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Returning Member

I’m contributing to the employer portion of my solo 401k. I can contribute 20% of my net income(my income - 1/2 SE taxes)..or do I also subtract the 20% QBI amount? Thx!

 
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Employee Tax Expert

I’m contributing to the employer portion of my solo 401k. I can contribute 20% of my net income(my income - 1/2 SE taxes)..or do I also subtract the 20% QBI amount? Thx!

The QBI deduction comes last.  You do not need to factor in the QBI for your solo 401K deduction, but rather, the QBI deduction will factor in the 401K contribution in determining the amount of taxable income produced by your sole proprietorship for the purpose of the QBI deduction.  Because of this, you can determine your 401K contribution like you may have done in the past on net income from the business (and taking into account the 1/2 of SE tax), but you do not need to factor in the QBI calculation for the sake of your 401K contribution.

I have provided a detailed answer on how the IRS is handling this, and it refers to the final regs just recently adopted by the IRS and Treasury Dept.  It's detailed, but may help you to understand (There's also a link to a TurboTax FAQ that provides additional information as well).  Please note:  https://ttlc.intuit.com/replies/7161701

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Employee Tax Expert

I’m contributing to the employer portion of my solo 401k. I can contribute 20% of my net income(my income - 1/2 SE taxes)..or do I also subtract the 20% QBI amount? Thx!

The QBI deduction comes last.  You do not need to factor in the QBI for your solo 401K deduction, but rather, the QBI deduction will factor in the 401K contribution in determining the amount of taxable income produced by your sole proprietorship for the purpose of the QBI deduction.  Because of this, you can determine your 401K contribution like you may have done in the past on net income from the business (and taking into account the 1/2 of SE tax), but you do not need to factor in the QBI calculation for the sake of your 401K contribution.

I have provided a detailed answer on how the IRS is handling this, and it refers to the final regs just recently adopted by the IRS and Treasury Dept.  It's detailed, but may help you to understand (There's also a link to a TurboTax FAQ that provides additional information as well).  Please note:  https://ttlc.intuit.com/replies/7161701

**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"

View solution in original post

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New Member

I’m contributing to the employer portion of my solo 401k. I can contribute 20% of my net income(my income - 1/2 SE taxes)..or do I also subtract the 20% QBI amount? Thx!

Can you respond to the meaning of the term "GROSS INCOME" in the IRS Regulations for Section 199A(c) on Page 44 you quoted above.  In using Turbo Tax, Schedule 1 (Addition Income and Adjustments to Income) subtracts the 401K contribution (elected deferral and profit sharing), HSA contribution, and SE Tax amount from my self-employed business schedule C NET PROFIT/LOSS (Schedule C-Line 31).  It would seem that IRS is stating in their Final 199A regulations above that the Schedule 1 form should deduct the 401K and HSA Contributions and SE Tax from the GROSS INCOME which is Schedule C Line 7.  Can you please address this, as the regulations do not say NET Profit/Loss, the regulations clearly state," Thus, for purposes of section 199A,
deductions such as the deductible portion of the tax on self-employment income under
section 164(f), the self-employed health insurance deduction under section 162(l), and
the deduction for contributions to qualified retirement plans under section 404 are
considered attributable to a trade or business to the extent that the individual’s GROSS INCOME
from the trade or business is taken into account in calculating the allowable
deduction, on a proportionate basis.   

Please explain why Turbo Tax is reducing the QBI Deduction against Net Profit and not Gross Income.  Thank you,
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Employee Tax Expert

I’m contributing to the employer portion of my solo 401k. I can contribute 20% of my net income(my income - 1/2 SE taxes)..or do I also subtract the 20% QBI amount? Thx!

If you'd like to post your question in a separate post, it will be easier to give you a more accurate answer.  
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New Member

I’m contributing to the employer portion of my solo 401k. I can contribute 20% of my net income(my income - 1/2 SE taxes)..or do I also subtract the 20% QBI amount? Thx!

I went to post the question separately and it didn't show up.  I rewrote the question and re submitted.  Now Turbo Tax gives message my account is under review and when I search my questions, they don't show up--message at top of page says the message was deleted.

Could you just answer the question here?  
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Level 15

I’m contributing to the employer portion of my solo 401k. I can contribute 20% of my net income(my income - 1/2 SE taxes)..or do I also subtract the 20% QBI amount? Thx!

The reference to "gross income" in this context is simply used to identify the portion of SE tax, SE health insurance and SE retirement deductions that are attributable to the business or businesses for which the QBI is being calculated.  It is not saying that these items are to be subtracted from gross income of the business.  The deduction has always been with respect to the income that is being passed through from the business to the individual, the net profit.
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