199A, it's not quite as simple as it looks. When we say taxable income, we are talking about taxable income before the QBID, in other words, AGI less the standard or itemized deduction. And when we say net capital gain, we really mean net capital gain for purposes of Section 199A, which is not simply the capital gain or loss reported on the face of the 1040. To get the net capital gain amount as applied here, we've got to look a little bit further. So, we start with any long-term capital gains. We then reduce these gains, if any, by any short-term capital losses, but we do not reduce them below zero. Then, we take any remaining amount and we're going to add that to any qualified dividends we might have. And that is how we get our net capital gains for purposes of 199A. So, again, it's long-term gain less short-term loss, but not below zero, and then we add to it any qualified dividend. We're then going to subtract our net capital gain amount from our taxable income amount before the QBID and multiply that result by 20 percent to compute our current taxable income limitation. Now, Philip, do we have another polling question? YAMALIS: We certainly do, Gillian. Our third polling question, ladies and gentlemen, is, Net capital gain for Section 199A includes which of the following amounts, Is it a, qualified dividends, b, REIT dividends, c, short-term capital gains, or is it d, long-term capital losses? Which of the following amounts are included in net capital gains for Section 199A? Take a moment. Click on the radio button that best answers the question. Let me give you just a few more seconds to make your selection, OK. OK Producers let's go ahead and stop the polling now and let's show the correct answer on the next slide. And the correct response is A, qualified dividends are included in net capital gain for purposes of Section 199A. How did we do on that? About 58 percent. I bet you we're having some technical, technological issues. But, Gillian, do you want to give us a little bit more clarification on that just in case it's not technology here? DALTON: Absolutely. Thanks, Philip. So, you know, I understand that this question is probably a little bit tricky because we went with the short-term capital gains and long-term capital losses as an option here. But, as I just stated, our net capital gains for purposes of 199A is long-term capital gain less short-term capital losses plus any qualified dividend. So, we are going to want to be careful when we're picking those numbers off the return. YAMALIS: OK, Gillian, thank you so much. So, with that, Richard, let's keep this moving, and let's talk about how the deduction is finally claimed. FURLONG: Certainly, Philip. So, as many of you recall, in 2018, the first year of 199A, the deduction was claimed in line 9 of the Form 1040, and with the other deductions line on the Form 1041.

And, for 2018, the IRS provided computational worksheets that were included in the Form 1040 instructions, and also, for that yearend publication 535, which is entitled, Business Expenses for Those Who Had More Complex Calculations. However, in 2019, we introduced the two new forms for calculating and claiming a QBID. The first Form 8995, that offers the simple computation for those taxpayers whose taxable income is at or below the threshold, and who are not patrons of a specified cooperative. The Form 8995-A provides the full computation and that includes the application of any applicable limitations and the computation of the patron reduction for those patrons with specified cooperatives. And then, Gillian's comprehensive example will be looking at segments of 8995-A. Now, for Form 1040 filers, the deduction is calculated ultimately on the appropriate form and, in 2019, that is reported on line 10 of the Form 1040. And that line 10 of the 1040 is directly below standard or itemized deductions. So, now, we're going to look at, now, that we've discussed the concepts and the general formula, I think it's time now to walk you through some computations for taxpayers above the threshold and above the phased-in range, or as Gillian refers to it, above, above. This includes taxpayers with 2019 taxable income before QBID that is greater than $210,700 or for married filing separate filing status greater than $210,725 or for married filing joint filers of taxable income before the deduction above $421,400. Those are all above the threshold and above the phased-in range. And remember, as I mentioned earlier, those threshold numbers I just mentioned, they're adjusted annually, and they will be for 2020. Now, for taxpayers whose taxable income is over the threshold and over the phased-in range, we still start with our general computation which remains the same. QBID for these taxpayers still equals the lesser of the QBI component plus the REIT/PTP component, if any, or 20 percent of taxable income less net capital gain. That's Gillian's seesaw. However, the W-2 wage and UBIA of qualified property and/or the SSTB limitations we just discussed; these may reduce the components themselves. Generally, the impact will be seen in the QBI component, and that is what we are going to focus on here. Now, the QBI component for these taxpayers, it does become a bit more complex than just 20 percent of QBI reduced by any applicable patron reduction. So, now, we must consider the following three items; first, and we spoke about this earlier, SSTBs are not qualified trades or businesses when you're above the threshold and above the phased-in range. So, they are items of income, gain, deduction and loss. They are not included in QBI. The QBI component or, again, 20 percent of QBI for each trade or business that is not an SSTB, that is now subject to the W-2 wage and UBIA qualified property limitation when you're above the threshold and above the phased-in range. And, as we mentioned briefly, if the taxpayer is a patron in a specified cooperative, the taxpayer may apply any applicable patron reduction. So, now, let's start looking at some examples that will bring all of this together.

So, let's first look at this fact pattern with a gentleman named Don. He operates a packing company. He did very well. The packing company had $1 million of QBI. Don paid no W-2 wages, and he had no UBI or qualified property. And Don's taxable income before any qualified business income deduction is $980,000. So, he's, and he has no capital gain for the year, no net capital gain. So, let's see how these numbers play out and let's look at this slide, and I want to go through it, make sure you understand why Don's QBID is zero for the year despite the fact that the QBI of the packing company was $1 million. First, because his taxable income is above the threshold plus the phased-in range; the W-2 wage and UBIA of qualified property limitations apply in determining ultimately Don's QBI for the business. So, as you can see on the slide, the QBI is limited to the lesser of 20 percent of QBI from the business. So, that's $200,000, 20 percent of $1 million or the greater of 50 percent of W-2 wages paid by the business or 25 percent of W-2 wages plus 2.5 percent of UBIA of qualified property. However, remember, because Don's business has paid no W-2 wages and Don had no UBIA of qualified property, his QBI component will be limited to zero. Hence, his overall QBID computation is also zero, so again, going back to the seesaw, it's the lesser of zero or 20 percent of taxable income. His taxable income was very good, $980,000, but he gets a QBID of zero. So, let me toss it to Gillian to change the facts a bit here. DALTON: Thanks, Richard. So, now, here we are again with Don and his $1 million of QBI, $980,000 in taxable income. But now, Don's hired some W-2 employees and he has $360,000 of qualified wages to consider now. So, as Richard already just explained to us, the W-2 wage and UBIA of qualified property limitations are going to apply to Don because the taxable income is above the threshold and above that phased-in range for over taxpayers. So, the QBI is limited to the lesser of 20 percent of QBI from the trade or business, which is $200,000; that doesn't change; or the greater of 50 percent of W-2 wages paid by the business, which is now $180,000 or 25 percent of those wages plus 2.5 percent of the UBIA of qualified property. So, we see now that because Don had $360,000 of qualified wages, his QBI component has gone from 0 to $180,000, which is the greater of these two possible limitations. And with this new QBI component amount, Don can now compute his QBID as the lesser of its QBI component, remember $180,000, and it's taxable income limitation, which was $196,000. And that's going to bring his total QBID to $180,000, and that's what's allowable in this year. Now, let's see if Richard has any updates for Don to consider. FURLONG: I do, Gillian. So, now, let's bring the UBIA limitation into the scenario. So, again, we're still with Don, $1 million in QBI, $980,000 in taxable income, $360,000 in qualified wages. But now, Don has a significant amount of qualified property. The UBIA is $4 million. So, let's see how these numbers play out. And as you can see, the answer at the top there, his QBID will go up to $190,000. So, let's see how we determine that. Now, remember, as we've already discussed, the W-2 and UBIA of qualified property limitations, these do apply to Don because his taxable income is well above the threshold in the phased-in range. So, the QBI is limited, again, to the lesser of 20 percent of QBI from the business, that would be the $200,000, or the greater of 50 percent of W-2 wages paid by the business, which is $180,000, or, and here's where it differs from the prior example, 25 percent of W-2 wages, which is the $90,000, but now 2.5 percent of the $4 million of UBIA of qualified property which is $100,000. So, you add that to the 25 percent of W-2 wages and get $190,000.

So, because Don had $4 million in UBIA of qualified property, his QBI component has gone from $180,000 up to $190,000. And again, that's the greater of the two possible limitations. And with the new QBI component amount, Don can now compute the qualified business income deduction as the lesser of this QBI component, which is $190,000, and his taxable income limitation.

Remember, that was 20 percent of the $980,000. And you see at the bottom there, $196,000. The lesser is $190,000 of allowable qualified business income deduction for Don. And now, we have another taxpayer also named Don, but Don now, he's taken his packing company and turned it into a dentist office, or we have a different Don who's a dentist, so remember, dental practice, health, SSTB. We see that Don's QBI, W-2 wages and UBIA of qualified property are all zero in our scenario. So, and this comes back to the polling question we had earlier because Don't taxable income is both over the threshold and over the phased-in range, SSTBs are no longer qualified trades or businesses and, as such, cannot generate any QBI, any W-2 wages, or have UBIA of qualified property. So, Don's QBID as a dentist would be zero in this scenario. And let me turn it back over to you, Gillian, to talk about computations within the phased-in range.

DALTON: Great. Thank you so much. All right. So, we talked a little bit about our taxpayers who are at or below the threshold and we've just covered taxpayers who are over the threshold and over the phased-in range, my over, over taxpayers. So, now, we're going to circle back a little bit and we're going to talk about the computation for taxpayers whose income is above the threshold, but within that phased-in range. And, once again, we are back to the same general computation, which we see remains identical when the taxpayer is within that phased-in range.

The QBID for these taxpayers still equals the lesser of the QBI component plus the REIT and PTP component, or 20 percent of taxable income less net capital gain. I've mentioned this a few times now as has Richard, but this fundamental formula does not change at all based on the taxpayer's income or the types of trades or businesses. It's the information that feeds this formula that changes. Generally, it's the QBI component that is impacted, so that's what we're going to focus on here for a bit. QBI for taxpayers above the threshold, but within the phased-in range is adjusted as follows. First, the QBI, W-2 wages and UBIA of qualified property from any SSTB is reduced to the applicable percentage. Then, each qualified of partially qualified trade or business is now subject to a phased-in wage and basis limitation. And again, if the taxpayer's a patron of a specified cooperative, the taxpayer has to consider the patron reduction. So, remember our, at or below threshold taxpayers are not impacted by the SSTB or wage and basis limitation. And our over, over taxpayers are fully limited by the SSTB and wage and basis limitation. But our, within phased-in range taxpayers, well, their limitations are phased-in as the name would imply. So, let's focus here again on our SSTB limitation first. As we just mentioned, individuals with taxable income above the threshold, but within the phased-in range, they're allowed to take into account an applicable percentage of their QBI, W-2 wages, and UBIA of qualified property from their SSTB. The applicable percentage is computed by first seeing how much the taxable income exceeds that threshold amount. We then divide that total by the total phased-in range, which remember is either $50,000 or $100,000 depending on the taxpayer's filing status. What this gives us is the percentage of the way through the phased-in range the taxpayers income had taken up, basically how much of that phased-in pie have they eaten up. Finally, to produce the applicable percentage, we subtract this figure from 100 percent, and this is the percentage of QBI, W-2 wages and UBIA of qualified property that can be used by the taxpayer when calculating their QBI deduction. Now, Richard, could you please take us through an example to see more clearly how this works? FURLONG: I'd be happy to. I think that would help. So, let's look in an example with Tom. Tom is single and, he is single. He is a sole proprietor in an accounting firm, so it's an SSTB. His taxable income is $178,200. His QBI is $172,000 from the accounting practice and the business paid W-2 wages of $65,000. And Tom's accounting practice has $80,000 in UBIA of qualified property. So, let's see how those numbers play out to calculate his applicable percentage. And this is an important slide, so let me slow down and walk you through it. Now, remember, Tom is a single taxpayer for 2019. The threshold is $160,700 and his phased-in range is $50,000. Since Tom's taxable income exceeds the threshold, but is within the phased-in range, only this applicable percentage of the SSTB's qualified business income, W-2 wages, and UBIA of qualified property are taken into account. So, to compute first his applicable percentage, we start by subtracting Tom's threshold of $160,700 from his taxable income of $178,200. So, that leaves us with a difference of $17,500. And then, as you can see at the top in the, in the blue bar, we divide the $17,500 by Tom's $50,000 phased-in range. And that leaves us with 0.35 or 35 percent. So, think of this 35 percent as representing the amount of the phased-in range that Tom's income has used up. So, to get the applicable percentage, we take 100 percent minus that 35 percent, and that results in an applicable percentage of 65 percent. So, what do we do with that 65 percent? To calculate the reduced qualified business income to use for computing Tom's QBID, we take the 65 percent applicable percentage, multiply it times QBI of $172,000. So, this results in reduced QBI of $111,800 as you see on the slide. Similarly, his reduced W-2 wages become $42,250 and his reduced UBIA of qualified property is now $52,000. And that is simply the W-2 wages of $65,000 and the UBIA of qualified property of $80,000, each of those amounts multiplied by the 65 percent applicable percentage. And then, we will use these adjusted amounts to compute Tom's QBI component. Now, I'm going to turn it back over to Gillian for her to discuss how to apply the W-2 wage and UBIA of qualified property limitation. DALTON: Great. Thank you, again, Richard. Now, with our SSTB determinations out of the way, we can focus on our phased-in wage and basis limitation and how to apply these within ranged taxpayers.

So, to compute the phased-in reduction, first, we must determine what the trade or business' reduction would have been had the full wage and basis limitation been in effect. When we're looking at this slide here in front of you, this is what we're doing on the first half of the equation on the left-hand side of the multiplication sign of your screen. To do this, we start off by identifying the greater of 50 percent of qualified wages or 25 percent of qualified wages plus 2.5 percent of that UBIA. We then subtract the greater of these two figures from 20 percent of the trade or business' QBI. And this represents our reduction to our QBI component had the taxpayer been one of those over, over taxpayers, over the threshold and over the phased-in range.

Once we have this amount, we kind of put it on the back burner. We set it aside, then we go back, and we compute our phased-in percentage, which should look a little bit familiar, right?

Just like we did when computing the applicable percentage, we first need to see how much the taxable income exceeds the threshold amount. And we do this by subtracting the threshold from that taxable income amount. And again, we divide this amount by the total phased-in range, either $50,000 or $100,000 depending on the taxpayer's filing status. And once we have the percentage here, we go back, and we multiply it by the total reduction that we computed during the first half of this calculation to come up with our phased-in reduction. And again, I assure you that an example will be helpful to see this in action. Now, remember from Richard's last example that he walked us through where we applied the applicable percentage to the SSTB, we had Tom and the remaining items seen here after that applicable percentage was applied. So, as mentioned, first, we're going to determine what the trade or business' reduction would have been the full W-2 wage and UBIA of qualified property limitation been in effect. We're going to start off by identifying the greater of 50 percent of qualified wages or 25 percent of the wages plus 2.5 percent of the UBIA of qualified property. And if we look to the bottom of this slide, we see that the greater of these amounts is $21,125, 50 percent of the wages. We then hop back up to the left-side of the blue box here and we subtract that $21,125 from 20 percent of the trade or business' QBI, which, as you see here, was $22,360. Remember, all of our starting figures here are after the applicable percentage has been taken into consideration to reduce the original amount Tom had. When we take that $21,125 from the $22,360, we get a full wage and basis limitation reduction of $1,235. Once we have that amount, remember we're going to put it on the back burner. We're going to set it aside and we're going to go back and compute our phased-in reduction percentage. First, we need to see how much taxable income exceeds the threshold amount.

And we do this by subtracting the threshold from that taxable income. We then divide this by the total phased-in range, and since Tom is single, we're going to divide it by $50,000 to generate his phased-in reduction of 35 percent. And finally, we take that number back off the back burner and we multiply the phased-in reduction percent of 35 percent by that total reduction of $1,235 to compute the first part of our calculation that we computed during the first part of the calculation and we're going to come up with our phased-in reduction as you see here of $432.

Now, let's just take this one step further and compute Tom's QBID. So, we have applied the applicable percentage limitation for the SSTB, and we've come back and put the phased-in reduction of the wage and basis limitation. Now, we're going to bring it all together and compute Tom's full QBID. The QBI component is 20 percent of QBI as limited by the SSTB and the phased-in reduction which gives us the $111,800 times 20 percent less the phased-in reduction of $432, eventually ending up with $21,928 as we see here on that first bulleted item. There's no REIT and PTP component in this example, so there's nothing else to consider on that side of our seesaw. Now, over to the other side of this seesaw, the taxable income limitation is 20 percent of Tom's taxable income before the QBID, less with net capital gain. And that's simply going to be $178,200 times 20 percent or $35,640, which is the second bullet on the slide here. And the result is the lesser of these two is the QBID. So, as we can see here, Tom's qualified business income deduction ends up being $21,928. And, Philip, I think it's a good time to pause for another polling question. YAMALIS: Yes. I think we better go to the next polling question or I'll be on that seesaw. Here's our fourth polling question, ladies and gentlemen. So, W-2 wages and UBIA of qualified property limitations do not apply to taxpayers whose taxable income before the QBID is a) over the threshold, but within the phased-in range, b) over the threshold and phased-in range, c) at or below the threshold, or d) both b and c. By now you know how this works. Please take a moment. Click the radio button that best answers the question. I want to give you a few more seconds to make your selection at this time. OK. Let's keep our fingers crossed. We're going to stop the polling now. Let's go ahead and share the correct answer on the next slide.

And the correct response is C, at or below the threshold. OK. We didn't get too good of a response rate once again, so Gillian, you want to clarify this just a bit for us. DALTON: Absolutely. And I'm hoping I'm going to go with this as technical difficulty. But in case I haven't been clear, the W-2 wage and UBIA of qualified property limitation don't apply to taxpayers whose income is at or below that threshold, just like our SSTB limitations, right. We, those taxpayers who are at or below the thresholds, they are not impacted by these limitations.

I hope that makes a little bit more sense. YAMALIS: It does. It does. DALTON: Great. YAMALIS: Thank you. So, with that, Richard, take it to the next step and let's get into aggregation here. FURLONG: Certainly. So, let's provide a bit of an overview on this new concept of aggregation for taxpayers over the threshold. Now that we've discussed taxpayers over the threshold, I'll shift gears and talk about aggregation as it applies to 199A. Now, several places in the Section 199A, they use the term "each qualified trade or business". However, this raises the question as to what constitutes a single qualified trade or business. Is each entity one trade or business or can an entity have two separate trades or businesses? So, for example, if a single partnership owns, let's say, a bakery and a movie theater, is that one or two trades or businesses? Or if an individual owns two fast food franchises in, let's say in two separate S corporations, does the individual have one or two trades or businesses? The determination of what constitutes a trade or business is a facts and circumstances decision. However, we can look to court decisions to find guidance in determining whether more than one trade or business exists.

Generally, under Internal Revenue Code Section 162, to be engaged in the trade or business, the taxpayer must be involved in the activity with continuity and with regularity and the taxpayer's primary purpose for engaging in the activity must be for income or profit. While whether multiple trades or businesses exist within an entity depends on facts and circumstances, multiple trades or businesses will generally not exist within an entity unless different methods of accounting could be used for each trade or business. And I would refer you to Treasury Regulation 1.446-1(d) because that regulation, which again, is 1.446-1(d), that regulation explains that no trade or business is considered separate and distinct unless a complete and separable set of books and records is kept for that trade and business. Further, trades or businesses will not be considered separate and distinct if, by reason of maintaining different methods of accounting, there is a creation or shifting of profits and losses between the businesses of the taxpayer so that income of the taxpayer is not clearly reflected. Now, when there are multiple trades or businesses, Treasury Regulation 1.199A-4, that regulation provides specific rules for aggregating them into a single trade or businesses for purposes of determining the QBID. Section 199A is applied on a business-by-business basis. So, each qualified trade or business, including those operated in the same entity, is treated as a separate trade or business for purposes of determining QBI and applying the W-2 wage and UBIA of qualified property limitations unless the taxpayer meets and chooses or elects to apply special rules under the regulations to aggregate multiple qualified trades or businesses together as a single trade or business, which can help increase the 199A deduction. However, the following four requirements must be met in order to aggregate two or more trades or businesses for 199A. First, the same person or group of persons must directly or indirectly own 50 percent or more of each trade or business for a majority of the taxable year, and that would include the last day of the taxable year. Second, continuing on the next slide, each business to be aggregated has the same taxable year end. Thirdly, none of the trades or businesses to be aggregated is a specified service, trade or business. And then, finally, number four, the trades or businesses must meet at least two of the following three tests you see on the slide. They must either a) provide products, property or services that are the same or that are customarily offered together, b) they share facilities or share significant centralized business elements and that would be things such as personnel, accounting, legal, manufacturing, purchasing, human resources, or information technology resources, or three, they are operated in coordination with or reliance upon one or more businesses in the aggregated group. So, two out of three on that slide must be met, along with the prior requirements. Now, what about a passthrough entity? A passthrough entity may aggregate multiple trades or businesses if the passthrough entity owns directly or possibly through another entity, if the passthrough entity complies with the aggregation rules that we've just discussed. The passthrough entity must attach a statement to each of the owner's Schedule K-1, identifying each trade or business aggregated by the entity. Owners of the passthrough entity, they may not separate trades or businesses aggregated by their business entity. However, the owners of the passthrough entity, they might add additional trades or businesses through the aggregation if the aggregation rules are met. Now, once an individual, an estate or passthrough entity chooses to aggregate two or more trades or business, then they must consistently report the aggregated trades or businesses in all subsequent taxable years unless there is a significant change in circumstances, such that the aggregation requirements I just walked you through are no longer satisfied. The taxpayer must attach a statement to the return each year identifying each aggregated business. In addition, if the taxpayer owns an interest in a passthrough entity that aggregated trades or business, then the owner must provide the information on the statement identifying any aggregations of the passthrough entity. If the entity chooses to aggregate, again, it must attach a statement to each owner's K-1 identifying each aggregated trade or business. And then, finally, to wrap up aggregation, if a taxpayer or entity fails to attach the required statement, the Internal Revenue Service Commissioner or his or her designee may disaggregate the trades or businesses. So, with that overview of aggregation, Philip, I think we're ready for our fifth polling question. YAMALIS: Let's do it, Richard. I do happen to have one more here. So, here it is, audience. Owners of a passthrough entity may separate the trades or businesses aggregated by the passthrough entity. And the answer, correct answer is it a) whenever they want, b) never, c) when they're taxable income before the QBID is at or below the threshold, or d) if the trade or business is not an SSTB? You know how this works by now.

Take a moment. Click on the radio button that best answers the question. Obviously, I'll give you a minute to make your selection at this point. OK. Another couple of seconds. Awesome.

Let's go ahead and stop the polling now. Let's share the correct answer on the next slide. And the correct response is B, never. Let's see how we did here. This has to be a technology issue because I thought that was pretty easy. But anyway, I see that we didn't do well. So, Richard, since you talked about the aggregate, why don't you clarify this question for us just a bit?

FURLONG: I'd be happy to. YAMALIS: To make it, to help us understand that. Thank you. FURLONG: So, I think those who did not check B were maybe misconstruing owners of a passthrough entity.

So, remember, an owner of a passthrough entity is an S corporation shareholder, a partner in a partnership or a beneficiary in a trust that is a qualified trade or business. And they, the owners, they're the ones getting the K-1s, they may not separate trades or businesses that were aggregated by the entity at the entity level. So, that's why the answer is B. So, I think that may have contributed to a number of folks not getting that correctly. The, it's the entity that can aggregate, and once the entity meets those rules that I described to aggregate and provides that information on the statement with the K-1, then the recipient to that K-1 who are the owners of the entity, they cannot disaggregate the, or separate the businesses aggregated at the entity level, Philip. YAMALIS: Absolutely. I got it, Rich. Thank you so much for that clarification.

With that, before we start taking your questions and answers folks, I'm going to turn it over to Gillian one more time to really bring this home with a comprehensive example. DALTON: Thank you so much, Philip. All right, as Phil just indicated, we are going to take a look now at one final comprehensive example along with the complex worksheet to pull together what we've talked about today. So, here we see Fred. And Fred is single, and he wholly owns four calendar year S corporation which, in turn, operate a restaurant, an accounting firm, a gas station, and a bakery. All businesses share centralized bookkeeping and payroll services and the bakery sells most of its goods to the restaurant. Fred chooses to aggregate the restaurant and the bakery.

So, we're going to think back for a moment about what Richard just talked about and the rule for aggregations. But as we see here, Fred is in compliance with all of those rules, right? They meet the ownership test, the businesses have the same taxable year, neither of them are a SSTB and they make two of the three other tests required to aggregate. They share significant centralized business elements and they are operated in reliance upon each other. So, Fred's taxable income is $208,700 and that includes $5,200 of net capital gain and $500 of qualified REIT dividends. The S corporations report to Fred the amounts that we see here on the screen on their Schedule K-1. And lastly, Fred's QBID is $30,515. Now, my personal experience has always been, when the answer is given at the start of a problem, there's always trouble that follows.

And although that isn't necessarily the case here, I did want to offer a quick warning that over the next few slides, we're going to be bouncing around the complex Form 8995-A with lots of information. So, please just stay with me here as we take this little adventure together, OK?

All right. Now, let's go see how we got this QBID amount from here. So, we're going to start with the Schedule A as seen here on the screen. Remember, when we think back to Richard's discussion earlier regarding SSTBs, one of the fields included there was accounting. And as it happens to be, Fred owns an accounting firm. Since Fred is within the range taxpayer, only the applicable percentage of his qualified items from the accounting firm are going to be taken into consideration. So, as we see here, we're going to start on line two and Fred will enter his accounting firm's full QBI of $30,000 as reported on the Schedule K-1, followed by the $25,000, the full amount of W-2 wages reported to him. There was no UBIA, so we don't put anything in line 4 there. Now, next up, on lines 5 through 10, we're computing the applicable percentage, right? Remember, we are simply determining how much over the threshold Fred's taxable income is and the percentage of that phased-in range that's left for us to use here. As we can see, by looking at line 10, only 4 percent of the phased-in range remain which makes sense because his taxable income was very close to putting him into that over, over category. When we apply that 4 percent applicable percentage to Fred's original QBI and W-2 wage amounts, we come up with the amounts on lines 11 and 12. And that is what Fred may use going forward in his QBID calculation. These are Fred's new normal figures from this trade or business. And the original amounts are gone. They're thrown away and we're never going to see from them again. Now, after Schedule A, next, Fred is going to look to Schedule B, Aggregation of Business Operations. As Fred chose to aggregate the restaurant and the bakery, he's going to use Schedule B to report that aggregation and combine those qualified items. So, again, starting on line one, we see that first, Fred list the conditions that allow him to aggregate these two trades of businesses, the rationale there. Next, Fred answers that there's been no changes to the aggregation from the prior year on line two. And then, on line three, columns A through D, Fred enters each trade or business separately along with their QBI, W-2 wages and UBIA of qualified property amounts.

These then get summed up on line four which becomes the total for aggregation number one. Again, this is Fred's new normal. The restaurant and the bakery are no longer separate businesses for purposes of Section 199A. They are now simply aggregation number one. Moving forward, we remember from the fact that Fred had a gas station and that gas station reported negative QBI of $7,000. Because of this, Fred's got to now turn to his Schedule C, Loss Netting and Carryover to net the negative QBI against positive QBI from his other qualified trades or businesses. So, again, we start on line one. And we see that Fred is going to enter each trade, business or aggregation and his qualified business income or loss in column A. Now, from 1(a), we're going hop down to line three which is where Fred places the sum of all of the losses reported in 1(a).

And this year, the only business that reported negative QBI was the gas station, so we see here the $7,000 loss amount. Next, Fred enters the sum of all positive QBI from line 1(a) on to line 4. And then on line 5, Fred is going to enter the smaller of the absolute value of line 3 or 4, which in this case happens to be $7,000. We then hop back up to line 1, to column B and that is where we allocate the $7,000 proportionately to the trades or businesses that produced positive QBI. Now, a quick look at the figures and we can see that aggregation 1 is the source of a significant majority of the positive QBI reported in the year. And, as such, aggregation 1 will be absorbing most of the loss. We then look to line 1, column C to see what QBI remains for use going forward. And these amounts here from the Schedule C, well, these are the amounts that are carried to the front of the Form 8995-A. And we finally made it, right. We're actually at the Form. Hooray. There's still a little way to go though, so don't celebrate quite yet. Here we see on part 1, Trade, Business or Aggregation Information and this is what's used to report the name and EIN of the qualified trades, businesses or aggregations. Part two of our form here picks up where Schedule C left off and it computes the rest of our QBI component. So, we went through Schedule A, B, C. now, we're here to finish off our QBI component calculation. On line two, Fred is going to enter his adjusted QBI for each of his qualified trades or businesses from that Schedule C. On line 3, we're going to take the QBI reported on line 2 and multiply it by 20 percent. Remember, this would have been our QBI component if none of those other limitations applied to Fred, if he wasn't an over threshold or over phased-in range tax. But, of course, that's not the case. And now, we must look to lines 4 through 10 to compute Fred's wage and basis limitation, right. So, on line 4, Fred enters the W-2 wages allocable to his qualified trades or businesses keeping in mind that these are the amounts after consideration of Schedules A and B, so the aggregated wages for the aggregation 1 and the applicable percentage for the accounting firm. On lines 5 and 6, we see 50 percent and 25 percent of this wage amounts respectively. And on line 7, we have the UBIA of qualified property for aggregation one with 2.5 percent of that amount on line 8. Just quickly go back to the fact and remember that the accounting firm didn't have any UBIA on line 9, so on line 9, you'll see the sum of 25 percent of the wages and 2.5 percent of the UBIA for each qualified trade or business. As we continue, remember that the limitation is the greater of 50 percent of the W-2 wages or 25 percent of the wages plus the 2.5 percent of UBIA. Well, line 10, that's where we're going to find this information. And then, on line 11, we see that the full limitation as applied to each qualified trade or business. Remember that's that left side of that phased-in reduction calculation. Line 11 is where we get the lesser of the wage and basis amount or 20 percent of QBI. And remember that Fred is a within-range taxpayer. So, before we can use, we can fill out line 12, we have to go over to part three to compute the rest of that phased-in reduction amount. Keep in mind that the phased-in reduction only applies if the wage and basis limitation was a factor in the trade or business. In other words, if 20 percent of the QBI for that trade or business is already lower than the wage and basis limitation in full, well, that wage or basis limitation isn't going to apply at all then. So, for the accounting firm, Fred doesn't need to compute a phased-in reduction because 20 percent of the QBI was $231 which was already smaller than the wage and basis limitation of $500. So, the worksheet shows N/A in column B for accounting firm. For aggregation 1, Fred calculates the total reduction of the QBI component on lines 17 through 19, and then, he works through lines 20 through 24 to calculate his phased-in reduction, in other words, how much of that total reduction Fred has to apply given the percentage through the phased-in range that his taxable income is, right, how much of the phased-in range pie did he eat up. As I see here on line 24, Fred was 96 percent of the way through that phased-in range which is how much of that limitation we're going to have to apply to Fred's QBI component. And this is what we see here on line 25, 96 percent of that full reduction which is then taken from 20 percent of Fred's QBI on line 26. We come back now to Part II and we enter the amount from line 26 here on line 12. Given that there's no patronage relationship, we can skip to line 15 which is where we see Fred's QBI component for each qualified trade or business. The sum of which is now placed in line 16. Now, finally, we get to the last leg of our calculation. On line 27, Fred is going to reenter the QBI component from line 16, then we're done with the QBI component. It took a long way to get there but we're done with it. Next, Fred is going to have to compute his REIT and PTP component. If you recall, in the facts, it stated that Fred had $500 of qualified REIT dividends, so that amount is entered on line 28. He doesn't have any REIT or PTP losses from prior years, so his total qualified REIT and PTP income is $500. He then takes that, multiplies it by 20 percent and his REIT and PTP component is $100 as we see here on line 31. So far, Fred's QBID before the income limitation is $30,515 which is simply the QBI component from line 27, plus the REIT and PTP component from line 31, wrapping up one side of our QBID seesaw. Now, Fred's going to have to determine if that amount is limited by his taxable income. Remember, the taxable income limitation is taxable income before the QBID which goes on line 33, less net capital gain on line 34 here, multiplied by 20 percent and falling out to line 36. Since the sum of Fred's component are less than his taxable income limitation, Fred's QBID is the sum of his components or $30,515 as we provided at the beginning of this exercise. Now, I know that that was a lot and we moved through it very quickly. But this example is on those downloadable slides that you have and going back through those numbers at your own pace, well that might help the context take shape. Although many of you will be using software to do these calculations and you're not necessarily going to need to know how to place each number and where and when, it does help to understand the mechanics of this form, so you'll be better equipped to spot problems if it doesn't come out quite right. And, with that, Philip, I believe it's time to move forward.

YAMALIS: Thanks, Gillian. That was awesome. Great example to really get us to understand that.

And you're right about the software. Thank goodness for it. Anyway, folks, it's me again. I'm Philip Yamalis. I'll be moderating the question and answer session for today. Before we start this session, I want to thank everyone for attending today's presentation on Section 199A, Qualified Business Income Deduction Over-Threshold Taxpayers. Earlier, I mentioned that we really want to know what questions you have for our presenters. Here's your opportunity if you have not input your questions, there's still time. Go ahead. Click on the drop-down arrow next to the, Ask Question, field. Type in your question and select, Send. Gillian is staying on with us to answer some of your questions. And joining her today are, I'd like to welcome Anne Ronholm as well as Nick Heiserman Both Anne and Nick are QBID subject matter experts and they are Senior Program Analyst in the Small Business/Self-Employed Division of the IRS. So, one thing before we start, we may not have time, of course, to answer all the questions submitted, however, let me assure you that we're going to try to answer as many as time allows. Now, if you're participating to earn a certificate and related continuing education credit, you will qualify for one credit by participating for at least 50 minutes from the official start time of the webinar.

And you are qualified for two credits by participating for at least 100 minutes, again, from the official start time of the webinar. That means the first few minutes of chatting before we got to the top of the hour does not count towards those 50 minutes or 100 minutes. So, with that, let's get started so we can get to as many questions as possible. Fair enough. Welcome Anne and Nick. Nick, why don't I go ahead and start with you with this question that's just come in. If my client's business uses a third party to pay and report wages to their employees, can those wages be used when determining their W-2 wage limitation? NICHOLAS "NICK" HEISERMAN: Hi, everyone. I want to thank you, first of all, for sitting through that and I would say too that this is a lot of technical material to absorb and there has been a lot of questions. And thank you for those questions. I wish we could get to all of them. It's not going to happen. But generally, with the question, yes. When you're determining qualified W-2 wages, an individual employer or RPE, your Relative Passthrough Entity may consider any W-2 wages that are paid or reported by third-party payor, typically referred to or sometimes referred to as a PEO, Professional Employer Organization on Form W-2 if the wages were paid to common-law employees or S corporation officers for employment by the individual employer or the relative passthrough entity, the RPE. Under those circumstances, the third-party payor is not allowed to take those same wages in that account in determining their own W-2 wage limitation. In other words, the same wage can't be used twice. There's no double dipping, as much as we might like that concept. YAMALIS: I got you. Thanks, Nicholas. Let me go ahead and throw the second question at you as well since you're here. Why do we have to back out self-employed items of deduction from the QBI? HEISERMAN: And I saw this one kind of coming up. So, to answer this question, we have to look to Section 199A(c)(1). It defines qualified, it defines qualified business income as the net amount, of qualified items of income, gain, deduction and loss with respect to any qualified trade or business of the taxpayer. Additionally, I'm going to have to pull the regulations. I did get them pulled up and I hate to do this, but I got to read a portion of the final regulation in attempts to clarify this. So, Regulation 1.199A-3(b)(2), it defines the phrase and here it is, "qualified items of income, gain, deduction and loss as items of gross income, gain, deduction and loss to the extent such items are effectively connected with the conduct of a trade or business within the United States with certain modifications and included or allowed in determining taxable income for the taxable year." Crystal clear, right? I mean, it couldn't get any better? Now, it's, so, well, maybe not crystal clear. The final regulations though, they added additional clarity in 199A-3(b)(1) and that would be Roman numeral six or VI which provides that, generally, deductions attributable to a trade or business are taken into account for purposes of computing QBI or your qualified business income to the extent that the requirements of Section 199A and regulation Section 1.199A-3 are satisfied. So, for purposes of Section 199A only, deduction such as the deductible portion, a tax on self-employment income under Section 164F, the self-employed health insurance deduction, under Section 162L and/or deductions for contributions and qualified retirement plans under Section 404 are considered attributable to a trade or business and, therefore, must be included in the QBI amount attributable to that applicable trade or business. It's a mouthful. It's wordy, I apologize.

YAMALIS: That's all right. But basically, we got a back out self-employment incomes because there's a part of a trade or business and the regs say so. HEISERMAN: Exactly. YAMALIS: Very good. Thanks, Nick. Hey, Anne Ronholm, welcome. Let me go ahead and throw a question at you if I can. The questioner says can I take a QBI deduction if I rent a property and report net profit? ANNE RONHOLM: Thanks Philip. So, that's a, that's a good question. We, and I saw a lot of questions related to rental were submitted today. So, just to kind of recap what was covered, rental real estate is treated as a trade or business for purposes of a qualified business income deduction if the rental real estate meets any one of the following three, and I'm going to call them tests. OK. So, there's three ways that rental real estate can be treated as a trade or business for purposes of the qualified business income deduction. So, first, rises to the level of a Section 162 trade or business. That means whether rental real estate rises to the level of a Section 162 trade or business depends on all of facts and circumstances. I mean it's truly a factual determination. And to be engaged in a trade or business under Section 162, the courts have required that, one, 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. So, again, these are, again, there's a large body of existing case law that interprets the meaning of trade or business. And, again, it's a factual determination. So, then, secondly, the other way, another way that a rental can rise to the level of a trade or business is that it meets the requirements of the safe harbor provided in Revenue Procedure 2019-38. So, check out the Revenue Procedure in 2019-38 for the safe harbor. And then, the third way. YAMALIS: So, before you, before you get to the third one, I'm going to ask you to move a little closer to your microphone so we can hear that come out. RONHOLM: OK. Sorry. I'm speaking as loud as I can and indirectly into it, and so, I'm sorry. YAMALIS: OK. That's all right. Go ahead. RONHOLM: The third way is that if it meets the self-rental exception. YAMALIS: All right. RONHOLM: And the self-rental exception is found in Treasury Regulation 1.199A-1(b), B like in balloon and then, and then, 14, so 1.199A-1(b)(14). YAMALIS: So, you've referred us to three items, Section 162, safe harbor and this, the safe harbor and the self-rental. So, if I rent property, reporting that profit, meets those three criteria, I could take the QBI deduction? That's what I'm hearing. RONHOLM: Correct. YAMALIS: Absolutely, thank you. Let me follow up then and ask you another question. If I report rental real estate on a Schedule C as a sole proprietor, right, if it's treated as a trade or businesses for purposes of a QBI deduction. RONHOLM: No. In general, no. And that's the general answer. Let me, let me expand on that. YAMALIS: OK. RONHOLM: How much real estate is reported on the Form 1040 has not changed due to the qualified business income deduction. So, rental real estate is usually reported on Schedule E Part 1. So, even if the rental rises to the level of a Section 162 trade or business, it is generally reported on Schedule E Part 1 because rental real estate is generally excluded from self-employment taxable income. However, there is an exception, I, some rental. YAMALIS: Always. RONHOLM: Right. Some rental real estate is subject to self-employment tax. So, for instance, boarding houses, hotels, motels, bed and breakfast, where substantial services are rendered at the convenience of the occupants. Those are subject to self-employment tax and those would be reported on Schedule C.

YAMALIS: OK. Excellent. So, just because of the reporting feature, it's still, it doesn't, the QBI does not change how we report the rental income. So, I get it. Gillian, let me, let me go ahead and bring you on to this again. If my client's income is over the threshold and phased-in range, does that mean, does that mean that they aren't eligible for the deduction at all? Their income is over the threshold and phased-in range. So, does that mean they're not eligible for the QBI? DALTON: Hi, Philip. Thank you for that. Well, perhaps, but not necessarily. All right, so, let me elaborate. Being over the threshold and phased-in range simply means that those SSTB and that wage and basis limitation apply in full when they're applicable. So, if someone's taxable income is over the threshold and over the phased-in range and they have a trade or business that's an SSTB, well, then none of those items, the QBI, W-2 wages or UBIA from that trade or business are going to be qualified. But they could still be eligible for a deduction if they have another trade or business that isn't an SSTB or if they have REIT dividends or PTP income from a PTP that's not an SSTB, right? YAMALIS: Absolutely. DALTON: So, if we're, talking about a , right, so, if we're talking about a trade or business that's not an SSTB, then they have qualified W-2 wages or UBIA of qualified property, well, then they are still going to have a QBI component for which to use when calculating the deduction. So, it might be a limited QBI component as we talked about. We have to either apply those limitations in full or in part, but it doesn't simply disappear because the taxpayer's income is over that threshold and phased-in range. Notice we call a phased-in range. I've seen it called other things, many, many times out there. But we call it a phased-in range because the limitations are being phased-in, they're not phased out. The deduction is not being phased out, it is a limitation phased-in. So, I hope that's clear. YAMALIS: It is. And thank goodness that software comes in and usually does this calculation, right? DALTON: Well, software does do an amazing job at working with our constantly evolving tax law. But it's always good to understand how the deduction is supposed to be computed, like we went through today, so that you can assess what the software is doing, to see if it sped out a good number, right, just like any other item on the tax return. It's always good to be able to verify those amounts, right? YAMALIS: Absolutely. And that's why, that's why we do this with these webinars and present this information in such a technical, in such a technical way to you. I must admit though and confess that I keep going back to one of the early slides where Richard shared those acronyms because I have to keep reminding myself that SSTB is Specified Service Trade or Business. So, thank goodness for those acronyms. I mean, we're good at that in the IRS, I get that. DALTON: True. Very true. YAMALIS: Nick, let me turn it back over to you, since we dealt with wages. I have somebody that brought in a question, it's an excellent question. I'm a statutory employee, I report my income on Schedule C. So, hearing about corporations and things like that, does it qualify for the qualified business income deduction when I'm a statutory employee. Help me out. HEISERMAN: OK. Yes, a great question.

And thanks for bringing it back to me. I was starting to feel neglected there, Phil. Yes.

Payments made to statutory employees, which are meeting the definition of 3121(d)(3), they're excluded, those statutory wages are excluded from definition of wages earned from the trade or business of performing services as an employee as we heard about in the presentation under Regulation 1.199A-5(d)(1). So, items of income, gain, deduction and loss from the performance of a, performance of services as a statutory employee are actually considered QBI and are eligible for the QBID deduction to the extent that all other requirements of Section 199A are satisfied.

And that's important to note. So, now it qualifies as QBI, but still you got to jump over all the other hurdles we just heard about to make sure you are entitled to the QBID under 199A.

YAMALIS: Wow. These regs get tough. But it is possible then as the statutory employee, even though it's on a Schedule C to qualify for QBID. So, thank you, thank you for that. Well then, let me, let's try to trick Nick here. How do I know if dividends that I receive, Nick, how do I know those dividends are eligible for a QBID deduction? HEISERMAN: Yes. And another good question. You come to this code section; it almost appears like every question is a good question because I had a lot them myself. So, in this one, you'd simply look to the Form DIV box 5 will detail Section 199A dividends. And that's not the only place you would look. You'd look also consider looking, if it's applicable to any RPE or your relevant passthrough entity Schedule K-1. And that K-1 should identify any IRC or Section 199A qualified REIT dividends passthrough and allocated to you as an investor or owner. YAMALIS: OK. HEISERMAN: So, those are the two, those are the two places you would typically have to look to determine if those dividends qualify for purposes of 199A. YAMALIS: Nick and Gillian, my technical producers over here are telling me to wrap it up. That means you guys answered the questions in such a thorough way that we really don't have time for any more questions. So, let me take this opportunity to thank, not only Richard Furlong of Stakeholder Liaison, but Gillian and Nick.

Awesome, awesome subject matter experts. Thank you for your knowledge and expertise, for answering some of these questions. Before we close the Q&A session though, let me turn it back over to Richard to remind us of what key points do you want us as attendees to remember from today's webinar. FURLONG: Thank you, Philip. So, from my perspective, a couple of the key points I'd like you to remember are, that, first, the W-2 wage and UBIA of qualified property limitation and the SSTB limitation, these do not apply to taxpayers whose taxable income is at or below the threshold. Again, remember that polling question. YAMALIS: Right. FURLONG: And as we, as Anne and Gillian both discussed, there are three ways a rental may be qualified for purposes of Section 199A, that is the self-rental under the Treasure Regulation you see there, could be eligible for the safe harbor in Rev Proc 2019-38 and/or rise to the level of a Section 162 trade or business. And one more plug for the excellent set of FAQs on IRS.gov, on all aspects of 199A and, specifically, for the rentals, there are 11 FAQs that go beyond the time we had today and I highly recommend them to our audience. And let me turn it to Gillian for her final thoughts. DALTON: Thank you so much, Rich. And I'll second that comment regarding the FAQs on 199 on the IRS.gov webpage. It's really, they're fantastic. My final thoughts would be to focus on the determination of whether a trade or business is an SSTB is based on facts and circumstances that are specific to that trade or business. So, we're not applying any broad-based blankets here. You really have to look at the business. Multiple trades or businesses may be aggregated if they meet the rules to aggregation that are outlined in Treasury Regulation 1.199A-4 and, once aggregated, the aggregation must be consistently reported and applied unless there is, of course, a significant change such that the aggregation requirements are no longer satisfied. And that's all I have. Thank you so much for your time today. Philip? YAMALIS: Thanks, Gillian. And thank you, Richard, for giving us those key reminders. To, again, Gillian, Anne and Nick as our subject matter experts and Richard, thank you for an excellent webinar. Thank you, audience, for attending. We are indeed planning additional webinars throughout this year. To register for upcoming webinars, please let me remind you to visit IRS.gov with the keyword search, webinars, and select the Webinars for Tax Practitioners or Webinars for Small Businesses. Again, when appropriate we will be offering certificates, as well as CE credits for upcoming webinars. Now, we invite you to visit our video portal www.irs videos.gov. Again, there you can view archived versions of our webinars. But continuing education credits or certificates of completion are not offered if you view an archived version of any of our webinars on the portal. Again, a big thank you to our phenomenal speakers today and our subject matter experts. Great webinar for sharing your expertise and for answering our questions. I also want to thank you, our attendees, for attending today's webinar. Now, again, I know you are all concerned about certificates and continuing education. If you did attend today for at least 50 minutes from the official start time, you'll qualify for one credit. If you attended today's webinar for at least 100 minutes from the official start time, you'll qualify for two CE credits. Again, that time that we spent chatting back and forth before the webinar started does not count towards that official 50 minutes or 100 minutes. So, if you are eligible for continuing education from the Internal Revenue Service and you registered with your valid PTIN today, your credit will be posted through your PTIN account. If you're eligible for CE from the California Tax Education Council, your credit will be posted to your CTEC account as well.

And also, if you registered through the Florida Institute of CPAs, your participation information will be provided directly to them. Now, if you qualify and you have not received your certificate and or credits by October 8, that's October 8, please e-mail us at CL.SL.Web.Conference.Team@IRS.gov. I know I said that e-mail address quickly, it is shown on the slide as well. Now, if you're interested in finding out who your local Stakeholder Liaison is for questions, information, you can send us an e-mail using this address shown on the slide and we'll send you that information as well, OK? We would appreciate it if you would take just a few minutes to complete a short evaluation before you exit today's webinar. If you'd like to have more sessions just like this one, let us know. That's how we know and present it to you. If you have thoughts on how we can make them even better, please let us know that as well. Now, if you have requests for future webinar topics or some pertinent information that you'd like to see in an IRS Fact Sheet or the Tax Tips or Frequently Asked Questions that Richard alluded to on IRS.gov, then please include your suggestions in the comment section of this survey. Click the, Survey, button on your screen to begin. Again, if it does not come up, please check to make sure that you disabled your pop-up blocker on your browser. It's been a pleasure to be here with you today, ladies and gentlemen. On behalf of the Internal Revenue Service and our excellent presenters today, we'd like to thank you for attending today's webinar. It's important for the IRS to stay connected with the tax professional community, with you, individual taxpayers, with industry associations, along with federal state and local government organizations. You indeed make our job much easier by sharing the information that allows for proper tax reporting. Thanks again for your time and attendance today. We wish you much success in your business or practice.

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