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So, our presenters for today's webinar are Sherry Saucerman and Richard Furlong. Both Sherry and Richard are senior stakeholder liaisons in the Communications and Liaison Division, and there is no time like the present to get things started. So, Richard, I'm going to turn the show over to you. RICHARD FURLONG: Thank you so much, Karen, and good day, everyone. Welcome to our webinar on the tax reform basics for the qualified business income deduction, and that's Section 199A of the Internal Revenue Code. So, to get started, let's look at the objectives that Sherry and I will cover today. We're going to discuss the new qualified income business deduction. It is also referred to as the passthrough deduction, or the Section 199A deduction.

Now this deduction is available for tax years ending after December 31st, 2017, and here's a fact that may surprise you. It is anticipated that this new deduction may affect nearly 40 million taxpayers. Quite a significant cohort. Now in today's discussion, we will cover the basics of the qualified business income tax deduction. We'll talk about who specifically is eligible for the deduction, we'll provide an overview of the qualified business income deduction. We'll provide some new terms to you today, with which you should become familiar, such as what constitutes qualified business income, and what is meant by a qualified trade or business for purposes of 199A. We will also explain how the general deduction is computed and work on an example for you. And then finally, we will wrap up today's webinar by discussing available resources and information as to where you can find these resources. Now, speaking of resources, we have provided you today an excellent resource document that's available through the materials button on your screen. In addition to links to additional guidance, this resource document also includes links to draft forms and instructions and a list of abbreviations that Sherry and I may use during today's webinar. So you may want to have this list available during the presentation. So let's get started with the eligibility requirements for the deduction, provide an overview of the deduction, and start to define some of those important terms.

So let me begin with eligibility. Who exactly is eligible to take this new qualified business income deduction? Well, it would be for taxpayers, other than C corporations, and that would include individuals and certain trusts and estates, who have qualified business income for tax years ending after December 31st, 2017, and that qualified business income must be from a qualified trade or business, or a qualified publicly traded partnership, sometimes referred to as a PTP, or Section 199A real estate investment trust dividends, or REIT dividends. These individuals may be able to claim the qualified business income deduction, or as it's sometimes referred to by its acronym, QBID. So, now, what is the qualified business income deduction?

As I said, individuals and certain trusts and estates may be entitled to a qualified business income deduction, and I will periodically refer to that as QBID, as the acronym. And that deduction can be up to 20% of their qualified net business income, from qualified trades or businesses conducted directly or through passthrough entities. Plus, 20% of their Section 199A real estate investment trust, or REIT dividends and 20% of their qualified publicly traded partnership income. Also, certain income from cooperatives is also eligible for the deduction. Now, the next point is very important. This qualified business income deduction, or QBID, can be taken in addition to the standard or itemized deduction claimed by the taxpayer.

Now, what you see on the slide is the basic definition. However, an important caveat here. The deduction is subject to multiple limitations, and those may be based on the type of trade or business the taxpayer's taxable income, the amount of W 2 wages paid with respect to a qualified trade or business, and it also may be limited by what is referred to as the unadjusted basis of qualified property held by a qualified trade or business. So now let's first discuss what we mean by qualified business income. We generally refer to that, as you can see on your slide, as QBI. Basically, QBI is the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business. Now, keep in mind that only items that are included in taxable income of the qualified trade or business for the year are counted. So, for example, if the taxpayer has a current year business loss, or losses, that are limited by what are referred to as passive activity loss limitations, then only those types of losses from the business that are allowed to be claimed on the current year's form 1040 would be included in the QBI computation.

Also, it is important to remember that only items for a QBI that are effectively connected with a United States trade or business are included. So, now, businesses may generate QBI, including those conducted through sole proprietorships, as you see, subchapter S corporations, partnerships, trusts, and estates. But again, a reminder that income earned through a C corporation is never eligible for the deduction. So, please keep that in mind as we go into the next slide, and we'll look at what is not included in QBI. Here is the beginning of a list of items not included in QBI. So, items not properly includable in taxable income for the qualified trade or business are not QBI, nor are investment items, such as capital gains or losses or dividends. Interest and any other income that is not properly allocable to a trade or business is not QBI, nor is wage income, W 2 income is not QBI. And finally, as I just mentioned, income that is not effectively connected with the conduct of a business within the United States is not QBI. And then just going on, certain other items are not QBI. Those would be commodity transactions, or foreign currency gains or losses, certain dividends and payments in lieu of dividends, certain income, loss, or deductions from notional principal contracts. And finally, most annuities are not QBI, unless in some circumstances, annuities are received in connection with a trade or business. Finally, QBI does not include reasonable compensation received by an owner shareholder from a subchapter S corporation, nor are guaranteed payments received by a partner from a partnership considered QBI. And finally, payments received by a partner for services that that partner might provide to the partnership in a capacity other than a partner, those are not QBI. So that's quite a bit of information, and I think, Karen, we may want to pause and take our first polling question. KAREN RUSSELL: You're right, we do want to pause, and this is our first polling question. Okay. And it is, which item is included in QBI? Please take a minute and click in the radio button you believe most closely answers this question, and it's based on the information Richard just shared. So, what is included in QBI?

Is it, A, qualified items of income, gain, deduction, and loss from any qualified trade or business; is it B, capital gains and losses; C, reasonable compensation received from an S corporation; or D, all of the above. Now, if you didn't get the polling feature, remember to submit your answer using the ask question feature so that we can track your participation.

Okay. And again, that question is, what is included in QBI? Is it A, qualified items of income, gain, deduction, and loss from any qualified trade or business; B, capital gains and losses; C, reasonable compensation received from an S corps; or D, all of the above. I'll give you a few more seconds to make your selection. Click in the radio button that you believe answers this question. Okay. If I had the music from Jeopardy, we would play that, but I don't. All right.

Let's go ahead and stop the polling, and we're going to share the correct response on the next slide. And the correct answer is A, qualified items of income, gain, deduction, and loss from any qualified trade or business are included in QBI. And I see that 81% of you responded correctly.

That is terrific. Thank you so much for participating in that, not that you really had a choice.

[Laughter] Okay. So, now that we know what is and what is not QBI, Sherry, will you explain what a qualified trade or business is, please? SHERRY SAUCERMAN: Okay. Thank you, Karen. Yes, that's another very important definition that we need to clarify. So, a qualified trade or business is basically any U.S. trade or business that qualifies as a trade or business under Section 162, and is therefore allowed a deduction for ordinary and necessary business expenses. And this is other than the trade or business of just being an employee.

Now, depending on the taxable income of the taxpayer, certain specified service trades or businesses, and we call those SSTBs, so depending on the taxable income, certain SSTBs are not eligible for the deduction. So what's an SSTB? Well, that's going to include trades or businesses that provide services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, or any other trade or business where the principal asset of the trade or business is the reputation or skill of one of its employees or owners. Now, SSTB is also going to include any trade or business that involves the performance of services that consists of investing and investment management, trading or dealing in securities, partnership interests, or commodities. Now, before you get all wound up about the SSTB, remember, the SSTB exception is only going to apply if the taxpayer's taxable income before taking the QBID exceeds the threshold amount of $315,000 if they're a married couple filing a joint return, or 157,500 for all other taxpayers. And unfortunately, a detailed discussion of SSTBs is beyond the scope of this webinar. Now, to be engaged in a trade or business, the taxpayer must be actively involved in the activity with continuity and regularity and the primary purpose for engaging in the activity must be for income or profit. Now, that's a standard that is higher than investing. And it clearly excludes something that's just a hobby. For interests that are owned in the passthrough entities, the trade or business determination gets made at the entity level. That's if a pass through entity is found to be engaged in a trade or business, the owner can claim the deduction even if that ownnership is passive. So rentals will qualify for the QBID if the rental activity rises to the level of a section 162 trade or business, or if that rental or licensing of property is to a commonly controlled trade or business, and that's sometimes what we refer to as a self rental. Now, before we can compute QBID, we must also define the REIT dividends, that's Real Estate Investment Trusts, REIT dividends and PTP income.

That's your publicly traded partnership income. So the REIT dividends are any dividends that's received from a REIT that's not a captain gain dividend under section 857(b)(3). And it's not a qualified dividend under Section 1(h)(11). And those code sections are on the slide.

PTP income is going to include qualified items of income, gain, deduction, and loss from a publicly traded partnership PTP, and it could also include gain or loss recognized on the disposition of your PTP interest, if that is not treated as a capital gain or loss. Now, you want to keep in mind that REIT and PTP items are combined for the QBID computation. So, if the PTP generates a loss, it will offset the REIT dividends. If the combined amount of the Section 199A REIT dividends and qualified PTP income is less than zero, the portion of the individual's deduction related to the REIT dividends and PTP income is zero for that taxable year and that loss will not offset any QBI of the taxpayer. That negative amount instead gets carried forward to offset future year REIT dividends and PTP income. Now, what about pass through entities?

Well pass through entities are not permitted to claim the deduction, but the income they generate may be QBI, and this is going to include income earned through a pass-through entity with a fiscal year beginning in 2017, if it's ending in 2018. So as a result, the S corporations and the partnerships must provide the necessary information to eligible shareholders or partners on their schedule K 1, and they have to include it for each QTB, so the shareholder or partner can compute their deduction. Estates and trusts, on the other hand, they might either claim the deduction or pass through the information to their beneficiaries, so the beneficiaries figure their deduction. So therefore, the estate or trust needs to split QBI items between the state or trust and the eligible beneficiaries and report necessary pass through information to the beneficiaries on their schedule K 1. And to the extent that the estate or trust retains QBI, then they can claim the deduction. In this next slide, you'll see what the pass through entity has to report to the eligible shareholders, partners, or beneficiaries, and it's basically all the information they need in order for them to properly compute their own QBID. That's going to include each owner's share of QBI, whether any trade or business conducted by the entity is an SSTB. The W 2 wages, the QBIA, that's unadjusted basis of investment immediately before acquisition of qualified property, Section 199A REIT dividends, and qualified PTP income. Also any domestic production activity deduction that gets passed through from an agricultural or horticultural cooperative so that the owners can determine their own deduction. The draft forms K 1 and the instructions have been released, and the links are available in your resource materials. So, Karen, I know that was a lot of information, so I think it's a good time to stop for a polling question KAREN RUSSELL: I'm sure the audience appreciates that, by the way, Sherry. Okay, so let's hope everyone was paying attention. And you guys, I've been seeing from your comments that you're not getting the polling questions. Remember to submit your response using the Ask Question feature. And you don't have to keep on submitting your response.

Submit it once and you'll be good to go using the ask question feature. Okay. So here's our second question. How does a partnership claim the deduction? And what is the correct answer? Do you think it is A, they take it as a deduction on Form 1065, or B, the partnership does not take the deduction, the partner does. Again, the question is, how does a partnership claim the deduction. Do they, A, take it as a deduction on Form 1065, or B, the partnership does not take the deduction, the partner does. If you're having to use the ask question feature, you can just put A or B in the response, and hit submit, and it will come right through to us, okay? And again, the possible answers are either A, they take the deduction on Form 1065, or B, the partnership does not take the deduction, the partner does. And that should be -- I think we've had sufficient time to answer. I'll talk a little slowly about closing out the polling now. Let's close the polling, and we will share the correct answer on the next slide. And the correct response is B, the partnership does not take the deduction, the partner does, and everybody must have been listening. We've got almost 100%. We were at 91% that got that right, which is totally awesome. SHERRY SAUCERMAN: Excellent. KAREN RUSSELL: It is excellent, isn't it?

Thank you. Okay, so Sherry, several people did ask about where REIT dividends are reported.

The slide indicated box 5 on Form 1099-DIV. But our audience is very intelligent and they say that this is where interest expenses are reported. SHERRY SAUCERMAN: Oh, well thank you, Karen. That's where interest expenses have been reported in the past, but the form 1099-DIV has been updated for 2018, so those REIT dividends, 199A REIT dividends should now appear in box 5.

KAREN RUSSELL: Okay. So that was one of the many forms that's been updated because of tax reform. All right. Okay. Thank you, Sherry, so much. So, Richard, can you discuss the general computation, please? RICHARD FURLONG: Certainly, Karen. So, let's look at the general computation. Now, by now you should know that Section 199A provides for a deduction of up to 20% of cumulative qualified business income, and we referred to that as the QBI component.

Plus, 20% of REIT dividends and publicly traded partnership income, and that is sometimes referred to as the REIT/PTP component. Now, remember, the deduction is limited to 20% of taxable income calculated before the qualified business income deduction, minus net capital gains. And those net capital gains would include qualified dividends. And once again, a reminder from a point I made earlier in today's webinar. QBID can be taken in addition to the standard or itemized deduction claimed by the taxpayer. Now, this slide shows the fundamental calculation of a qualified business income deduction. However, again, a reminder that there are many intricacies to the law, and they complicate the calculation for some taxpayers. Specifically, the items that are included in calculating the QBI component, and that's the first line of the formula.

Certain items can differ significantly depending upon the taxpayer's specific circumstances.

So, moving on to this next slide, computation of the QBI component varies again based on the taxpayer's taxable income before taking the qualified business income deduction. Now for taxpayers at or below the threshold set in the law, and that threshold is $157,500 of taxable income before QBID for all filing statuses except married filing joint. For joint filers, that threshold is $315,000. Then the QBI component for those below those thresholds simply equals QBI times 20% minus the patron reduction, if there is any patron reduction. Now for taxpayers above the threshold, within what we refer to as a phase in range, then the QBI component equals QBI times 20%. But as you can see on the slide, it's adjusted by an applicable percentage for those specified service, trades, businesses, or SSTBs, which Sherry described earlier, a limitation for wages and basis, and that limitation is phased in. And finally, a limitation for a cooperative patron reduction. Now, for those taxpayers who are above the threshold and the phase in range, the QBI component for those taxpayers equals 20%, but it is adjusted, as you can see on the slide, by a limitation for wages and basis, and also againa limitation for any patron reduction.

One very important point to keep in mind, and it's explicit on this slide, is that a specified service trade or business is not a qualified trade or business for those taxpayers with taxable income above the threshold and the phase in range. Now if we move to our next slide, we see, again, those threshold amounts in the phase in range. So, just to reinforce the point, because it is a very important point to take away from today's webinar, the threshold amount is taxable income of $157,500 for taxable year 2018, for all filing statuses except for married filing joint, in which case for joint filers, the taxable income threshold amount is $315,000. Now, those are for 2018. The amount of the threshold is adjusted annually for inflation each year under the statute. And the phase in range is determined by taking the threshold amount and then adding $50,000 for all filing statuses except married filing joint, in which case you would add $100,000.

Taxpayers within the phase in range, including those with taxable income of more than 157,500, up to 207,500, and for couples, more than 315,000 to 415,000, that is the phase in range, and you can see that on the slide there. Now, the next slide I think is very helpful in showing where this deduction shows up on the 1040. Now, this is a draft, as you can see there, of the new 1040 for the 2018 tax year. So, remember, that the taxable income amount is determined prior to the qualified business income deduction. So to determine a taxpayer's threshold amount from the tax return, simply look to adjusted gross income, and if you can see it there, it's highlighted in yellow, that's line 7 of the draft form 1040 for 2018, and then subtract from that line 7 the taxpayer's standard or itemized deduction, which is line 18. So that's where it will end up on the 1040. Now, I mentioned earlier that qualified income business income deduction is limited to 20% of taxable income, again, calculated before the QBID, minus net capital gains, and those net capital gains would include qualified dividends. So, for purposes of Section 199A, your net capital gains include any amounts from the new 1040, line 3A, plus net capital gain or loss. So if you file a Schedule D, your net capital gain or loss is the smaller of line 15 or 16 of the Schedule D, unless either line 15 or 16 is blank or it might even be a loss. In which case, your net capital gain is zero. And if you are not required to file Schedule D, then your net capital gain is the gain that is reported on the front of the 1040, or actually this year, it's on the new Schedule 1, line 13 of Schedule 1 carried over to the front of the 1040. Now in determining a taxpayer's qualified business income for the year, we must consider what is referred to as the loss netting rule. Now, if a taxpayer's qualified trade or business generates a net loss for the year, then that loss must be netted against the income of any other qualified trades or businesses of that taxpayer in proportion to the net income of those other qualified trades or businesses. If the overall amount is a net loss of the year, when you do that netting, then these losses are carried over to the next year and they would offset any qualified business income in the subsequent year. Also, you might have netting required for negative combined REIT dividends and publicly traded partnership income. So any deductible losses that are flowing through from a publicly traded partnership to a partner, those must be combined with any qualified income from any other publicly traded partnerships that that taxpayer might have, and also possibly any Section 199A REIT dividends that that taxpayer might receive. And then if the combined amount of 199A REIT dividends and the qualified publicly traded partnership income is less than zero, then that negative combined amount will be carried over and used to offset in the next year the combined amount of Section 199A REIT dividends, qualified publicly traded partnership income, again, in that subsequent tax year. But it does not affect the qualified income, qualified business income from a trade or business in a subsequent tax year. So that's quite a bit information we've provided to you, and Karen, I think we may be ready for our third polling question. KAREN RUSSELL: You are correct, sir. Okay, you guys. Here is the question. So how do you treat a net loss from a qualified trade or business, and what do you think the correct answer is? Do you add 20% of the loss to taxable income; or losses from QTB must offset the income of other QTBs in proportion to their net income; or, you do not net the loss, you carry it over to the next year, even if you have QBI from other QTBs. So let me read that again. How do you treat a net loss from a qualified trade or business? Do you. A, add 20% of the loss to taxable income? B, losses from a QTB must offset the income of other QTBs in proportion to their net income? Or C, you do not net the loss, you carry it over to the next year, even if you have a QBI from other QTBs? Again, if you're not getting the polling feature or the radio buttons, just pop your answer into the ask question feature. And it's A, you add 20% of the loss to taxable income; B, losses from a QTB must offset the income of other QTBs in proportion to their net income, or C, you do not net the loss, you carry it over to the next year.

So how do we treat a net loss from a qualified trade or business? All right. Let's stop the polling and we'll flip on over to the next slide to see what the correct answer is. Okey dokey.

And the correct response is B, losses from a QTB must offset the income of other QTBs in proportion to their net income. And we have 83% of you got that right. Thank you so much.

That's awesome. So, Richard, you mentioned the patron reduction several times with regard to the computation of QBID, and more than a handful of people asked what that is. RICHARD FURLONG: Well, that doesn't surprise me, Karen. Some taxpayers may have a domestic production activity deduction, or DPAD, which is passed through to them from an agricultural or horticultural cooperative. And those taxpayers will need to make an adjustment, and we refer to that adjustment as the patron deduction. Unfortunately, Karen, we don't have time to discuss in depth this adjustment today. KAREN RUSSELL: Okay, that's fine. But thank you for the quick synopsis of it. Okay. Sherry, can you talk a little bit more about the computation, you know, what we do have time for? SHERRY SAUCERMAN: Sure. Sure Karen. We do want to get some time in for questions. So let's just focus on the computation for taxpayers with taxable income, and that's before taking that QBID, and that taxable income at or below the threshold, and the threshold again, is 157,500 or if you're married filing joint, it's $315,000. Now, for these taxpayers, the QBID is going to be limited to the lesser of the QBI component, plus the 20% of REIT dividends and PTP net income, or 20% of taxable income calculated before you taking the QBID, less the net capital gains, and that's an important thing to remember. So, the QBI component for taxpayers with taxable income at or below the threshold is going to equal QBI times 20% less that cooperative patron reduction that Rich talked about. Now, at this level, remember, the SSTB exclusion does not apply. Neither do any of the other limitations. In other words, QBI, attributable to an SSTB is included in the QBI component if the taxpayer's taxable income is at or below the threshold. And as I was saying, the limitations based on wages and then adjusted basis of qualified property also do not apply to taxpayers at or below the threshold. So now, let's look at an example. Here we have Abel, he's an unmarried individual, and he's operating a bakery as a sole proprietorship. In 2018, the business generated $100,000 of QBI. Abel has $7,000 in net capital gains for the year. Now after allowing all his deductions on the return, Abel's total taxable income prior to this QBID is $81,000. So he's below the threshold. Now, Abel's QBID is going to be 14,800, and we'll show how it's computed on the next slide. The QBID is going to equal the lesser of 20% of his QBI or 20% of his taxable income less the net capital gains. 20% of his QBI, of $100,000, is $20,000. But we're going to have to take that $81,000 of taxable income and reduce it by the net capital gains. So 81,000 minus 7,000 comes to 74,000, and 20% of 74,000 is $14,800. As the QBID is limited to the lesser of the two numbers, Abel is going to get a QBID of 14,800. For taxpayers that are at or below the threshold and they're not patrons in an agricultural or horticultural cooperative, they can use -- there's a simplified worksheet and it's in the instructions for the 1040, it's in the draft instructions that you can look at now, and they can just use that simplified worksheet to compute their QBID. And now, Karen, I think it's time for our final polling question. KAREN RUSSELL: Okay, awesome.

So let's hope again that everyone was paying attention. And our final polling question is, in general, the QBID equals the lesser of the QBID component plus REIT/PTP component, or, A, 20% of the taxable income; B, 50% taxable income; or C, 20% of the taxable income the result of the taxable income less net capital gains; or D, net capital gains. Let me read that again.

Okay. So, in general, the QBID equals the lesser of the QBID component plus REIT/PTP component, or A, 20% taxable income, A; B, 50% taxable income; C, 20% of the result of the net result of taxable income less net capital gains; or D, net capital gains. If you're not getting the polling feature or the radio buttons, use the Ask Question feature to submit your response. And you can just submit A, B, C, or D. You don't have to input anything else. So in general, the QBID equals the lesser of the QBID component plus REIT/PTP component or 20% taxable income, A; 50% taxable income, B; 20% of the net of between the taxable income less net capital gains, or D, net capital gains. Okay. A few more seconds. Is that A, B, C, or D. All right. We've got lots of responses. That is terrific. Okay. Let's go ahead and stop the polling. And we'll share the correct answer on the next slide. And the correct response is C. You take 20% of the net result taxable income less net taxable gains. And how many of us got that right? 93%. That's a great last polling question accuracy rate. Okay. So, I think with that, I am going to turn it over to oh, is it myself? I guess I'm staying on, you guys. We are ready for our Q&;A section. Holy cow. So we have three subject matter experts joining us to help answer your questions. Gillian Dalton and Anne Ronholm are with our small business and self employed division, and we've got Racheal Jaeckel with our Large Business and International division with us today. Our SMEs. So before we begin the Q&;A session, I want to mention that we may not have time to answer all the questions, because we got a boat load. But we will do the best we can to get to as many of them as we can. And if you are participating to earn a certificate and related continuing education credit, you will qualify by participating for at least 50 minutes from the official start time of the webcast, which means, you know, when we started at the top of the hour, that's when the official clock starts running. So, as long as you meet that 50 minute threshold, you are not required to stay on for the Q&;A portion, but I certainly think it would be beneficial if you did, but don't let me influence you one way or the other. Okay, my SMEs, I hope you're ready.

We've got lots and lots of questions, like I said. And so let's get started. So, Racheal, I'm going to start off with a good one. Can you tell us, is there a form for reporting the deduction under Section 199A, and if so, where can our participants find it? And make sure that you're not on mute. Racheal Jaeckel: Yes, can you hear me? KAREN RUSSELL: Sure can. Thank you, Racheal. RACHEAL JAECKEL: So that's a great question. Currently, there's not going to be a form for the Section 199A, however we have created two worksheets to help taxpayers compute this deduction. The first worksheet that we've created is called the simplified worksheet. It can be found in the instructions to form 1040 for the 2018 tax filing year. And this should be used by those taxpayers that have taxable income that's under the threshold. So for those taxpayers with income under 157,500 or if you're married filing jointly, 315,000. Now the second worksheet that we created is called the complex worksheet, and it's going to be located in publication 535 as our business expense. That one should be used by taxpayers whose income exceeds that threshold amount. And also, it should be used by patrons of a specified agricultural and horticultural cooperatives. So there's not going to be a form for this upcoming tax year, but we do have two worksheets. The first can be found in the instructions to form 1040, and the second one can be found in publication 535. KAREN RUSSELL: Okay, good. So we've got instructions on the 1040 and then the publication you just mentioned, so we do have stuff out there for the folks to have access to. Thank you so much. Okay. So, Anne, I have a question for you. And this is a good one. Does the deduction reduce earnings that are subject to self employment tax? ANNE RONHOLM: Good question. The answer is no. The qualified business income deduction does not reduce net earnings from self employment. In a similar vein, the qualified business income deduction does not reduce net investment income for purposes of net investment income tax, which is computed on form 8960. So therefore net earnings from self employment and net investment income are calculated with no reduction for the qualified business income deduction. KAREN RUSSELL: I'm sure some folks in the audience are saying, darn!

Thank you so much for that. Gillian, I'm going to toss a question out to you. So the question is if they report taxable income under the threshold, are there any limits to their deduction?

GILLIAN DALTON: Hi. All right. That is a great question. And when we say under the threshold, of course I'm going to assume that we're meaning under taxable income under the $157,500 or if married $315,000 thresholds. If that assumption is correct, in fact, then most of the limitations are not going to be applicable to those taxpayers. The specified business service trade or business limitations as well as the W 2 wage and unadjusted basis limitations are not applied to taxpayers whose taxable income is below these thresholds. Now, it is important to note that there is that one limitation that will apply, and that's a taxable income limitation.

And this limits the amount of the deduction as is discussed in the webinar, to no more than 20% of taxable income less net capital gains and is applied to all taxpayers regardless of their income above or below the threshold within the phase in range. It applies across the board.

KAREN RUSSELL: That is a great explanation. Thank you so much. You hit a lot of high points, a lot of questions that we had gotten during the webinar about those thresholds. So, thank you very much. Anne, I'm going to go back to you real quick. If someone is a real estate professional and they have rental real estate, because they're a real estate professional, will they still qualify for the deduction? ANNE RONHOLM: There were a lot of questions on rental real estate in there. This one was specific to real estate professionals. And the qualified business income deduction is not based on whether the taxpayer qualified as a real estate professional under section 469. Those are our pass through activity loss rules. So whether or not they qualify as a real estate pro is not going to have an impact on the qualified business income deduction. And as discussed earlier, rental real estate may qualify for the Section 199A qualified business income deduction if the rental real estate rises to the level of a Section 162 trade or business, or it meets that self rental exception. So that is in the proposed regulation, there was an exception carved out for certain self rental property, and that is the rental or licensing of property to a commonly controlled trade or business, that will be treated as a trade or business solely for purposes of the Section 199A qualified business income deduction. So again the criteria is not real estate professional as defined in code section 469, which is passive activity loss limitations. We're looking at does the rental real estate rise to the level of a section 162 trade or business, or does it meet the self rental exception in the proposed regulations, and whether rental real estate rises to the level of a section 162 trade or business depends on all the facts and circumstances. And to be engaged in a trade or business, the taxpayer must be actively involved with continuity and regularity and the primary purpose for engaging in the activity must be for income or profit. Again, it's going to depend on all the facts and circumstances. KAREN RUSSELL: Okay, so Anne, you know what, I'm going to go ahead and roll right into or segue right into another -- so the question was, do I have to materially participate in a business to qualify for the deduction, and you just touched on that.

So, will you reiterate that one more time? ANNE RONHOLM: Sure. Yeah, for trade or businesses, there's no requirement for material participation. So, again, material participation is a code section 469. That's, again, our pass activity loss limitations. That is not required for the qualified business income deduction. So, material participation not required for this deduction. Both active businesses and passive businesses, business with no material participation, both active and passive may qualify for the qualified business income deduction, assuming they otherwise satisfy all the requirements of Section 199A. KAREN RUSSELL: Thank you so much for that. Racheal, I'm going to go back to you. And I've got a question that says that I'm a partner in several partnerships, and how do I know what qualifies for the deduction?

RACHEAL JAECKEL: So, for partnerships, there should be on the K 1 that you receive, we've added some -- let me back up. So for 2018, the K 1 for partnerships are going to have some new codes that have been added for the boxes for the schedule K 1, and those boxes should have information in it necessary for the partner to be able to determine the amount that should be included for your QBI computation. So the partnership is going to have to provide you with the amount of the qualified business income, any W 2 wages, any unadjusted basis, plus any other items that there might be in order for you to be able to actually be able to compute your QBI deduction.

I do want to point out that if for some reason the partnership of an S corporation or a trust fails to provide that information to you and it's not on the schedule K 1, the proposed regulations right now as they stand state that the amounts are presumed to be zero. So if you know that you've got a partnership that would, you know, qualify, you know, as an active trade or business that would give you income to include in your QBI and you look at your schedule K 1 and there's no amounts reported in those appropriate boxes for the 199A items, the presumption is that those amounts are zero, which means that you wouldn't get a deduction for the partnership that failed to report that income item to you. So it's important that the partnerships to report it properly. There should be boxes on the schedule K 1 for that, and that is what's going to tell you what income you have for calculating your QBI. KAREN RUSSELL: Thank you. And you know what, I'm going to ask Gillian something. So what about fiscal year end? If they have a partnership whose fiscal year ended on March 31st, do they get a qualified business income deduction for the income that was earned? GILLIAN DALTON: That's a good question, actually. And the qualified business income deduction, the deduction itself, is available to taxpayers whose tax years begin after December 31st, 2017, as stated in the law. However, the determination of qualified business income reported to a taxpayer from our related pass through entity that has a fiscal year, so an entity whose taxable year starts say in 2017 and ends in 2018, that's treated as having been incurred in the year of the pass through entity's taxable year end. So, for that example, for instance, a partnership that had a taxable year ending in 2018, I'm not sure what date you said, I apologize, but in 2018. But that started in 2017. The qualified business income as well as the W 2 wages, the unadjusted basis of qualified property, if those are applicable, those would be taken into account in calculating the 199A deduction for 2018. So, again, to kind of circle back, fiscal years that run into 2018 that have fiscal years ending in 2018, those would be included in the -- - from related pass-through entities, it would be included in the taxpayer's determination of their qualified business income deduction, because that's the year in which the fiscal year-end, and pass through entity taxable year ended, was within that parameter. KAREN RUSSELL: Okay. All right, Gillian, thank you so much, and you guys, if you can believe it, that's all the time that we have questions for. So, Richard and Sherry, before we, I mean I've got to close out the Q&;A, but what are the most important points you want the attendees to remember from today's web conference? SHERRY SAUCERMAN: Okay, I guess I'll start first, Karen. This is Sherry. First of all, I want you to remember that the general computation is going to be 20% of QBI plus 20% of the REIT/PTP income.

Now, that computation is subject to limitations, depending on taxable income. But you need to remember that that deduction can never exceed 20% of taxable income less the net capital gains, and when we're looking at the taxable income there, that's before taking the deduction, of course.

And finally, QBI only is going to include net amounts of qualified items of income, gain, deduction, and loss from a qualified trade or business. KAREN RUSSELL: Okay, thank you, Sherry. And Richard, what are your closing thoughts, quickly, please here. RICHARD FURLONG: Yes. A reminder that the pass through entities, those would be the S corps, the partnerships and possibly the trusts, must provide sufficient information to the shareholders, partners and beneficiaries respectively on the form K 1 and associated information, so that they can properly calculate the deduction on their 1040. The income threshold, as you can see, is for all filing statuses except joint 157,500. For couples filing jointly, it's 315,000. And then when qualified business income has those additional limitations, once the taxpayer is at or above those thresholds and those limitations would be impacting specified service trades or businesses within the phase in range, and also remember the wage and basis limitations. And before we close out, Sherry, I think you want to point out the excellent resources we have for our audience today. KAREN RUSSELL: Sherry, I want to cut in for just a second on that, because I want the audience to know that we did not load the resource document. So we will get that out to the participants, but Sherry will go over the resources that we have. Go ahead, Sherry.

SHERRY SAUCERMAN: Thank you for mentioning that, Karen. So, be sure you pay attention to this slide then. Our business tax reforms page, that's got a lot links to some really helpful links to pages regarding tax reform, including it also has links to FAQs and additional guidance. You'll find the information for this topic under the title deduction for pass through businesses.

Included in the guidance is a link to the proposed regulations, and the proposed regulations have a lot more examples than we were able to discuss today. The draft instructions for form 1040 include information on calculating the deduction when the taxable income, as long as the taxable income is below the threshold that Richard mentioned. And you can find that on the drafts page.

Now if you have more complex situations, you're going to need to go to publication 535, which the Business Expenses. It hasn't been updated yet, but there will be an updated version coming out that will include that information. Okay, Karen, back to you. KAREN RUSSELL: Thank you, Sherry, and a big shoutout for our subject matter experts Racheal, Anne, and Gillian.

Thank you, ladies, for being on today. And Sherry and Richard, you guys are the greatest. Thank you for providing the important information and updates on the qualified business income deduction, 199A. And of course to everyone that attended the webinar, and we hope you learned a few new things and received clarification on some matters that can assist you with your clients more effectively. So, for those of you that attended today for at least 50 minutes after the official start time of the webinar, you will receive a certificate of completion that you can use with your credentialing organization for possible CPE credit. If you're eligible for continuing education from the IRS and registered with your valid PTIN, your credit will be posted in your PTIN account, and if you're eligible for continuing education from the California Tax Education Council, your credit will be posted to your CTEC account. Now, if you qualify and you haven't received your certificate or credit by December 30th, you can email us at the address on this slide. I'm not going to read over it. It's big enough, I think everybody can see it. But if you want to know who your local stakeholder liaison is, you can send us an email to this address as well, and we'll send you that information, or you can go on IRS.gov and find your contact for your state using keyword search stakeholder liaison. Now, as part of the service's continuing efforts to provide you with timely topics and interesting speakers, please take the survey before you exit. It's a little short evaluation. If you have any requests for future webinar topics or pertinent information you would like to see on IRS.gov or in a fact sheet or tax tip or FAQ, include your suggestions in the Comments section of the survey or use the Ask Question feature on your viewing screen if you choose not to take the survey. And if for some reason when you click on the survey button on the left side of your screen it doesn't pop up, that's probably because you didn't disable your pop up blocker. So, use the Ask Question feature or disable your pop up blocker. We do hope you'll be able to join us for future webinars. Our next webinar is on Tax Reform Due Diligence Requirements. It's December 13th. If you want to register for this, go on IRS.gov, put webinars in the search box, and click on Webinars For Tax Practitioners.

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