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This calculation determines the §199A Deduction for taxpayers who own an interest in one or more Relevant Passthrough Entities (RPE). It allows you to aggregate RPEs that are eligible for aggregation, run the calculations on the non-aggregated RPEs separately, then view the combined result for all RPEs. You can run "what-if" scenarios with various combinations of aggregation and non-aggregation to get the best possible tax result.
In this article:
Relevant Passthrough Entity (RPE)
A Relevant Passthrough Entity (RPE) can be any of the following:
- S Corporation
- Schedule C business
- Schedule E business/activity
- Schedule F farm
- Estate or Trust (treated as an "Individual" for threshold purposes)
- LLC (single-member or one that does not elect to be taxed as a corporation)
C Corporations Not Eligible
§199A specifically makes income from a C Corporation ineligible for a passthrough deduction. First of all, it is not a "passthrough" entity because it is taxed at the corporate level. Second of all, it already got a huge tax break when the marginal corporate rate of 35% was reduced to a flat rate of 21%.
Trades or Businesses
A single Relevant Passthrough Entity (RPE) might be engaged in one or more trades or businesses. Each such trade or business is considered a separate trade or business for purposes of applying the wage and capital limitations.
Also, a single trade or business might be conducted across multiple RPEs. In this case as well, it might be beneficial to break this trade or business into multiple trades or businesses, then aggregate them as appropriate.
This module allows you to enter as many as 10 trades or businesses (whether it's one RPE with 10 trades or businesses, 10 RPEs engaged in one trade or business, or some combination of the two).
Thus, you could have many combinations of RPEs and trades or businesses.
Aggregation involves the combining of the following elements for any given entity:
- QBI (including any combination of positive and negative QBIs)
- W-2 Wages
- REIT Income
- PTP Income
Aggregation is done before applying the wage and capital tests. Aggregated trades or businesses are treated as a single trade or business for purposes of applying these tests.
If a trade or business generates a negative QBI, then this negative QBI must be netted across trades or businesses with positive QBI in a pro-rata manner. This netting is done for all negative QBI across all positive QBI, before and independently of aggregation. This netting is fully automatic, and does not depend on when you activate or deactivate aggregation for any given trade or business.
For any trade or business with negative QBI (any SSTB, or any non-aggregated non-SSTB), this negative QBI is netted against the positive QBI for the other trades or businesses. Furthermore, the W-2 and UBIA (wage and capital) items are disregarded for all purposes and are never used, not even in a future year.
If the sum of all trade or business QBI is negative, then the QBI component (i.e., the non-REIT, non-PTP) is zero for the taxable year. This negative amount is treated as negative QBI from a separate trade or business in the succeeding taxable years of the individual for purposes of §199A.
Negative QBI for an SSTB
An SSTB with negative QBI presents a special case. If the Taxpayer's Modified Taxable Income is in Zone #2, then you must apply the applicable percentage (percent of Zone #2 not consumed by Taxpayer's Modified Taxable Income) against the SSTB's negative QBI. Then allocate that reduced negative QBI against the positive QBI of the other RPEs.
When a Taxpayer has a combination of positive and negative REIT dividends and PTP income, all such income is combined.
Combined Qualified Business Income Amount (Combined QBI x 20%)
If the REIT/PTP combination is positive, it is multiplied by 20% and added to the sum of all modified trade or business income (x 20%) to generate the Combined Qualified Business Income Amount.
Negative Combined REIT/PTP
If the combination is negative, it is treated as zero for the current year, and carried forward to the next year to be netted against that year's combined REIT/PTP income.
Tax Year: Enter the year for which the federal income tax is being calculated. The program handles from year 2018 onwards. For future years, the program will default to the current year.
Relevant Passthrough Entity Window
- Name: Enter a name for the RPE.
- Specified Service Trade or Business (SSTB)?: Select "Yes" if the entity is an SSTB. This entity involves the performance of services in one or more of the following fields: health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management trading, or dealing in securities, partnership interests, or commodities, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more its employees or owners.
- RPE Total Taxable Income: Enter the taxable income for the year for the RPE.
- Capital Losses: Enter the capital losses that are a part of the RPE Total Taxable Income. These are entered as a positive number to modify the Total Taxable Income in order to determine the QBI deduction.
- Capital Gains, Divs, Int, Other: Enter the capital gains, dividends, interest or other portions of the RPE Total Taxable Income. These are entered as a negative number to modify the Total Taxable Income in order to determine the QBI deduction.
- QBI (Qualified Business Income, before Other RPE losses): This is calculated using the RPE Taxable Income plus the Capital Losses and minus Capital Gains and Other Reductions. It is determined for each qualified trade or business of the taxpayer. For any taxable year, qualified business income means the net amount of qualified items of income, gain, deduction, and loss with respect to the qualified trade or business of the taxpayer. The determination of qualified items of income, gain, deduction, and loss takes into account these items only to the extent included or allowed in the determination of taxable income for the year. For example, if in a taxable year, a qualified business has $100,000 of ordinary income from inventory sales, and makes an expenditure of $25,000 that is to required to be capitalized and amortized over 5 years under applicable tax rules, the qualified business income is $100,000 minus $5,000 (current-year ordinary amortization deduction), or $95,000. The qualified business income is not reduced by the entire amount of the capital expenditure, only by the amount deductible in determining taxable income for the year. If the net amount of qualified business income from all qualified trade or businesses combined during the year is a loss, it is carried forward as a loss from a qualified trade or business in the next taxable year.
- W-2 Wages Paid by RPE: Enter the amount of W-2 Wages paid to employees of the business. Include W-2 Wages paid to shareholder- employees of an S corporation. Do not include guaranteed payments to partners of a partenerhip. Sole proprietors are not paid W-2 Wages from their own sole proprietorship. W-2 Wages refers to the amounts described in paragraphs(3) and (8) of §6051(a) which are paid by a person with respect to employment of employees by the person during the calendar year ending during that taxable year. §6051(a) is "the total amount of wages as defined in §3401(a) " and §6051(a)(8) is "the total of amount of elective deferrals. §3401(a) provides that generally "wages" means all remuneration for services performed by an employee for his employer.
- Unadjusted Basis (UBIA): Tangible property of a character subject to depreciation that is held by, and available for use in, the qualified trade or business at the close of the taxable year, and which is used in the production of qualified business income, and for which the depreciable period has not ended before the close of the taxable year. The depreciable period with respect to qualified property of a taxpayer means the period beginning on the date the property is first placed in service by the taxpayer and ending on the later of (a) the date 10 years after that date, or (b) the last day of the last full year in the applicable recovery period that would apply to the property under §168.
- Keep Aggregation?: If you have chosen Aggregate "Yes" on the main screen, and "Specified Service Business or Trade (SSTB)" is set to "No" on the Add/Edit screen, the "Keep Aggregation" input will become visible. If you do not want to aggregate this non-SSTB, select "No" for "Keep Aggregation?".
Qualified REIT Dividends: Do not include any portion of a dividend received from a REIT that is a capital gain dividend [ defined in §857(b)(3)] or a qualified dividend [defined in §1(h)(11)].
Pub. Tr. Pship. Inc (Publicly Traded Partnership, or PTP): Enter the publicly traded partnership Income (PTP). This is the sum of the (a) net amount of the taxpayer's allocable share of each qualified item of income, gain, deduction, and loss (that are effectively connected with U.S. trade or business and are included or allowed in determining taxable income for the taxable year and do not constitute excepted enumerated investment-type income, and not including the taxpayer's reasonable compensation, guaranteed payments for service or §707(a) payments for services) from a publicly traded partnership not treated as a corporation, and (b) gain recognized by the taxpayer on disposition of its interest in the partnership that is treated as ordinary income.
Aggregate (Reg. 1.199A-4)?: Select "Yes" if Prop. Treasury Regulation 1.199A-4 regarding aggregate businesses should be applied to all eligible RPEs. RPEs that are considered SSTBs are not eligible for aggregation. In the edit window for each eligible RPE, you may choose not to keep aggregation. If you answer No to that question, this RPE will not be aggregated, but the other RPEs will remain aggregated.
Filing Status: Choose the applicable filing status - Single, Joint, Separate, Head of Household, or Estate or Trust.
Other Income Sources: Enter other net income received by the taxpayer, such as Wages, Interest, Dividends, Social Security, IRA, etc.
Capital Gain: Enter the net capital gain for the taxpayer. These are entered as a negative number to modify the Total Taxable Income in order to determine the deduction.
Qualified Dividends: Enter the qualified dividends for the taxpayer. These are entered as a negative number to modify the Total Taxable Income in order to determine the deduction.
Char, Ret. Plan Contr.: Enter the amount of charitable gifts or retirement plan contributions. This should be entered as a negative number, to determine the modified taxable income used in determining the §199A deduction.
Standard, Itemized Deductions: Enter the amount of itemized deductions as a negative number.
Edit Button: Click to edit a relevant passthrough entity that is highlighted in the list
Add Button: Click to Add a relevant passthrough entity to the list. A maximum of 10 entities can be entered.
Delete Button: Click to Delete a relevant passthrough entity from the list.
Relevant Passthrough Entity (RPE) vs. Trade or Business
On this screen, Relevant Passthrough Entity (RPE) and "trade or business" are being used interchangeably for reasons of simplicity.
In fact, an RPE can have multiple trades or businesses, and a single trade or business can be operated across multiple RPEs.
You should be as granular as possible when deciding how to enter an RPE/trade or business. If a trade or business meets the tests for being a separate and distinct trade or business ("complete and separable set of books and records kept for that trade or business", §1.446-1(d)), you should treat it as a separate trade or business.
You may then choose to aggregate a trade or business with one or more other trades or businesses if the aggregation tests are met (see below).
In order to aggregate trades or businesses for the first time (in the current or a future year), you must do so on an original return (not an amended return). It's not clear whether an election to aggregate may be made on a late-filed return, as long as it is the original return.
Aggregation Elected on Amended Return (2018)
Exception: the aggregation election may be made on an amended return for the 2018 taxable year only.
SSTB vs. non-SSTB
A collection of trades or businesses can be any combination of the following:
- SSTB (Specified Service Trade or Business – health, law, accounting, doctors, etc.)
- Non-SSTB: Aggregated
- Non-SSTB: Non-Aggregated
Key Aggregation Rules
- Rule #1: You may choose overall ("master") aggregation
- Rule #2: SSTBs may never be aggregated, so master aggregation will not aggregate SSTBs
- Rule #3: Even if you choose master aggregation, you may choose not to keep aggregation turned on for any non-SSTB
- Rule #4: You must have at least two non-SSTBs before aggregation will matter
- Rule #5: Not all non-SSTBs are eligible for aggregation.
You may aggregate non-SSTBs only if the trades or businesses meet the following tests:
- Ownership: The same person or group of persons, directly or by attribution, owns 50% or more of each trade or business to be aggregated.
- Majority of the Year, Including Last Day of Year: The majority ownership exists for the majority of the taxable year, including the last day of the taxable year.
- Same Taxable Year. All items attributable to each trade or business are reported on returns for the same taxable year, not taking into account short taxable years. It would appear that, if a trade or business has a short taxable year that ends on the same last day as the full-year returns of the other trades or businesses, its items maybe aggregated.
Levels of Similarity or Common Operations: The trades or businesses to be aggregated meet at least two of the following three tests:
- The trades or businesses provide products, property, or services that are the same or customarily offered together.
- The trades or businesses share facilities or share significant centralized business elements, such as personnel, accounting, legal, manufacturing, purchasing, human resources, or information technology resources.
- The trades or businesses are operated in coordination with, or reliance upon, one or more of the businesses in the aggregated group (for example, supply chain interdependencies).
If you choose Aggregate "No", your results screen (bottom) will display two tabs:
- RPE Worksheet
If you choose Aggregate "Yes", your results screen (bottom) will display three tabs:
- RPE Worksheet
- RPE Worksheet - Aggregating non-SSTBs
If you do not have two or more aggregated trades or businesses, Tab #3 will display this message:
"You did not enter enough non-SSTB allowable entities. You must enter at least 2 non-SSTB entities that are eligible for aggregation"
Add: an RPE/trade or business: click on the Add button. Enter the data, then click on Save.
Master Aggregation.: If you have chosen "master" aggregation" (on the main screen) and choose SSTB "No" on the Add or Edit screen, an additional field will appear at the bottom, where you may choose Keep Aggregation "No". This will treat this RPE/trade or business as non-aggregated, and it will appear on Tab #2 along with other non-aggregated non-SSTBs and all SSTBs.
Edit: An RPE/trade or business: highlight the name of the RPE/trade or business on the list, then click on Edit. Or just double-click on the name of the RPE/trade or business. Make any changes, then click on Save.