IRA contribution when QBI is my only income - Is this be a T-TAX flaw?

[franksrental]

Hello,

I am in a situation where I own rental properties and I meet the criteria for a QBI (200 hours a year, actively involved, etc.)  Basically it is a full time job.  The way my business is set up, is a sole proprietorship and my only income is the QBI (besides some dividends and capital gains). Based on that, my understanding is that I should be able to contribute to an IRA.  When I go to do that in TTax, I am told that my EARNED INCOME is ZERO, thus I can contribute ZERO dollars to an IRA. Basically TTax wants explicit earned income (self-employed, 1099, W2 etc.). Isn't this INCORRECT and should be fixed? 

thank you in advance

[Bsch4477]

Do you report your income on Sch C?

[franksrental]

Hello Bsch, 

That was exactly my point. If I report it on Schedule C I would call it 'explicit' earned income. In that case obviously everything works as expected. So that is a work-around: my QBI pays me $10,000, I report it on Schedule C and I can contribute.

My question was: if I don't report anything on Schedule C, shouldn't my QBI income implicitly be considered as earned income (or at least part of it)? Thus allowing me to contribute to an IRA?

[VolvoGirl]

If you don't report it on schedule C then where were you reporting it?  On Schedule E for rentals?  You only get Earned Income on Schedule C Net Profit of $400 or more.  

[VolvoGirl]

Found this FAQ.    QBI on Rental Income

https://ttlc.intuit.com/turbotax-support/en-us/help-article/tax-credits-deductions/get-qbi-deduction...

[franksrental]

thanks Volvogirl, I was inexact, I did mark the 750+ hours  (and not 200 as I posted) and the other requirements  Basically Turbotax aknowledged that I do qualify for QBI and adjusted my taxable income accordingly.

My question is again: now that I did actively participated in the QBI I should be able to contribute to an IRA, doesn't make sense?  Not according to TTax which considers that a $0 earned income. I believe that is INCORRECT.

[franksrental]

thanks VGirl, yes it is reported on schedule E by Turbotax.  My schedule C is empty.

The way TTax works is: it makes you enter you rental income then it asks if it qualifies for QBI (it is a business and not an investment). At that point it creates a deduction but nothing happens to your schedule C which stays ZERO if it was ZERO. And obviously your schedule E.

So you are basically saying if SCHEDULE C is ZERO then IRAs are not permissible? 

If that is the case, then: does that mean that the only way to do this is for my QBI to pay me so I can report a SCHEDULE C? 

[franksrental]

Bottom line: I believe the calculation of "EARNED INCOME" in turbotax is not comprehensive.

Basically to contribute to an IRA you need EARNED INCOME. It seems to me Turbotax is not considering all the earned incomes scenarios like for instance the one of QBI. What are your thoughts?

[dmertz]

More properly stated, IRA contributions must be supported by compensation.  Amounts reported on Schedule E are not compensation that will support an IRA contribution.  See Table 1-1 of IRS Pub 590-A:

https://www.irs.gov/pub/irs-pdf/p590a.pdf

[franksrental]

thanks so much Drmetz!

In simple words, the income needs to show "explicitly" somewhere as compensation.

So, Drmetz in your opinion:

Do I need to charge my QBI an amount for my services and then report it as earned income on Schedule C or another form?

[VolvoGirl]

The QBI seems to be only used to qualify for the 20% QBI deduction.  Not to count as income for other purposes.

IRS QBI Deduction

Qualified Business Income Deduction | Internal Revenue Service

IRS QBI FAQs

Tax Cuts and Jobs Act, Provision 11011 Section 199A - Qualified Business Income Deduction FAQs | Int...

[franksrental]

Thanks VG, I follow your point, but by definition of QBI is what makes your rental properties become a business and not anymore an investment. Basically their income becomes ACTIVE and not anymore PASSIVE.

I guess since it's kind of a hybrid, it's ACTIVE but still reported on schedule E, makes it so TTax can't consider it EARNED. Is that what you are saying?

[Bsch4477]

You are conflating earned income with QBI. Being QBI eligible does not make the income earned income. For example, many mutual funds with real estate holdings distribute earnings that qualify for QBI. But those distributions are not earned income. 

[franksrental]

thanks Bsch, I assumed that was the case since in order to be QBI you have to be actively involved 250 hours a year. Clearly with RE mutual funds that would not be the case. So now I get it...