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|Examples for non-SSTBs||Example for SSTBs|
The amount of the deduction for “qualified trades or businesses” depends largely on taxpayers’ taxable income — that is, their AGI less itemized deductions (excluding the QBI deduction). It’s most easily calculated when taxable income is under $157,500 for single filers and $315,000 for married joint filers so the wage limit doesn’t apply. For example, joint filers Jane and Michael have taxable income of $150,000, including $75,000 in QBI. They can deduct 20% of $75,000, or $15,000, from their taxable income.
Computing the deduction also is fairly straightforward when taxable income exceeds $207,500 for single filers or $415,000 for married joint filers. Let’s assume Jane and Michael have taxable income of $575,000, including $75,000 of Jane’s QBI. She pays $20,000 in wages and has $90,000 of QBP. The first option for the wage limit calculation in this situation is $10,000 (50% of $20,000), and the second option is $7,250 (25% of $20,000 + 2.5% of $90,000) — making the wage limit, and the deduction, $10,000.
What if Jane and Michael’s taxable income falls into the range between $315,000 and $415,000, where the wage limit is phasing in, with everything else remaining the same? If their taxable income is, say, $400,000, their deduction is partially capped by the wage limit. As in the immediately preceding example, the full wage limit is $10,000, but, with taxable income of $400,000, only 85% of the full limit applies:
($400,000 taxable income – $315,000 threshold)/$100,000 = 85%
When taxable income doesn’t exceed $157,500 for single filers or $315,000 for married couples filing jointly, SSTBs are treated in the same manner as qualified businesses (see first example on left) when it comes to the QBI deduction. And, if the taxable income equals or exceeds $207,500 for single filers or $415,000 for married joint filers, SSTB owners receive no QBI deduction.
It’s when taxable income falls between those thresholds that things get trickier because the QBI, W-2 wages and QBP all gradually phase out on a prorated basis over this income range. The percentage that a taxpayer can take into account is 100% less the percentage equal to the ratio of 1) the amount by which taxable income exceeds the threshold amount to 2) $50,000 for single filers or $100,000 for joint filers:
1- (taxable income – applicable threshold)/$50,000 or $100,000 = applicable percentage
For example, let’s say Jane and Michael have joint taxable income of $400,000, and Jane has an SSTB with $75,000 in QBI. She pays $20,000 in wages and owns $90,000 in QBP. Only 15% of the QBI, or $11,250, qualifies for the deduction:
1- ($400,000 – $315,000)/$100,000 = 15% × $75,000 = $11,250
The gross deduction is 20% of $11,250, or $2,250. But, because only 15% of the QBI qualifies for the deduction, the couple can take account of only 15% of wages ($3,000) and QBP ($13,500) when calculating the wage limit. Fifty percent of wages for purposes of the limit, therefore, is $1,500, and 25% of wages plus 2.5% of QBP is $1,087.50 — setting the full wage limit at the greater amount of $1,500.
As for a non-SSTB, though, the wage limit phases in gradually over this income range.
In this case, 85% of the limit applies:
($400,000 – $315,000)/$100,000 = 85%
The couple must reduce their QBI deduction by 85% of the difference between the gross deduction amount and the deduction amount if the full wage limit applied:
($2,250 – $1,500) × 85% = $637.50
As a result, their allowable deduction is $1,612.50 ($2,250 – $637.50).
|Taxpayer||Results Under TCJA (Assuming Same Facts in 2018)|
|Files a 2017 Form 1040, married filing joint status, shows taxable income as -$750,000 which is solely comprised of:
||Reports $500,000 of taxable income on their 2018 form 1040 and will have an excess business loss in the current tax year of $1.25 million which is treated as an NOL in the subsequent tax year.|
|(Ordering with Passive Activity Loss Limitation)
Files a 2017 Form 1040, married filing joint status, shows taxable income as -$750,000 which is solely comprised of:
|Reports $500,000 of taxable income on their 2018 form 1040 and will have a passive loss carryforward of $500,000 and an excess business loss in the current tax year of $1.25 million which is treated as an NOL in the subsequent tax year.|
|(Ordering with Disposition of Passive Activity and Free Up of Suspended Losses)
Files a 2017 Form 1040, married filing joint status, shows taxable income as -$1,250,000 which is solely comprised of:
|Reports $500,000 of taxable income on their 2018 form 1040 and as a result of ordering rules will have an excess business loss in the current tax year of $1.75 million which is treated as an NOL in the subsequent tax year.|
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