1. Business Issues Chapter 10 pp. 329-380
2018 National Income
Tax Workbook™

2. Business Issues p. 329 Qualified Business Income Deduction
Breweries, Wineries, and Distilleries
Transportation, Entertainment, Meals
Family and Medical Leave Credit
Accounting Methods for Small Businesses
Business Interest Limitation
QBI Deduction for Real Estate Businesses
Allocation of QBI Items by Pass-Throughs

3. Qualified Business Income Deduction Overview p. 331
Lesser of 20% of QBI or 20% of taxable income
Tax Inc w/o QBI deduction
Tax Inc w/o net cap gain (LTCG, collectibles unrecaptured §1250, §1202, qualified div.)
W-2 wage limit (based on taxable income)
Specified service Tor B limit (based on taxable inc.)
Allowed for AMT calculation, not for SE tax
Deduction after AGI
May not be allowed for state income tax

4. Qualified Business Income Deduction QBI Definition p. 331
Qualified income, gain, deduction, & loss with respect to a qualified T or B
Not qualified REIT dividends or PTP income
Not wages, salaries, guaranteed payments
Other exclusions: List p. 331
Must be effectively connected w/US
Section 1231 gains/losses if ordinary

5. Qualified Business Income Deduction Limitations pp. 331-332
Phase-in range for limitations – Figure 10.1
MFJ: Tax. Inc. $315,000 to $415,000
Others: Tax. Inc. $157,500 to $207,500
Below the phase-in
No W-2 limitation and SSTB income = QBI
Above the phase-in
W-2 imitation applies in full, SSTB ≠ QBI
Within phase-in range: Both limits partially apply

6. Qualified Business Income Deduction US Trade or Business p. 332
§864(c), Treas. Reg (b)(1) Income is effectively connected w/US Tor B if:
Business has office/fixed place in US;
Office/fixed place is material factor in the realization of income, gain; or loss, and
Activities at office/fixed place substantially contribute to realization of income, gain, loss
Puerto Rico business = US Tor B if taxable in US

7. Qualified Business Income Deduction SSTB p. 332
Health, law, acctg, actuarial science, performing arts, consulting, athletics, financial/brokerage services, Tor B where principal asset is skill/reputation of ≥ 1 EE
Invest’g & investmt mgmt., trading, dealing in securities, PS interests, commodities
But NOT engineering and architecture

8. Qualified Business Income Deduction SSTB, Tax. Inc. < Threshold p
Ex SMLLC (Sch C) – Acctg. $125,000
Wages on Sched C = $200,000
TI = $134,169 (Figure 10.2) < $157,500
Sched C income = QBI, no wage limitation
Deduction = $25,000 = Lesser of
25,000 (20% x 125,000) or 26,834 (20% x 134,169)
NOTE: Net cap gains in TI for phase-in threshold test but not for 20% of taxable income limitation

9. Qualified Business Income Deduction SSTB, Tax. Inc. < Threshold pp
Ex. 10.2
Same facts but $12,000 qualified dividends & $18,000 annuity income
Tax Inc: $134,169 (Figure 10.4) < $157,500
Acctg income = QBI and no wage limitation
Tax Inc for 20% comp: $122,169 (w/o qual. div.)
Deduction = $24,434 = lesser of:
25,000 (20% x 125,000) or 24,434 (20% x 122,169)

10. Tax Inc: $212,294 (Figure 10.6) > $207,500 Accounting income ≠ QBI
Qualified Business Income Deduction SSTB, Tax. Inc. > Phasein pp
Ex. 10.3
Same as Ex 10.2 but Sch C = $205,000
Tax Inc: $212,294 (Figure 10.6) > $207,500
Accounting income ≠ QBI
No QBI deduction

11. Qualified Business Income Deduction SSTB, TI In Phasein Range p. 335
In phasein range → % of SSTB = QBI
MFJ: $315,001 to $415,000
QBI% = [1 – (tax inc - 315,000)/100,000]
Others: $157,501 to $207,500
QBI% = [1 – (tax inc – 157,500)/50,000]
Prop. Regs Formula: Reduce SSTB to app. %
% = 100% - (Excess > threshold)/50K or 100K
Same % applied in wage limit (& qualified prop.)

12. Qualified Business Income Deduction SSTB, TI In Phasein Range p. 335
Ex Ex but Sch C: $180,000
TI $187,629 (Fig. 10.7) (157, ,500)
40% of Sch C = QBI = $72,000
[1 – (187,629 – 157,500)/50,000] = 40%
(Wages also reduced 60% for limit - to 40%)
QBI Ded = $14,400
Lesser of 14,400 or 35,126
( 20% x 72,000) or [20% x (187,629-12,000)]

13. Qualified Business Income Deduction W-2 Wage Limitation p. 336
No wage limitation if tax inc ≤ threshold
Wage limit: Deduction the greater of:
50% of W-2 wages paid by qualified Tor B (other than SSTB or as EE) or
25% of W-2 wages + 2.5% of unadjusted basis of qualified property
Applies to each separate Tor B (may group)

14. Qualified Business Income Deduction W-2 Wage Limitation p. 336
Qualified Property (basic definition)
Held by/available for use in qualified Tor B at close of the year, and
Used in the production of QBI
W-2 Wages
Wages, elective deferrals, deferred comp
$ on return filed w/SSA w/in 60 days of due
NOT guaranteed payments to PNs
Special rules in prop regs for corrected W-2s

15. Qualified Business Income Deduction W-2 Wage Limitation pp. 336-337
Ex. 10.5
2 = owners of LLC, tax inc > phasein range
No EEs, just independent contractors
Rents all equipment used
No QBID: Wage limit applies and = 0
Could pay speakers as EEs
Become S corp - pay owners W-2 wages
Could purchase equipment used

16. Qualified Business Income Deduction W-2 Wage Limitation pp. 337-338
Qualified Property
Tangible & depreciable, held at yearend
Not: land, intangibles, or sold prior to yearend
Depreciable period not ended by yearend
MACRS < 10 yrs, use 10 years from purchase (NOTE: may need old depreciation schedules)
MACRS > 10 yrs, period ends on last full day of last full year of MACRS recovery period

17. Qualified Business Income Deduction W-2 Wage Limitation pp. 338-339
W/in phasein, limit applies proportionately
Disallowance %
MFJ: (tax inc – 315,000) / 100,000
Others: (tax inc – 157,500) / 50,000
% applied to difference between
Deduction without wage limitation and
Deduction with wage limitation
Result reduces potential QBI deduction

18. Qualified Business Income Deduction W-2 Wage Limitation pp. 338-339
Joint return & multiple businesses
Compute tentative QBI deduction for each – applying wage limit if applicable
Combine tentative QBI deductions
Deduct lesser of #2 or 20% x taxable income (w/o cap gains, qual. div.)

19. Qualified Business Income Deduction W-2 Wage Limitation p. 338
Ex. 10.6
2 businesses, no SSTB, no qual. prop.
H: $260,000 net, $24,000 W-2 wages
W: $310,000 net, $1,500,000 W-2 wages
Taxable Income: $814,000 (Figure 10.9)
> $415,000, limit applies in full
Must compute QBI deduct. separately

20. Qualified Business Income Deduction W-2 Wage Limitation p. 338-339
Ex. 10.6
H: $12,000 QBI deduction = lesser of:
$52, (20% x 260,000 QBI) or
$12, (50% x 24,000 W-2 wages)
W: $62,000 QBI deduction = lesser of:
$62, (20% x 310,000 QBI) or
$750,000 (50% x 1.5M W-2 wages)
QBID = $74,000 [< 20% x (814,000 – 10,000)]

21. Qualified Business Income Deduction W-2 Wage Limitation p. 339
Ex. 10.7
Qual. Prop. H: $600,000, W: $1M
H: $21,000 QBI deduction = lesser of:
$52,000 (20% x $260,000 QBI) or
$21,000 which is the greater of:
$12,000 (50% x 24,000 W-2 wages) or
$21,000 [(25% x 24,000) + (2.5% x 600,000)]

22. Qualified Business Income Deduction W-2 Wage Limitation p. 339
Ex. 10.7
Qual. Prop. H: $600,000, W: $1M
W: $62,000 QBI deduction = lesser of:
$62,000 (20% x $310,000 QBI) or
$750,000 which is the greater of:
$750,000 (50% x 1.5M wages) or
$400,000 [(25% x 1.5M) + (2.5% x 1M)]

23. Qualified Business Income Deduction W-2 Wage Limitation p. 339
Ex. 10.7
QBI Deduction is $83,000 = lesser of:
$83,000 - Combined QBI Deduction (21, ,000) OR
$160,800 (20% x taxable income) [20% x (814,000 – 10,000)]

24. Qualified Business Income Deduction W-2 Wage Limitation p. 339
Ex. 10.8
Ex ($425,000) Jamaican resort
Business not in US, no effect on QBI
Taxable income: $389,000 (Figure 10.12)
W/in phasein range (315, ,000)
Disallowance % = 74% (389, ,000)/100,000

25. Qualified Business Income Deduction W-2 Wage Limitation p. 340
Ex. 10.8
H: Reduction = $22,940
74% x (52, ,000) = 22,940
52,000 = 20% x QBI 21,000 = 50% x wages
w/o wage limit with wage limit
H: QBID: $29,060 (52,000 – 22,940)
W: No affect to wage limit, no reduction

26. Qualified Business Income Deduction W-2 Wage Limitation p. 340
Ex. 10.8
QBI deduction before TI limit: $ 91,060 (H 29,060 + W 62,000)
Taxable income limitation: $ 75,800
[20% x (389,000 – 10,000)]
QBI deduction: $75,800

27. Qualified Business Income Deduction W-2 Wage & SSBT Limitation p. 340
Ex. 10.9
Taxable income $395,000
W/in phasein (315,000 – 415,000)
H: $300,000 = QBI (LLC, not an SSTB)
W-2 wages $100,000
W: $325,000 = SSTB (Sole prop, Attorney)

28. Qualified Business Income Deduction W-2 Wage & SSBT Limitation p. 340
Ex H: Wage limitation phased in
20% x QBI = $60, (20% x 300,000)
50% x wages = $50,000 (20% x 100,000)
Reduction % = 80% [(395K - 315K)/100,000]
Reduction = $8, [80% x (60,000 – 50,000)]
[80% x (QBID w/o wages limit – QBID w/ wages limit)]
$52,000 = H’s QBID before TI limitation (60K-8K)

29. Qualified Business Income Deduction W-2 Wage & SSBT Limitation p. 340
Ex W: Wage & SSBT limitations phased in
SSBT % = 20% [1-(395, ,000)/100,000)]
QBI = $65, (20% x 325,000)
20% x QBI = $13, (20% x 65,000)
50% x wages = $10,000 [50% x (100,000 x 20%)]
Reduction % = 80% (395, ,000)/100K
Reduction = $2, [80% x (13,000 – 10,000)]
$10,600 = W’s QBID before TI limit (13K-2,400)

30. Combined QBID before TI limit: $62,600 (52,000 + 10,600)
Qualified Business Income Deduction W-2 Wage & SSBT Limitations pp
Ex.10.9
Combined QBID before TI limit: $62,600 (52, ,600)
Taxable income limit: $79,000 (20% x 395,000)
QBI deduction: $62,600
Figure – Software QBI worksheet

31. Qualified Business Income Deduction Grouping Activities p. 343
Computed separately for each business
Wages & qualified property kept separate
May want to separate or combine Tor B
Separate if one = SSTB, other is not
Combine if one has higher W-2 wages or qualified property
Proposed Regs. for §199A provide grouping rules (Chapter 13)

32. Qualified Business Income Deduction Qualified Business Loss p. 343
Proposed Regs:
If at least 1 qualified business has net loss:
Net income of each qualified business with profit reduced by % of loss
% = Tor B profit/Total all Tor B profits
Adjusted QBI used for W-2 wage limit
Qual. Prop. & wages of loss Tor B ignored

33. Qualified Business Income Deduction Qualified Business Loss p. 343Ex
$150,000 Golf course (wages: $40,000)
$150,000 Restaurant (wages: $30,000)
($20,000) Boutique (wages: $20,000)
Each reduced by $10,000 (20K x 150K/300K)
No qualified property in any business
Taxable income = $418,000
Over phasein range (157, ,500)

34. Golf Course QBID = $20,000 = lesser of:
Qualified Business Income Deduction Qualified Business Loss pp Ex
Golf Course QBID = $20,000 = lesser of:
$28,000 [20% x (150,000 – 10,000)] or
$20,000 (50% x 40,000)
Restaurant QBID = $15,000 = lesser of:
$15,000 (50% x 30,000)
QBID = $35,000 (< 20% x TI 418,000)

35. Qualified Business Income Deduction Qualified Business Loss p. 344
Overall QBI negative → c/o to offset in future
Ex.10.11: Ex but boutique ($400,000)
Net loss for all qualified Tor B ($100,000)
No QBID for current year (2018)
($100,000) c/o – treated as separate Tor B loss in 2019 for QBID purposes
Loss still deducted for TI on 2018 return

36. Qualified Business Income Deduction S Corps and Partnerships p. 344
No QBID for corporations
S corp SH and PS PN claim QBID based on S corp and PS allocation of
Qualifying business income/loss items
W-2 wages paid by qualifying business
Qualified property owned by qualifying business at yearend

37. Qualified Business Income Deduction Penalties p. 344
Substantial understatement penalty of 20% for TP claiming QBID:
Understatement exceeds the greater of $5,000 or 10% of corrected tax
replaced with
Understatement exceeds the greater of $5,000 or 5% of corrected tax
Adjustments need not be QBI adjustments

38. Breweries, Wineries, and Distilleries UNICAP p. 345
§263A: Capitalize direct & indirect costs:
To produce certain real & tangible
To acquire certain property for resale
Add costs to inventory or basis
Recover costs – CGS, depreciation, amortization, adjustment to basis
UNICAP Exception: ≤ $25M in average gross receipts for preceding 3 years

39. Breweries, Wineries, and Distilleries UNICAP – Interest Costs p. 345
Indirect interest subject to UNICAP if:
Real property w/class life ≥ 20 years
Property w/production period > 2 years
Property w/production period > 1 year and costs > $1,000,000
Production period:
Production start to date ready for service/sale
Plants: published nat’l weighted average

40. Breweries, Wineries, and Distilleries Production Period pp. 345-346
Wine grape vines: 4 year production pd.
Wine grapes: Acquisition of the vine to production of marketable quantities
Covers harvest costs & > de minimis amount of production costs of plant/crop
If growing grapes & processing to wine, period ends no later than when crushed

41. Breweries, Wineries, and Distilleries Production Period p. 346
TCJA temporarily excludes the aging period from production period
For aged wine, beer, distilled spirits
Not for distilled spirits unfit as beverage
Exclusion applies only for interest incurred > 12/31/2017 and < 1/1/2020
May shorten period such that §263A N/A

42. Breweries, Wineries, and Distilleries Excise Taxes pp. 346-347
Producers and importers
Beer, wine and distilled spirits
Form
TCJA provides credit for certain wine products removed during 2018 & 2019
Filing schedule dependent on prior-year and expected current-year liabilities

43. Breweries, Wineries, and Distilleries Excise Taxes - Beer p. 347
Liability arises when produced or imported
Tax payable when removed from brewery or customs for consumption or sale
No tax if exported or w/drawn for certain authorized uses (e.g. industrial, nonbeverage)
Go to commonly owned brewery w/o tax
Tax Rates – Figure 10.18

44. Breweries, Wineries, and Distilleries Excise Taxes - Wine p. 348
Small Producer Rates/Credits – Fig
Due: Removed from wine cellar or winery for consumption or sale
No tax on certain transfers
Transfer in bond – customs to winery (bulk), between bonded premises (bulk/bottled)
Exported or w/drawn for specific uses

45. Expanded to include sparkling wines
Breweries, Wineries, and Distilleries Wine –TCJA Credit Changes pp
Expanded to include sparkling wines
Available to all domestic producers & importers regardless of size
Eliminates phaseout of the credit
Allows credit transfer from foreign producer to domestic importer
Increases alcohol level for lowest tax
Tax Rates – Figure 10.19

46. Liability at production or importation
Breweries, Wineries, and Distilleries Excise Tax – Distilled Spirits pp
2017 rate: $13.50/proof gallon
Liability at production or importation
Due: domestic bottled when leave distillery
Due: imported when leaves customs
No tax if transferred in bond
TCJA
Reduced 2018 & 2019 rates – Figure 10.21
Removed size limit on exempt bulk transfers

47. Transportation Fringe Benefits pp. 350-353
Excludable from EE wages:
To/from work in commuter highway vehicle
Transit passes
Qualified parking
Qualified bicycle commuting reimbursements (suspended for )
Deduction by ER:
Tax years > 2017, no deduction for #1-#3
Deduct #4 for but not > 2025

48. Transportation Fringe Benefits p. 350
EE = common law EE & statutory EE’s
Generally, > 2% S corp SH & PS PN ≠ EE
Working condition fringe & de minimis fringe rules may apply to transit passes to allow exclusion
De minimis rules may allow exclusion of parking provided to nonemployees
Exclusion applies ER by ER (note p. 353)

49. Transportation Fringe Benefits Commuter Highway Vehicle p. 351
2018: Exclusion limit = $260/month
Between EE home and work
Vehicle must seat at least 6 plus driver
80% of more of mileage for commuting
# of EEs transported must be ≥ 50% of seats
Ex 10.12
Chevy Impala – seats 5 including driver
Does not seat 6 – FMV taxable (also for FICA)

50. Transportation Fringe Benefits Transit Passes pp. 351-352
2018: Exclusion limit = $260/month less commuter highway vehicle expense provided
Pass, token, farecard, voucher or similar
Vehicle operated by person in business of providing transportation – public or private
Cash reimbursem’ts only if voucher qualifies Ex

51. Transportation Fringe Benefits Parking p. 352
2018: Exclusion limit = $260/month
Parking provided by ER if:
Parking on ER owned/leased property
ER pays for the parking, or
ER reimburses EE for parking expenses
On/near business or commuting lot
Not parking near EE’s residence

52. Transportation Fringe Benefits Bicycle Commuting Expenses p. 352
Exclusion suspended for
Employer may deduct for
Exclusion when applies limited to $20/mo.
Purchase, improvements, repairs, storage if bike used regularly for commuting
No exclusion if another excludable fringe received during the same month

53. Transportation Fringe Benefits $$ Exceed Monthly Limit pp. 352-353
Taxable = benefit FMV exceeding sum of:
$ paid by EE + exclusion limit Ex
$270/mo transit pass for 12 mos, EE paid -0-
$10/mo taxable to EE or $120/year Ex
$295/mo parking, EE paid $45
Nothing taxable $260 + $45 > $295 FMV

54. Transportation Fringe Benefits AICPA Requested Guidance pp. 351-353
Exception for safety of EE (p. 351)
Taxable excess of fringe deductible by ER? (p. 353)

55. Entertainment Expense pp. 353-354 TCJA Change
No deduction after 12/31/2017 for:
Activity generally considered entertainment, amusement or recreation
Membership dues - club for business, pleasure, recreation, or other social purpose
Facility used in connection with #1 or #2 Ex
Client to baseball game w/business discussion
No deduction allowed for costs in 2018

56. Entertainment Expense p. 354 TCJA Change
Disallowance after 2017 N/A to expense if:
Goods, services, facilities = EE wages
TP’s substantiated expenses paid/incurred as EE & reimbursed by ER
Recreational, social, or similar primarily for EEs (other HCE)
Directly related to business meetings of EEs, SHs, agents or directors

57. Entertainment Expense p. 354 TCJA Change
Disallowance after 2017 N/A to expense if:
To attend a business league meeting or trade convention
Goods, services, facilities TP makes available to the public
Goods or services TP sells for FMV
Ex – Company party costs deductible

58. Entertainment/Meals AICPA Requested Guidance p. 354
ER hosted social activities for EE’s and families 100% deductible? (p. 354)
Dues to civic and other business orgs still deductible? (p. 354)

59. Employer Provided Meals p. 355 ER Provided Snacks
EE excludes as de minimis meal exp.
: ER may deduct 50%
After 2025: No ER deduction
(PN on AICPA request for guidance) Ex
CPA firm – EEs working 65 hours
Occasional pizza/sandwich during OT
ER deduct 50%, EE exclude

60. Employer Provided Meals p. 355 Employer-Operated Eating Facility
EE may exclude if:
Annual revenue ≥ direct operating costs
Available on same terms to each in EE group
No discrimination in favor of HCEs
ER deducts:
50% of operating costs
No deduction for operating costs > 2025
(PN re: AICPA request for guidance)

61. Employer Provided Meals p. 355 Meals Furnished on Business Premises
EE may exclude if:
On business premises for ER convenience
But not if EE may opt for pay instead ER
Deduction 50% of costs
No deduction after 2025

62. Employer Provided Meals p. 355 Meals Furnished on Business Premises
To food service EEs during, immediately before or after EE’s working hours
During working hours to ensure EE available for emergency calls
During working hours as nature of business restricts meal period & EE cannot eat elsewhere

63. Employer Provided Meals p. 356 Meals Furnished on Business Premises
During work hours if EE could not eat due to insufficient eating facilities nearby
Immediately after work hours if would have provided for noncomp reason during work but prevented by EE’s duties
NOT if for goodwill, morale (may = de minimis)
> 50% of EEs getting for ER convenience, may treat all as for ER convenience (Ex )

64. Employer Provided Meals p. 356 Client-Related Business Meals
§274(k) - 50% deduction for expenses related to business meals provided:
Not lavish or extravagant and
TP or EE of TP is present
AICPA requesting guidance
Conflict with §274(a)(1)(A) that entertainment no longer deductible?
Status of meals before, during, after entertainment business meal?

65. Credit for Paid Family/Medical Leave p. 357
General Business Credit
Based on wages paid to qualifying employees
While EEs on family and medical leave
Employer
Must have written policy
Allows FT EEs ≥ 2 weeks/year (PT %)
Require payment of ≥ 50% regular pay

66. Credit for Paid Family/Medical Leave p. 357
Employee
Employed 1 year or more and
For preceding year comp not > 60% HCE ($72,000 in 2018)
Leave for one of listed reasons – p. 357
Paid vacation, personal, medical, or sick leave ≠ family and medical leave
Leave paid by govt or required under state/local law not taken into account

67. Credit for Paid Family/Medical Leave p. 358
Credit computation
Up to 12 weeks wages/year/EE
12.5% if wages = 50% of EE’s wage
+ .25% for each % paid > 50% (max 25%)
Wage deduction reduced by credit
Wages cannot be used for any other credit
Wages paid in tax years beginning after 12/31/17 and before 1/1/20

68. Acctg Methods - Small Businesses p. 359
Cash
Income when actually/constructively received
Deduct expense when paid (limits on prepaid)
Accrual
Income when earned – all events test
Deduct expense when
All events have occurred for liability
$ can be determined – reasonable accuracy
Economic performance has occurred
Or could have hybrid combo of both.

69. No cash method if C corp, PS with C corp PN, or tax shelter
Acctg Methods - Small Businesses Limitations on Cash Method pp
No cash method if C corp, PS with C corp PN, or tax shelter
Exceptions:
Certain farming businesses (TCJA expanded)
Qualified PSC and
Meet gross receipts test
TCJA change: $5M up to $25M
Cash method must clearly reflect income

70. > 2017, expanded to include C’s or PS w/C PN if meet $25M GR test
Acctg Methods - Small Businesses Limitations on Cash Method pp
Farming Exception
> 2017, expanded to include C’s or PS w/C PN if meet $25M GR test
Qualified PSC Exception
May be cash w/o regard to GR test
Meet function & ownership tests

71. Acctg Methods - Small Businesses Limitations on Cash Method p. 361
Gross Receipts Test Exception - > 2017
Any TP (other than tax shelter)
Average GR for 3 period yrs ≤ $25M
Aggregate GR if under common control, affiliated service group, combined for §§414(m) and (o)
If exists < 3 yrs, use average of yrs
If short year, annualize GR

72. Acctg Methods - Small Businesses Gross Receipts Test p. 361
GR include:
GR recognized for federal tax purposes
Sales net of returns & allowances
All amounts received for services
Income from incidental/outside sources – interest, dividends, rents, royalties, annuities

73. Acctg Methods - Small Businesses Gross Receipts Test p. 361
GR do not include:
Reduction for CGS or cost of noncapital asset sold
Adjusted basis of capital asset sold (i.e., GR reduced by adjusted basis)
Repayment of a loan
Sales tax collected that is imposed on buyer

74. Acctg Methods - Small Businesses Inventories pp. 361-362
Required if production, purchase, or sale of merchandise = income-producing factor
Exception (unless a tax shelter):
Average annual GR ≤ $1M or certain industries w/average annual GR ≤ $10M
Account for as materials & supplies that are not incidental
Deduct in year consumed or used in Tor B

75. Acctg Methods - Small Businesses Inventories… p. 362
Exception under TCJA for years beg’g > 2017
Meet the $25M GR test
Account for inventories either
As nonincidental materials & supplies, or
In accordance with TP’s financial accounting treatment (AFS, books & records)
Cash or inventory method change due to TCJA → §481(a) adjustment – Rev. Proc

76. Acctg Methods - Small Businesses UNICAP pp. 362-363
Capitalize certain direct/indirect costs allocable to production/inventory
Exceptions – list p
TCJA – years beginning after 2017:
#1 expanded to meeting $25M GR test
Method change due to TCJA → §481(a) adjustment – Rev. Proc

77. Acctg Methods - Small Businesses Long Term Contracts pp. 363-364
Requires percentage-of-completion method
Exception for small construction contracts
Completion expected w/in 2 years and
TP met $10M GR test (3-yr average)
TCJA: Contracts after 2017
Expands GR test to the $25M GR test
TCJA acctg change = cutoff, no §481(a)

78. Business Interest Limitation p. 364
Tax years beginning after 12/31/17
Business interest limited to the sum of:
Business interest income
30% x adjusted taxable income (not <0)
Floor plan financing interest
Limit N/A if TP not a tax shelter & annual average GR ≤ $25M for 3 prior-tax-years

79. Business Interest Limitation Regs Coming…. pp. 364-365
Notice – initial guidance
Disallowed interest carryover to next year
Treated as accrued in succeeding year
Expect regs to allow corp to c/o interest disallowed under old law to 1st yr > 2017
Expect regs to not allow c/o of excess limitation of old law (for corporate)

80. Business Interest Limitation Regs Coming…… pp. 365-366
C Corporation only
All interest paid/accrued = business int.
All interest income = bus. interest inc.
Regs to address:
Interest exp/income of noncorporate entity w/C corp owner
Consolidated group issues (p )
C/o does not affect reduction of E & P

81. Business Interest Limitation Regs Coming…… p. 366
Flow-through entities
Annual limitation applied at entity level
Business interest deduction on page 1
Regs to address:
PN/SH can use share of entity’s business interest income to extent > entity’s business interest (“unused” income)
PN/SH cannot use share of floor-plan int.

82. QBID – Real Estate Businesses Qualified Business Income p. 367
Net income from qualified RE activities = QBI if activities give rise to §162 Tor B
Rental to related Tor B is treated as Tor B if commonly controlled (for §199A only)
Specific income exclusions (list p. 367)
§1231 gain if held < 1 yr and §1231 loss = QBI (NOT gain treated as capital gain)

83. QBID – Real Estate Businesses §162 Trade or Business??? p. 368
Case Law
Facts and circumstances determination
Continuous and regular activity with primary purpose for income/profit
One property may rise to level of Tor B
Long-term tenant, activities minimal → not Tor B
Activities of agent attributed to owner

84. QBID – Real Estate Businesses §162 Trade or Business??? pp. 368-9
Net Investment Income Tax Regulations
Defined w/reference to § 162
One property may rise to level of Tor B
Key facts:
Type of property
Number of properties
Day-to-day involvement (owner/agent)
Type of rental

85. QBID – Real Estate Businesses §162 Trade or Business??? p. 369
Proposed Section 199A Regulations
Mgmt of several parcels land = Tor B
Triple Net Lease
More like an investment than a rental
Self-Rentals
Rental to related business under common control automatically = Tor B

86. QBID – Real Estate Businesses Deduction Limits pp. 369-370
20% of QBI limited by
20% x taxable income (w/o “net cap gain”)
W-2 Wages and Capital Limitation
Applies if TI > $157,500 ($315,000 MFJ)
Phasein over $50,000 ($100,000 MFJ)
Full limit if > $207,500 ($415,000 MFJ)
Greater of 50% x wages or 25% x wages + 2.5% x qualified property unadj. basis

87. QBID – Real Estate Businesses Deduction Limits p. 370
Wages for wage limitation
Wages allocable to QBI
Must be properly & timely reported to SSA
Subject to wage withholding
Includes elective deferrals/deferred comp
NOT fees paid to prop. mgmt. companies

88. QBID – Real Estate Businesses Deduction Limits p. 370
Qualified property for capital limitation:
Tangible property,
subject to depreciation under §167,
held by & available for use in qualified Tor B at yearend,
used in the production of QBI, and
still w/in depreciable period at end of year (or 10 years from purchase if later)

89. QBID – Real Estate Businesses Deduction Limits p. 371
Unadjusted basis
Cost basis immediately after acquisition
No depreciation, §179, no bonus dep
Inherited: FMV at date of death
Reduce by basis of personal use property
Improvements to qualified property = separate qualified property

90. QBID – Real Estate Businesses Deduction Limits p. 371Ex
Apartment rental, manage, cost $1M
Joint return – taxable income $210,000
$50,000 net income each from rental
QBID = $20,000 - lesser of:
$20,000 [20% x ($50,000 + $50,000)]
$42,000 (20% x $210,000)

91. QBID – Real Estate Businesses Deduction Limits p. 371Ex
Same but $250,000 rental income each
Taxable income = $470,000
> $415,000→ wage/capital limit applies
QBID = $25, 000 which is the greater of:
$ (50% x wages paid)
$25,000 [(25% x wages) + 2.5% x $1M]
(no limit from TI – 20% x 470,000 = 94,000)

92. QBID – Real Estate Businesses Specified Service TorB pp. 371-372
SSTB = QBI if TI < thresholds
Part of SSTB = QBI if TI in phasein range
SSTB ≠ QBI if TI above phasein range
Proposed regs clarify what ≠ SSTB
RE agent/broker ≠ brokerage
Directly managing real property ≠ investing & investment management
Ex Broker income = QBI, limits apply

93. QBID – Real Estate Businesses REIT Dividends p. 372
Qualified REIT dividend may yield QBID
Qualified REIT dividend = REIT dividend that is not a capital gain or qualified dividend
QBID = 20% x qualified REIT dividends received during the year
QBID from REIT dividends + QBID of qualified Tor B (after wage/capital limit) limited by 20% x TI

94. QBID – Real Estate Businesses REIT Dividends pp. 372-373Ex
Single, TI = $150,000, $10,000 cap gain
Qualified REIT dividends = $80,000
Real estate business QBI = $100,000
QBID = $28,000 – lesser of
$36, [20% x (80, ,000)]
$28, [20% x (150,000 – 10,000)]

95. Pass-Through Allocation of QBI Items pp. 373-374
PN or SH claim QBID at individual level
QBID available w/o regard to participation
Use share of each item for each Tor B
Qualified business income
Form W-2 wages paid
Unadjusted basis of qualified property
Fiscal year entity: Treat all items as incurred within year entity tax year ends

96. Pass-Through Allocation of QBI Items Qualified Business Income pp
If Tor B item in TI, include in QBI
Exclusions list – p
Prop Regs:
§751(a) & (b) ordinary = Tor B income
Previously suspended items allowed treated as current Tor B item
N/A if from year beginning < 2018

97. Pass-Through Allocation of QBI Items Entity Computational Steps p. 375
Determine if engaged in ≥ 1 Tor B
Identify if any are SSTB
Determine QBI for each Tor B (direct)
Determine W-2 wages & unadjusted basis of qualified property for each Tor B
Determine qualified REIT dividends & qualified PTP income earned directly or through another

98. Pass-Through Allocation of QBI Items pp. 375-376
Allocations based on general rules
PS: PS agreement
S corp: Pro rata share
W-2 Wages
Includes S corp SH wages but does NOT include PN’s guaranteed payment
PS: Allocate same as wage expense
S: Allocate on per share/per day basis

99. Pass-Through Allocation of QBI Items W-2 Wages p. 376
Ex S corp – QBI $350,000
John 40% $100,000 salary from S
Jennifer 60% $40,000 salary from S
John (40%):
Wages: $56,000 (40% x $140,000)
QBI: $140,000 (40% x $350,000)
Jennifer (60%):
Wages: $84,000 QBI: $210,000

100. Pass-Through Allocation of QBI Items Unadjusted Basis QBP pp. 376-377
General rule (prop. regs.):
Basis share = Share of dep. / total dep.
Determined property by property
Basis share if no current dep. expense
PS: Use % share of gain on sale at FMV
S: Use % of total S shares owned

101. Pass-Through Allocation of QBI Items Multiple T or Bs pp. 377-378
Compute QBI for each separate Tor B Ex
Separately report items for each Tor B on schedule with K-1

102. Pass-Through Allocation of QBI Items Multiple Tor Bs: Anti-Abuse Rules p. 378
T or B treated as part of an SSTB
≥ 50% common ownership
Tor B provides ≥ 80% of its property or services to the SSTB, Tor B part of SSTB
Tor B provides < 80% of its property or services to the SSTB, % of Tor B in SSTB
≥ 50% common ownership & shared expenses
If Tor B GR ≤ 5% of combined gross receipts Tor B treated as part of the SSTB

103. Pass-Through Allocation of QBI Items Multiple Tor Bs: Anti-Abuse Rules p. 378Ex
S corporation – optometry - sole SH
Taxable income: $450,000
Eye exams $750,000 GR = SSTB
Sales $ 35,000 GR
As $35,000 < $39,250, sales = SSTB
[5% x (750, ,000)] = 39,250

104. Pass-Through Allocation of QBI Items QBI Loss p. 379
Net of all QBI = loss, c/o to next year Ex
2018: QBI = (30,000), c/o to 2019
2019: QBI of 20,000 and 30,000
c/o loss reduces 2019 QBI

105. Pass-Through Allocation of QBI Items Schedule K-1 p. 380
Figure – QBI item Box 20 codes
Separate schedule needed if > 1 Tor B
No K-1 QBI item reporting → all = 0
1040 QBI does not include comp or guaranteed payment rec’d by SH or PN
SH comp = W-2 wages, PN GP ≠ wages

106. Pass-Through Allocation of QBI Items Schedule K-1 p. 380Ex
2 50/50 PNs, $125,000 GP each
PS QBI = $800,000 (1,050,000 – 250,000)
QBID for each computed on $400,000
GP vs distribution
GP reduces QBI, distribution does not
GP not subject to reasonable standard

107. Questions?