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How do I claim the Qualified Business Income Deduction as a Schedule K-1 Recipient?

The Qualified Business Income (QBI) deduction, created by the 2017 Tax Cuts and Jobs Act, allows non-corporate taxpayers to deduct up to 20% of their qualified business income.  Business owners and beneficiaries with income from a partnership, S Corporation, or trust reported on Schedule K-1 are generally eligible for the QBI deduction. TurboTax will automatically make the QBI deduction calculation for you based on your Schedule K-1 entries.

Types of Schedule K-1 Forms

Starting in 2019, the information for your QBI deduction is associated with a certain box and code on your K-1. Your K-1 will also have an attached Section 199A “Statement” with the amounts needed to calculate your QBI deduction.

The QBI box and code on your K-1 depends on which type of K-1 you have:

  • For a partnership Form 1065 Schedule K-1, a Section 199A Statement is associated with box 20, code Z
  • For an S Corporation Form 1120S Schedule K-1, a Section 199A Statement is associated with box 17, code V
  • For a trust Form 1041 Schedule K-1, a Section 199A Statement is associated with box 14, code I (as in India).

Enter the appropriate code and Section 199A statement amount when you get to the corresponding box screen. Continue answering the interview questions until you get to the We need some information about your 199A income or loss screen. 

On this screen, only enter amounts from your Section 199A Statement, not any of the other boxes on the K-1 form. When you check the box next to a line, an additional box will open where you can enter your Section 199A amount for that line. Continue, and you’ll find the Let’s check for uncommon adjustments screen. Enter any applicable Section 199A Statement amounts. These screens, to the extent applicable to your Section 199A statement, must be completed for your K-1 QBI information to be correctly inputted into TurboTax.

If your section 199A Statement has amounts related to the W-2 wages of your business or UBIA of qualified property, an amount must be entered or no QBI deduction will populate on your tax return. If left blank or zero is entered, no deduction is allowed.

It is not uncommon for a K-1 to report Qualified Business Income (QBI) information not only for activities of that partnership, S Corporation, or trust but also for QBI passed to that partnership from another partnership, S Corp, or trust. If your K-1 reports Section 199A information for both the “main” entity and a “pass-through” entity, you must enter your K-1 as if it were two (or more) separate K-1s. One K-1 will report only the box amounts for the main entity, and a separate K-1 is needed for each pass-through entity. If you can't figure out how to split the amounts from the information you have, you’ll need to contact the preparer of the K-1 to get those amounts.

When entering those separate K-1s for the “main” and “pass-through” entities (and after you’ve entered your specific box/code) you’ll be asked if the Section 199A information comes from the entity that sent you the K-1, from another business, or is only Section 199A (REIT) dividends. For the K-1 that has the “pass-through” entity box numbers, choose the from another business option. At that point, TurboTax will ask for the name and EIN of the pass-through entity.

A K-1 entry for QBI can be further complicated if:

  • your K-1 has entries for any two boxes of boxes 1 through 3; or,
  • if there are rental activities reported on lines 2 or 3 where at least one of the rental activities is self-rented or land and there are also additional rental activities that are NOT self-rented or land.

Even when there’s no Section 199A information, these situations require a separate K-1 in TurboTax for each type of activity. When K-1s such as these also have a Section 199A Statement with QBI information, the Section 199A Statement amounts must be split within those separate K-1s.

The SSTB (specified service trade or business) designation reduces or eliminates the 20% Qualified Business Income (QBI) deduction at higher income levels. Once your 2020 taxable income exceeds the threshold of $163,300 for Single tax filers and $326,600 for Married Filing Jointly, the IRS limits the QBI deduction for an SSTB. To properly calculate your QBI deduction, TurboTax asks if your business receives income from specified services. 

Specified services are professional services in the fields of health; law; accounting; actuarial sciences; performing arts; consulting; athletics; financial services; brokerage services; investing and investment management; trading; dealing in securities, partnership interests, or commodities; or endorsements, brand licensing, or media appearances.

Even if your K-1 entity doesn’t generate specified services income, if it makes money from selling to a SSTB that is at least 50% co-owned by your K-1 entity you’ll need to report that amount. Once you tell TurboTax your K-1 entity has sales to a co-owned SSTB, you’ll be directed to either identify the percentage of your income related to sales to that co-owned SSTB, or allocate specific amounts of income from that co-owned SSTB.

If you are itemizing deductions and taking an itemized deduction for expenses related to your K-1 business, you must subtract those deductions from your QBI. If you are taking the standard deduction, this doesn’t apply to you. On the Let’s check for some uncommon adjustments screen, check the box next to Value(s) on Statement A need to be changed. Additional boxes will open, and you’ll enter the business expenses deducted as itemized deductions in the Other deductions related to QBI box.

K-1 businesses that receive income from a specified agricultural or horticultural cooperative get an additional statement with their K-1 that reports the income, wages, and domestic production activity deduction (DPAD) for the business. If your K-1 business fits this description, you report the amounts on the Let’s cover some uncommon situations screen. When you check the box next to This business received income from a specified agricultural or horticultural cooperative (Schedule C), additional boxes will open for you to make entries. Use the Learn more links on this page to get more information about how to report your agricultural or horticultural cooperative amounts.

The QBI deduction is based on net income, so if your business had a net loss you do not qualify for the QBI deduction for that year. A net loss gets “carried over” to the next year’s QBI calculation, and is used to offset any future year QBI income for your K-1 business. In other words, when the QBI deduction is calculated, your current year’s QBI is reduced by any losses from the previous year. This is called a loss carryover.

When you prepare your tax return with TurboTax, the software automatically tracks and carries over your QBI business losses to the next year’s tax return. If you are preparing your return for the first time in TurboTax, you’ll need to indicate that you have carryovers from the prior year, and manually enter those amounts. In TurboTax Online, you’ll enter those amounts in the Income section. Under Other Business Situations, select Net Operating Loss/QBI Carryforward Loss. In TurboTax CD/Download Premier, you’ll enter those amounts in the Wages and Income section, under Business Items. Go to Business Deductions & Credits and select Net Operating Loss. In TurboTax CD/Download Home & Business, you'll enter those amounts in the Business Income & Expenses section. Under Less Common Business Situations, select Net Operating Loss/QBI Carryforward Loss.

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