Qualified business income for pass-through entities (1120)

Alerts and notices

Overview

This article provides information on how UltraTax/1120 calculates the Qualified Business Income Deduction (QBID) under section 199A of the Internal Revenue Code, created by the 2017 Tax Cuts and Jobs Act.

An S Corporation cannot take the deduction itself; instead, the calculated amounts are passed through to shareholders on Schedule K-1, Box 17. Amounts reported on Schedule K-1 are unadjusted figures, which are then multiplied by the shareholder's ownership percentage. You cannot specially allocate these amounts, but you can force the amount of qualified business income for the activity in the Qualified business income (Force) field on Screen QBI if you disagree with the calculated amount.

Qualifying an activity

The application calculates an activity's qualified business income, W-2 wages, and qualified property when you enter in the Qualifies as trade or business for section 199A field on Screen QBI for an activity.

Note: If you leave the Qualifies as trade or business for section 199A field blank on Screen QBI, the application assumes that activity does not qualify for Section 199A purposes.

The Section 199A Information Worksheet includes columns for multiple activities. You may mark more than one unit of Screen QBI in the Income & Deductions folder as a qualifying activity, however the application will no longer calculate the qualified business income or the W-2 wages for the Page 1 activity. You will need to enter an amount in the Qualified business income (Force), and W-2 wages (Force) fields for each Screen QBI unit. In addition, the Qualified property field on Screen QBI will transfer from the asset module for the first unit of Screen QBI. If the qualified property should be divided between all Screen QBI units, you will need to change the amount transferred from the asset module.

How QBI is calculated

Business Income

The qualified business income for each activity is equal to the respective net income, except for income from the Page 1 activity. The qualified business income from a Page 1 activity is equal to Schedule K, line 1 less the income from a farm activity and a pass-through entity.

W-2 Wages

The application uses the wages entered in the following fields for each activity reported on the Section 199A Information Worksheet.

  • Officer’s compensation before employment credit reduction, net of Compensation claimed elsewhere on return on Screen Inc
  • Salaries and wages before employment credit reduction on Screen Inc
  • Cost of labor before employment credit reduction on Screen A
  • Labor hired before employment credit reduction on Screen F-2
  • Labor hired before employment credit reduction on Screen 4835-2
  • Wages and salaries before employment credits on Screen Rent

You can also force the amount of W-2 wages for the activity in the W-2 wages (Force) field on Screen QBI if the wages entered in the input screens are not the Form W-2 wages.

Each member of the consolidated S Corporation that qualifies as a trade or business for Section 199A will need to force the amount of qualified business income and W-2 wages on Screen QBI in the Income and Deductions folder.

Qualified Property

The qualified property amount transfers from the asset module. Assets are treated as qualified property if they are tangible depreciable assets held in the trade or business at the close of the tax year and the depreciable period has not ended before the end of the tax year. Depreciable period is the later of: ten years after the asset was placed in service; or the last year of the recovery period. Show me an example.

Examples

  • An asset was purchased on 7/1/02 and had a 5-year depreciable life. The later date is ten years after the asset was placed in service, 7/1/12. Because this date ends before the current tax year-end, the asset is not qualified property.
  • An asset was purchased on 7/1/15 and had a 5-year depreciable life. The later date is ten years after the asset was placed in service, 7/1/25. Because this date ends after the current tax year-end, the asset is qualified property.
  • An asset was purchased on 7/1/02 and had 39-year depreciable life. The later date is the end of the recovery period, 7/1/41. Because this date ends after the current tax year-end, the asset is qualified property.

Allocating qualified property to the shareholder

Based on regulation 1.199A-2(a)(3)(iii), each shareholder’s share of the qualified property is proportionate to the ratio of shares in the S Corporation held by the shareholder on the last day of the taxable year over the total issued and outstanding shares of the S Corporation.

However, taxpayers may rely on the rules set forth in the proposed regulations under 1.199A-1 through 1.199A-6 issued on August 16, 2018, in their entirety, for taxable years ending in calendar year 2018.

Mark the Allocate Section 199A unadjusted basis of property to shareholders based on end of year shares on Screen KSep in the Schedule K folder if you wish to follow the final regulation for allocating the qualified property to the shareholder. If this field is blank, UltraTax/1120 allocates the qualified property to the shareholder based on the ratio of shares in the S Corporation held by the shareholder over the total shares of the S Corporation.

Additional Information

Worksheets

Qualified Business Income and Section 199A worksheets are available in Forms view and supporting statements will print with the worksheets as necessary. For instance, the Section 199A Worksheet will automatically print when you enter 1 in the Qualifies as trade or business for section 199A field on Screen QBI.

Notice 2019-07, Section 199A Trade or Business Safe Harbor

To print the Section 199A Trade or Business Safe Harbor statement required under Notice 2019-07, enter X in the Section 199A safe harbor field on Screen QBI of each Rent & Royalty or Farm Rental activity that is included in the statement. This statement must be signed by an officer of the corporation and attached to the return. If the return is being filed electronically, the statement must be signed and attached as a PDF.

Section 1377 election

When the S Corporation makes a Section 1377 election, you should enter the Section 199A amounts in Screen 1377-4 in the Shr Allocation folder. The application does not print the Shareholder’s Section 199A Information worksheet, but the applicable Section 199A codes print on the Schedule K-1. You will also need to indicate whether or not the qualified business activity is a specified service in the View > Shareholder Information > Other Info tab > Supplemental information statement dialog.

Section 199A safe harbor custom paragraph

If you've modified the filing instructions or federal instruction inserts, you can insert the Section 199A safe harbor custom paragraph by following one of the procedures below.

  1. Choose Setup > 1120 Corporation.
  2. From the Federal tab, click the Filing Instructions button.
  3. Highlight 1120 Return Instructions, then click Open.
  4. Scroll to the bottom of the file and place your cursor on the last blank line.
  5. Choose Insert > Embedded Content > Custom Paragraph.
  6. Select the custom paragraph Sign Section 199A Safe Harbor Stmt (FI) and click the Insert button.
  7. Choose Document > Save, and then Document > Exit.
  1. Choose Setup > 1120 Corporation.
  2. From the Federal tab, click the Filing Instructions button. If the Filing Instructions button is disabled, click the Letters & Emails button.
  3. Highlight Federal Instruction Insert from the Insert tab, then click Open.
  4. Scroll towards the bottom of the file until you see the section for the estimated payments.
  5. Place your cursor after the optional paragraph for Schedule Q (DISC) and press Enter.
  6. Place your cursor on the blank line, then choose Insert > Embedded Content > Custom Paragraph.
  7. Select the custom paragraph Sign Section 199A Safe Harbor Stmt (FI) and click the Insert button.
  8. Choose Document > Save, and then Document > Exit.

Troubleshooting

If you do not receive the result you expect, see Qualified business income deduction calculations and troubleshooting for more details on the calculations and instructions for correcting common data entry problems.

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