Qualified business income for pass-through entities (1065)

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Overview

This article provides information on how UltraTax/1065 calculates the components necessary to compute the Qualified Business Income Deduction (QBID) under section 199A of the Internal Revenue Code, created by the 2017 Tax Cuts and Jobs Act.

A Partnership cannot take the deduction itself; instead, the calculated components are passed through to partners on Schedule K-1, Box 20. Use the Ptr Alloc buttons on Screen QBI to specially allocate these amounts to partners using ratios that are different from the profit-sharing percentages.

Qualifying an activity

The application calculates an activity's qualified business income, W-2 wages, and qualified property when you enter 1 in the Qualifies as trade or business for section 199A field on Screen QBI. The Section 199A Information Worksheet includes a column for each qualifying 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.

How QBI is calculated

Business Income

Generally, the qualified business income for each activity is equal to the net income of the activity. The qualified business income from a Page 1 activity is equal to Form 1065, page 1, line 22, less the income from a farm activity and a pass-through entity.

Show me the amounts included in the QBI calculation.

QBI is calculated as the sum of the following items:

  • Ordinary business income (loss)
  • Net rental real estate income (loss)
  • Other net rental income (loss)
  • Royalty income
  • Other income (loss), including
    • Specially allocated farm income
    • Specially allocated oil and gas income
    • Specially allocated Form 4797 ordinary income
    • Specially allocated taxes
    • Specially allocated depletion
    • Specially allocated meals
    • Specially allocated page 1 depreciation, if included with the activity
    • Specially allocated cost of goods sold depreciation, if included with the activity
    • Specially allocated farm depreciation, if included with the activity

Less the sum of the following items:

  • Other deductions, including
    • Royalty deductions
    • Oil and gas production taxes
    • Oil and gas dry hole costs
    • Oil and gas lease operating expenses
    • Oil and gas other expenses
    • Oil and gas direct depreciation
    • Oil and gas allocated overhead
    • Specially allocated royalty depreciation
    • Specially allocated rental real estate depreciation, if not included in the activity
    • Specially allocated other rental depreciation, if not included in the activity
    • Specially allocated farm rental depreciation, if not included in the activity
    • Specially allocated farm depreciation, if not included in the activity
    • Specially allocated page 1 depreciation, if not included in the activity
    • Specially allocated cost of goods sold depreciation, if not included in the activity

Qualified W-2 Wages

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

Page 1 activity

  • Salaries and wages before employment credits on Screen Inc
  • Cost of labor on Screen A

Farm activity

  • Labor hired on Screen F-2

Farm Rental activity

  • Labor hired on Screen 4835-2

Rental activity

  • Wages and salaries on Screen Rent

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

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.

Additional Information

Worksheets

The Partnership’s Section 199A Information Worksheet and Partner’s Section 199A Information Worksheet are available in Forms view and display the qualified business income information by activity. These worksheets will print when you enter 1 in the Qualifies as trade or business for section 199A field on Screen QBI for at least one activity.

Data sharing

Qualified business income information will data share to the partner. In the 1040 return, choose File > Client Properties > Advanced Properties and mark Elect to import the data share of 1065 Schedule K-1’s by the per activity method, in lieu of the single K-1 method. This will import the information separately for each activity.

Troubleshooting

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

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