Qualified business income for pass-through entities (1120)

Show expandable text

New (tax) year, new help!

Fixed Assets and UltraTax CS 2023 help is now on Help and Support. We're still moving articles, but you can find most content for the 2023 tax year there. Continue using the Help & How-To Center for tax years 2022 and older.

Overview

This article provides information on how UltraTax CS/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. You cannot specially allocate these amounts, but you can force the amount of business income for the activity in the Business income (loss) (Force) field on Screen QBI if you disagree with the calculated amount.

Qualifying an activity

UltraTax CS calculates an activity's business income, Section 179 deduction, W-2 wages, and qualified property when you enter 1 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, UltraTax CS 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 UltraTax CS will no longer calculate the qualified business income, Section 179, or the W-2 wages for the Page 1 activity. You will need to enter an amount in the Business income (loss) (Force), Section 179 deduction (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 business income for each activity is equal to the respective net income, except for income from the Page 1 activity. The business income from a Page 1 activity is equal to Schedule K, line 1 minus the income from a farm activity and a pass-through entity.

Section 179 Deduction

UltraTax CS calculates the allowable Section 179 deduction allocated to the activity. Any Section 179 carryover from the prior year is allocated to the Page 1 QBI activity. If the Page 1 activity does not exist, the Section 179 carryover from the prior year is allocated to the next available QBI activity.

Section 1231 Gain (loss)

The Section 1231 gain (loss) is allocated to the Page 1 QBI activity. If the Page 1 activity does not exist, the Section 1231 gain (loss) is allocated to the next available QBI activity.

W-2 Wages

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

Page 1 activity

  • 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

Farm activity

  • Labor hired before employment credit reduction on Screen F-2

Farm Rental activity

  • Labor hired before employment credit reduction on Screen 4835-2

Rental activity

  • 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 unadjusted basis immediately after acquisition (UBIA) of qualified property amount transfers from the asset module and displays the cost of the asset that qualifies for the QBI deduction.

  • The amount is included on the Section 199A Information Worksheet if the Qualifies as trade or business for Section 199A box is marked for the activity in the QBI screen.
  • The Qualified Property Report prints when you choose Yes in the Qualifies as trade or business for Section 199A field for the asset. To do so, open the asset and choose Setup > Activity.
  • To exclude an asset from the QBI deduction and from the Qualified Property Report, mark the Exclude asset from qualified business income deduction box in the Asset detail > Other tab.

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 the following: 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 7/1/04 and had a 5-year depreciable life. The later date is ten years after the asset was placed in service, 7/1/14. Because this date ends before the current tax year-end, the asset is not qualified property.
  • An asset was purchased on 7/1/17 and had a 5-year depreciable life. The later date is ten years after the asset was placed in service, 7/1/27. Because this date ends after the current tax year-end, the asset is qualified property.
  • An asset was purchased on 7/1/04 and had 39-year depreciable life. The later date is the end of the recovery period, 7/1/43. Because this date ends after the current tax year-end, the asset is qualified property.

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. The shareholder must have a beginning of year shares amount entered in View> Shareholder Information> Shareholder tab if there were no changes of ownership during the tax year.

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. The shareholder must have a beginning of year shares amount entered in View> Shareholder Information> Shareholder tab if there were no changes of ownership during the tax year.

The S Corporation must separately identify the shareholder’s pro rata share of:

  • Qualified items of income, gain, deduction, and loss
  • W-2 wages
  • Unadjusted basis immediately after acquisition of qualified property
  • Qualified publicly traded partnership items
  • Section 199A dividends (Qualified REIT dividends)

The S Corporation must make an initial determination of which items are qualified items of income, gain, deduction, and loss at its level and report to each shareholder their pro rata share of all items. The shareholder must then determine whether each item is includible in its QBI.

The following fields were added to Screen QBI in the Income & Deductions, Farm, Farm Rental, and Rent & Royalty folders to report items of income, gain, deduction, and loss. UltraTax CS/1120 does not automatically calculate these amounts for the QBI activity.

  • Section 1231 (gain) loss (see note below)
  • Other income (loss) separately stated on Form 1120-S, Schedule K
  • Other deductions separately stated on Form 1120-S, Schedule K

Note: The Section 1231 gain (loss) is allocated to the Page 1 QBI activity. If the Page 1 activity does not exist, the Section 1231 gain (loss) is allocated to the next available QBI activity.

Additional Information

Worksheets

The Section 199A Information worksheet for the S Corporation and the shareholder, and the Section 199A Aggregation worksheets are available in Forms view. The information worksheets print when you enter 1 in the Qualifies as trade or business for section 199A field on Screen QBI. The aggregation worksheet prints when an aggregation group number is entered in the Regulation 1.199A-4 aggregation group number field on Screen QBI

Rev. Proc. 2019-38, Section 199A Trade or Business Safe Harbor

To print the Section 199A Trade or Business Safe Harbor statement required under Rev. Proc. 2019-38, 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.

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. UltraTax CS does not print the Shareholder’s Section 199A Information worksheet. A Schedule K-1 statement prints with the totals of the Section 199A items for all the activities. You will also need to indicate whether or not the qualified business activity is a specified service trade or business in View > Shareholder Information > Other Info tab > Supplemental information statement dialog.

Consolidated S Corporation

Each member of the consolidated group that qualifies as a trade or business for Section 199A purposes needs to complete the following fields on the QBI screen, in the Income and Deductions folder.

  • Description to differentiate the Page 1 activity between the members of the consolidated group.
  • Business income (loss) (Force) is equal to Schedule K, line 1 minus the income from a farm activity and pass-through entity for the member.
  • Section 1231 gain (loss) (Force) allocated to the page 1 activity for the member.
  • Section 179 deduction (Force) allocated to the page 1 activity for the member.
  • W-2 wages (Force) is equal to the sum of following fields in the member client.
    • 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.

UltraTax CS combines the QBI screens from each member client and transfers the data to a separate column on the consolidated S Corporation Section 199A Information Worksheet.

Was this article helpful?

Thank you for the feedback!