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markblaze
New Member

How is qualified business income calculated when a loan is taken out (and interest is paid) to purchase a share in a partnership?

For example, suppose I earn $10,000 from a partnership in 2020.  Also suppose I had to take out a loan and paid $5,000 in interest in 2020 to purchase the share of the partnership.  Form 8995 seems to deduct the $5,000 interest to calculate my qualified business income if I enter the interest as a separate line on Schedule E.  But Form 8995 seems to not deduct the $5,000 interest to calculate my qualified business income if I put the $5,000 interest in with other UPE (unreimbursed partnership expenses).  Which way is correct?
1 Best answer

Accepted Solutions
Rick19744
Level 11

How is qualified business income calculated when a loan is taken out (and interest is paid) to purchase a share in a partnership?

It is interesting that TT handles this differently, but then again, there is no real guidance.

  • The Preamble to the final regulations for Section 199A states the following "The Treasury Department and the IRS decline to address whether deductions for unreimbursed partnership expenses, the interest expense to acquire partnership and S corporation interests........are attributable to a trade or business as such guidance is beyond the scope of these regulations."
  • Business interest expense and unreimbursed partnership expenses are to be separately stated on Schedule E.
  • While the preamble to the final regulations note one thing (as reflected above), the instructions to form 8995 indicate "To figure the total amount of QBI, you must consider all items that are attributable to the trade or business. This includes, but isn’t limited to, unreimbursed partnership expenses, business interest expense, deductible part of self-employment tax, self-employment health insurance deduction, and contributions to qualified retirement plans."
  • So are the instructions telling the taxpayer that all those items should be deducted when determining QBI or are they just indicating that the items need to be considered?
  • So as you can see, this is a gray area and TT needed to make a decision when developing the software.
  • Unreimbursed partnership expenses can be a slippery area.
  • So while TT, based on your facts, is handling each item differently when computing QBI, the right answer is to prepare the return accurately, which means each item should be reflected on a separate line on the K-1.
  • Should you want to reflect something differently than how TT is computing it, then you will need to override the software and paper file your tax return.
  • Finally, TT software may change should additional guidance become available at a later time.

 

*A reminder that posts in a forum such as this do not constitute tax advice.*

View solution in original post

1 Reply
Rick19744
Level 11

How is qualified business income calculated when a loan is taken out (and interest is paid) to purchase a share in a partnership?

It is interesting that TT handles this differently, but then again, there is no real guidance.

  • The Preamble to the final regulations for Section 199A states the following "The Treasury Department and the IRS decline to address whether deductions for unreimbursed partnership expenses, the interest expense to acquire partnership and S corporation interests........are attributable to a trade or business as such guidance is beyond the scope of these regulations."
  • Business interest expense and unreimbursed partnership expenses are to be separately stated on Schedule E.
  • While the preamble to the final regulations note one thing (as reflected above), the instructions to form 8995 indicate "To figure the total amount of QBI, you must consider all items that are attributable to the trade or business. This includes, but isn’t limited to, unreimbursed partnership expenses, business interest expense, deductible part of self-employment tax, self-employment health insurance deduction, and contributions to qualified retirement plans."
  • So are the instructions telling the taxpayer that all those items should be deducted when determining QBI or are they just indicating that the items need to be considered?
  • So as you can see, this is a gray area and TT needed to make a decision when developing the software.
  • Unreimbursed partnership expenses can be a slippery area.
  • So while TT, based on your facts, is handling each item differently when computing QBI, the right answer is to prepare the return accurately, which means each item should be reflected on a separate line on the K-1.
  • Should you want to reflect something differently than how TT is computing it, then you will need to override the software and paper file your tax return.
  • Finally, TT software may change should additional guidance become available at a later time.

 

*A reminder that posts in a forum such as this do not constitute tax advice.*

View solution in original post

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