§199A Keebler Example Descriptions 3rd Edition

Copyright © 2018 Keebler Tax & Wealth Education, Inc.

Rev. 1/31/2019

1    Go Zone: Simple Calculation. Unmarried, sole proprietor, computer repair shop. QBI $100K x 20% vs Taxable (Go Zone) $81K x 20% => Deduction $16,200.

2    Capital Gain Backed out of Taxable Before Applying 20% Limitation.Similar to Example 1, but Taxable $74K includes $7K gain. Gain backed out. QBI $100K x 20% vs Taxable (Go Zone) $67K x 20% => Deduction $13,400.

3    Married, S Corporation, Go Zone, Wages/UBIA Don't Matter. B and C married. C sole owner of X, an S Corporation providing landscaping services. QBI $100K x 20% vs. Taxable (Go Zone) $270K x 20% => Deduction $20K.

4    REIT and PTP. Same as Example 3, but REIT $1,000 and PTP $500. Combined REIT/PTP $1,500 x 20% => Additional Deduction $300.

5a   Netting of Negative QBI. Cathy QBI A $30K, QBI B Loss ($50K). Net QBI ($20K), carry forward to next year. Deduction $0.

5b   QBI Loss Carryforward. 2019. QBI AB Loss Carryforward ($20K), QBI A $30K, QBI B $40K. Net QBI $50K x 20% vs. Taxable (Go Zone) $50K x 20% => Deduction $10K.

6    No Wages, No UBIA, No Deduction.D, $1M QBI x 20% vs. Taxable (No Zone) $980K x 20%. No Wages or UBIA => Deduction $0K.

7    UBIA. Same as Example 6, but D spends $10M on parking structure. QBI $4M x 20% vs. UBIA $10M x 2.5% => $250K vs. Taxable (No Zone) $3.98M x 20% => Deduction $250K.

8    Wages and UBIA. E, LLC 30% owner. QBI $900K x 20% vs. greater of $300K Wages x 50% or (Wages $300K x 25% + UBIA $30K x 2.5%) => $150K vs. $Taxable (No Zone) 880K x 20% => Deduction $150K.

9    Positive QBI; Negative PTP Carried Forward. F, unmarried, S Corp 30% owner. QBI $3M x 20% vs. greater of Wages $1M x 50% or (Wages $1M x 25% + UBIA $100K x 2.5%) => $500K vs. Taxable (No Zone) $1.88M x 20% => Deduction $376K. Negative PTP carried forward to next year.

10   Twilight Zone, non-SSTB, Phase-in. B and C married, QBI $300K x 20% vs. $Taxable (Twilight Zone) 375K x 20% => $60K (tentative deduction). Wages $40K x 50% => $20K. $60K - $20K => Excess Amount $40K x 40% unconsumed Twilight Zone => $16K + Wages Base $20K => Deduction $36K.

11   No Zone, SSTB, SOL. Brad married lawyer with QBI $450K => Taxable (No Zone) $450K. Because SSTB, Deduction $0. Goal is to reduce income to $315K x 20% to generate a $63K Deduction.

12   Twilight Zone, SSTB, Phase-in and Phase-out. Same as Example 10, but SSTB causes phase-out in addition to Wage/UBIA phase-in. Previous result $36K x 40% (unconsumed Twilight Zone or 'Applicable Percentage') => Deduction $14.4K.

13   No Aggregation. F, unmarried, X, Y, Z. QBI "X" $1M x 20% vs. Wages $500K x 50% => $200K; QBI Y $1M x 20% vs. Wages $0K x 50% => $0K; QBI Z $2K x 20% vs. Wages $500K x 50% => $400; XYZ $200,400 vs. Taxable (No Zone) $2.722M x 20% => Deduction $200,400.

14   Aggregation. Same as Example 13, but F aggregates XYZ. Aggregated QBI $2.002M x 20% vs. Aggregated Wages $1M x 50% => Deduction $400,400.

15   No Aggregation, Netting of Negative QBI. Same as Example 13, but QBI Z Loss $600K. Loss $600K netted 1/2 to X, 1/2 to Y. QBI X $1M - Loss $300K => Net QBI $700K x 20% vs. Wages $500K x 50% => Deduction $140K for X. Deduction $0 for Y (no wages).

16   Aggregation, No Netting of Negative QBI Required. Same as Example 15, but aggregate XYZ. Aggregated QBI $1.4M x 20% vs. Aggregated Wages $1M x 50% => Deduction $280K.

17a  No Aggregation, Netting of Negative QBI, Combined Negative QBI Carried Forward. Same as Example 16, but Z QBI Loss $2.15M. Loss $2.15M netted 1/2 to X, 1/2 to Y. QBI XY $2M - Loss $2.15M => Net QBI Loss ($150K) => Deduction $0K.

17b  Netting of Negative QBI. 2019 year. QBI 2018 Loss ($150K) carried forward to 2019, netted with other QBI XYZ, QBI $200K - $154,286 Loss => Net QBI $45,714 x 20% vs. Wages $100K x 50% => Deduction for business "X" $9,143.

18a  Aggregation, Negative QBI 2018 Carried Forward to 2019 (again Net Negative QBI), then Carried Forward to 2020. Same as Example 17a, but aggregate Loss Carryforward with 2019 QBI XYZ. Aggregated 2019 QBI Loss ($150K) => Deduction $0. QBI Loss ($150K) carried forward to 2020.

18b  Aggregation, Negative QBI Carried Forward to 2019, Net Positive QBI. Same as Example 17b, but aggregate Loss Carryforward with QBI XYZ. Aggregated QBI $80K x 20% vs. Aggregated Wages $100,500 x 20% => Deduction $16K.

20a  Trust with Partners A and B (Who Are also Trust Beneficiaries). Trust owns 25% of PRS Partnership and 100% of LLC. AB together own 75% of PRS. A is 50% beny of Trust. B is 25% beny of Trust. Trust aggregated QBI Loss ($47K). Sets the stage for individual and trust §199A Deduction results for 19b-d.

20b  Trust Beneficiary A. A QBI Loss ($47K) x 50% => ($23.5K) + $100K separate QBI => Aggregated QBI $76.5K x 20% vs. Aggregated Wages $40K x 50% => $15.3K vs. Taxable (No Zone) $357.5K x 20% => Deduction $15.3K.

20c  Trust Beneficiary B. B QBI Loss ($47K) x 25% => ($11,750) carried forward to next year. Deduction $0.

20d  Trust. Trust QBI Loss ($47K) x 25% => ($11,750) carried forward to next year. Deduction $0.

36   Partnership, Non-SSTB. Partner X in Partnership XYZ, QBI $1M x 20% vs. Wages $360K x 20% => Deduction $180K.

41   Wages $0. John/Melissa QBI $100K x 20% vs. Wages $0 x 20% => $0 vs. Taxable (No Zone) $415K x 20% => Deduction $0.

43   Increase Wages. Same as Example 41, but convert to S Corporation, pay Melissa Wages $50K (which reduces QBI). QBI $50K x 20% vs. Wages $50K x 50% => $10K vs. Taxable (No Zone) $415K x 20% => Deduction $10K.

44   Increase Wages More. Same as Example 41, but pay Melissa Wages $28,571 (which reduces QBI). QBI $71,429 x 20% vs. Wages $28,571 x 20% => $14,286 vs. Taxable (No Zone) $415K x 20% => Deduction $14,286. The Wages of $28,571 ($100K x 2/7) represent the "Sweet Spot" (optimal balance of QBI and Wages). If $28,571 not considered "reasonable compensation", IRS might try to recharacterize some of the S Corporation profit as W-2 Wages.

45a  Pay Independent Contractors. Ted, single, sole proprietor of TR Trucking, 2 drivers (independent contractors), paid $50K each. QBI $225K x 20% vs. Wages $0 x 50% => $0 vs. Taxable (No Zone) $250K x 20% => Deduction $0.

45b  Convert Independent Contractors to Employees. Same as Example 43a, but Ted converts 2 drivers to employees. QBI $225K x 20% vs. Wages $100K x 50% => $45K vs. Taxable (No Zone) $250K x 20% => Deduction $45K.

46a  Wages Low. Linda, single, sole proprietor of bakery. QBI $230K x 20% vs. Wages $30K x 50% => $15K vs. Taxable (No Zone) $240K x 20% => Deduction $15K.

46b  Increase Wages. Same as Example 46a, except increase wages by $10K. QBI $220K x 20% vs. Wages $40K x 50% => $20K vs. Taxable $230K x 20% => Deduction $20K (increase of $5K).

47a  Wages High. Tim/Dora, married, own S Corporation. QBI $150K x 20% vs. Wages $120K x 50% => $30K vs. Taxable (Twilight Zone) $315K x 20% => Deduction $30K.

47b  Decrease Wages. Same as Example 47a, but decrease wages by $40K to $80K. QBI $190K x 20% vs. Wages $80K x 50% => $38K vs. Taxable (Twilight Zone) $315K x 20% => Deduction $38K (increase of $8K).

47c  Decrease Wages More. Same as 47a, but reduce wages by $42,857 to $77,143. QBI $192,857 x 20% vs. Wages $77,143 x 50% => $38,571 vs. Taxable (Twilight Zone) $315K x 20% => Deduction $38,571 (increase of $8,571). The Wages of $77,143 ($270K x 2/7) represent the "Sweet Spot" (optimal balance of QBI and Wages).

48a  No Wages, No UBIA (Rents Building and Leases Machinery). Bill/Kelly own sole proprietorship, rent building and lease machinery. No wages, no UBIA. QBI $1M x 20% vs. Wages/UBIA $0 => $0 vs. Taxable (No Zone) $1M x 20% => Deduction $0.

48b  Buys Building. Same as Example 48a, but Bill/Kelly buy building for $1M. QBI $1M x 20% vs. UBIA $1M x 2.5% => $25K vs. Taxable (No Zone) $1M x 20% => Deduction $25K.

49   No UBIA (Leases Trucks). Beth owns trucking company, leases trucks. QBI $800K x 20% vs. Wages/UBIA $0 => $0 vs. Taxable (No Zone) $700K x 20% => Deduction $0.

50   Buys Trucks. Same as Example 49, but Beth buys trucks for $1M. QBI $800K x 20% vs. UBIA $1M x 2.5% => $25K vs. Taxable (No Zone) $700K x 20% => Deduction $25K.

51   No Charitable or Qualified Plan Contributions. Tom, single, lawyer, pays wages $100K, leases office space. QBI $240K x 20% vs. Wages $100K x 50% => $48K vs. Taxable (No Zone) $208,500 x 20% => Deduction $0 (because lawyer in the No Zone and engaged in SSTB).

52   Charitable Contribution. Same as Example 51, but Tom makes a charitable contribution of $51K. QBI $240K x 20% vs. Wages $100K x 50% => $48K vs. Taxable (Go Zone) $157,500 x 20% => Deduction $31.5K.

53a  No Gifts of Business Interests. Al/Paula, married, own AP Partnership. No wages. QBI $400K x 20% vs. Wages $0 x 50% => $0 vs. Taxable (No Zone) $500K x 20% => Deduction $0 (because in the No Zone and no wages paid).

53b  Gifts of Business Interests (Parents' Result). Same as Example 53a, but Al/Paula gift 25% interest in AP to each of children Ted and Susan (both married). Al/Paula (parents) reduced QBI $200K x 20% vs. reduced Taxable (Go Zone) $300K x 50% => Deduction $40K for parents.

53c  Gifts of Business Interests (Children's Results). Ted and Susan (children) each has $200K Taxable (including AP QBI $400K x 25%). QBI $100K x 20% vs. Taxable (Go Zone) $200K x 20% => Deduction $20K for each child. Total increase in Deduction for family: $40K + $20K + $20K = $80K.

54a  Interplay with Capital Gains. Gary, single, farmer. QBI $100K x 20% vs. Taxable (Go Zone) $85K x 20% => Deduction $17K. Sale of piece of land with resulting capital gain would not increase "Modified Taxable", because Net Capital Gain is backed out of Taxable before 20% limitation is applied.

54b  Second Job Increases Taxable and §199A Deduction. Same as Example 54a, but Gary takes a second job at a store and earns additional $15K. QBI $100K x 20% vs. Taxable (Go Zone) $100K x 20% => Deduction $20K (increase of $3K).

55a  Partnership Guaranteed Payments. Brothers Paul/Al partners in non-SSTB partnership with no UBIA, guaranteed payments of $150K each. Each QBI $150K x 20% vs. Wages $200K x 50% => $30K vs. Taxable (No Zone) $207.5K x 20% => Deduction $30K.

55b  Reduce Partnership Guaranteed Payments, Increase §199A Deduction. Same as Example 55a, except that guaranteed payments reduced from $150K to $50K each. Each increased QBI $250K x 20% vs. Wages $200K x 50% => $50K vs. Taxable (No Zone) $207.5K x 20% => Deduction $50K.

56a  Single. Dawn, single, doctor. QBI $282K x 20% vs. Wages/UBIA $0 => $0 vs. Taxable (No Zone) $270K x 20% => Deduction $0 (in No Zone, SSTB, no wages).

56b  Married. Same as Example 56a, except that Dawn marries Sam, who makes $52K as teacher. QBI $282K x 20% vs. Taxable (Go Zone) $310K x 20% => Deduction $56.4K.

57a  Single. Larry, single, consultant. QBI $500K x 20% vs. Wages/UBIA $0 => $0 vs. Taxable (No Zone) $500K x 20% => Deduction $0.

57b  Single. Robin, single, consultant. QBI $150K x 20% vs. Taxable (Go Zone) $150 x 20% => Deduction $30K. Note that combined tax result for Larry (single) and Robin (single, even with $30K §199A Deduction) not much better than married/joint (with no $199A Deduction). See Example #55c.

57c  Married (Examples 57a and 57b Combined). Larry and Robin marry. QBI $650K x 20% vs. Wages/UBIA $0Taxable => $0 vs. Taxable (No Zone) $650K x 20% => Deduction $0.