Q:
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What is U.S. Qualified Business Income Deduction?
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A:
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Many individuals, including owners of businesses operated through sole proprietorships, partnerships, S corporations, trusts and estates may be eligible for a Qualified Business Income Deduction, also called the section 199A deduction, for years beginning after December 31.
The deduction allows them to deduct up to 20% of their qualified business income (QBI), plus 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. Income earned by a C corporation or by providing services as an employee is not eligible for the deduction.
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Q:
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What are two components of U.S. Qualified Business Income Deduction?
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A:
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The deduction has two components.
1.
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QBI Component. This component of the deduction equals 20% of QBI from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust or estate.
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2.
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REIT/PTP Component. This component of the deduction equals 20% of qualified REIT dividends and qualified PTP income.
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Q:
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What is the limitation of U.S. Qualified Business Income Deduction?
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A:
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1.
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QBI Component. Depending on the taxpayer's taxable income, the QBI Component is subject to limitations including:
(1)
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The type of trade or business,
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(2)
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The amount of W-2 wages paid by the qualified trade or business, and
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(3)
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The unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business.
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These limitations do not apply to taxpayers with taxable income at or below a certain threshold. For 2019, the threshold amount is $321,400 for a married couple filing a joint return, and $160,700 for all other taxpayers.
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2.
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REIT/PTP Component. This component is not limited by W-2 wages or the UBIA of qualified property. Depending on the taxpayer's taxable income, the amount of PTP income that qualifies may be limited if the PTP is engaged in a specified service trade or business.
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Q:
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What is the overall limitation of U.S. Qualified Business Income Deduction?
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A:
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The overall deduction is limited to the lesser of the QBI component plus the REIT/PTP component or 20% of the taxable income minus net capital gain. The deduction is available regardless of whether an individual itemizes their deductions on Schedule A or takes the standard deduction.
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Q:
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Any exemptions for Qualified Business Income?
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A:
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QBI does not include any of the following:
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Items not properly includible in income, such as losses or deductions disallowed under the basis, at-risk, passive loss, or excess business loss rules.
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Investment items such as capital gains or losses, or dividends.
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Interest income not properly allocable to a trade or business.
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Wage income.
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Income not effectively connected with the conduct of business within the U.S.
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Commodities transactions or foreign currency gains or losses.
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Income, loss, or deductions from notional principal contracts.
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Annuities (unless received in connection with the trade or business).
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Amounts received as reasonable compensation from an S corporation.
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Amounts received as guaranteed payments from a partnership.
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Payments received by a partner for services other than in a capacity as a partner.
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Qualified REIT dividends.
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Qualified PTP income.
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