The Qualified Business Income Deduction (“QBID”) treats certain personal service businesses which are classified as Specified Service Trades or Businesses (“SSTB”) differently once the income from these pass-through businesses exceeds certain thresholds based on the taxpayer’s filing status.
Personal service businesses are defined in the tax code as a business whose primary activity involves accounting, actuarial services, architecture, brokerage services, consulting, engineering, financial services, health, medical and veterinary services, law, performing arts, or athletic endeavors. A business whose primary activity is to prepare tax returns would be a personal service business.
Not all personal service businesses are considered a SSTB. Due to an exclusion in Section 199A, architects and engineers are not subject to these additional QBID provisions and are not classified as a SSTB, but all other personal service trades or business are deemed a SSTB. Detailed definitions of what the IRS has deemed constitutes a SSTB can be found in Publication 535 – Business Expenses.
For any personal service business which is classified as a SSTB, the QBID will be limited in 2019 once the taxpayer’s income reaches the threshold amounts of $321,400 if Married Filing Jointly; $160,725 for Married Filing Separately and $160,700 for all other filing statuses (in 2018 the threshold amounts were $315,000 for Married Filing Jointly or $157,500 for all other filing statuses). When this occurs, the QBID for that business is phased-out, and the deduction is eventually eliminated if the taxpayer’s income rises by $100,000 for Married Filing Jointly or $50,000 for all other filing statuses.
The phase-out reduction of the QBID for a SSTB is based on the extent taxable income exceeds the threshold amount and the QBID is reduced by that percentage. For example, if a taxpayer’s business is a SSTB and taxable income exceeds the threshold amount by 35%, then the QBID for that SSTB will be reduced by 35%. This phase-out reduction is calculated on Form 8995-A, Schedule A. In 2018, this phase-out reduction was calculated on Worksheet 12-A, Schedule A which was found in Publication 535.
In the tax program, Form 8995-A, Schedule A will only be applicable if the business is designated as a Specified Service Trade or Business and the taxable income before any Qualified Business Income Deduction is taken is more than the income threshold amounts. For any SSTB below the income thresholds, the QBID is treated exactly in the same manner as it would be calculated for any other pass-through business.
The designation of a pass-through business as a Specified Service Trade or Business is done in the tax program when the user enters the basic information for that business on the applicable schedule of the tax return. For each pass-through business that can be deemed a SSTB, the Specified Service Trade or Business designation is found in the tax program as follows:
Sole Proprietorship – Schedule C
When reporting business income (or loss) from a Schedule C, the SSTB designation is located at the Schedule C – Edit Menu by selecting Qualified Business Income Deduction Amounts and then answering the question “Is Specified Service Business” which requires a YES or NO response. The default response to this question is set at NO. Changing this response to YES will then treat the income (or loss) coming from this Schedule C as coming from a Specified Service Trade or Business for the Qualified Business Income Deduction.
Partnership
When reporting business income (or loss) from a Schedule K-1 (Form 1065) issued to a taxpayer by a partnership, the SSTB designation is located on the K-1 1065 Edit Menu under the Heading Information section at Line O. The question “Is Section 199A Income from a Specified Service Business?” requires a YES or NO response. The default response to this question is set at NO. Changing this response to YES will then treat the income (or loss) coming from this Schedule K-1 (Form 1065) as coming from a Specified Service Trade or Business for the Qualified Business Income Deduction.
If the Schedule K-1 (Form 1065) was pulled from the Business Program, you must edit this default answer on the K-1 1065 Edit Menu. Any determination as to whether the taxpayer’s activities in the business of the partnership satisfies the requirements of a Specified Service Trade of Business is not made at the partnership level and is not indicated on the Schedule K-1 (Form 1065). As a result, this designation must be made by the taxpayer on the individual return.
S Corporation
When reporting business income (or loss) from a Schedule K-1 (Form 1120S) issued to a taxpayer by the S Corporation, the SSTB designation is located on the K-1 1120S Edit Menu under the Heading Information section at Line L. The question “Is Section 199A Income from a Specified Service Business?” requires a YES or NO response. The default response to this question is set at NO. Changing this response to YES will then treat the income (or loss) coming from this Schedule K-1 (Form 1120S) as coming from a Specified Service Trade or Business for the Qualified Business Income Deduction.
If the Schedule K-1 (Form 1120S) was pulled from the Business Program, you must edit this default answer on the K-1 1120S Edit Menu. Any determination as to whether the taxpayer’s activities in the business of the corporation satisfies the requirements of a Specified Service Trade of Business is not made at the corporation level and is not indicated on the Schedule K-1 (Form 1120S). As a result, this designation must be made by the taxpayer on the individual return.
NOTE: This is a guide on entering the Qualified Business Income Deduction into the Keystone Tax Solutions Pro program. This is not intended as tax advice.
Additional Information: