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Is TurboTax QBI deduction incorrect for sole proprietor with solo 401K contribution? Recent IRS guidance suggests that QBI is calculated before solo 401k contribution.

 
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Is TurboTax QBI deduction incorrect for sole proprietor with solo 401K contribution? Recent IRS guidance suggests that QBI is calculated before solo 401k contribution.

It is correct.  The 20% QBI deduction calculation compares the difference between net business income , which is 20% of your Schedule C net income, minus any other deductions attributable to your Schedule C income, (which encompasses deductions such as the solo 401K deduction, Self-Employed Health Insurance Deduction attributable to the business, and 1/2 of SE tax being deducted on your return) and 20% of your Taxable Income  (which encompasses all other deductions and income amounts you claim on your return)  Whichever amount is lower is the QBI deduction.  

Why is TurboTax using this calculation?  Although there has been recommendations that these deductions not be considered for QBI considerations, here is what the IRS decided in their final regs.  What follows comes directly from their final regulations, which you can access through the link below.  I will be quoting from pages 43 and 44 of the regulation:  Final Regulations on Section 199A deduction (PDF) (Italics are added to show IRS official procedure on this provision) :

5. Treatment of Other Deductions

Section 199A(c)(1) provides that QBI includes the net amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer. Commenters requested additional guidance on whether certain items constitute qualified items under this provision. Several commenters suggested that deductions for self-employment tax, self-employed health insurance, and certain other retirement plan contribution deductions should not reduce QBI. One commenter reasoned that qualified retirement plan contributions should not reduce QBI because they should not be treated as being associated with a trade or business, consistent with the treatment when calculating net operating losses under section 172(d)(4)(D). The commenter also suggested that while self-employed health insurance is treated as associated with a trade or business, such expense should likewise not reduce QBI for purposes of simplification in administering the rule. Another commenter suggested that QBI should not be reduced by these expenses because they are personal adjustments. One commenter also requested guidance on whether unreimbursed partnership expenses, the interest expense to acquire partnership and S corporation interests, and state and local taxes reduce QBI.

The Treasury Department and the IRS have not adopted these recommendations because they are inconsistent with the statutory language of section 199A(c). Whether a deduction is attributable to a trade or business must be determined under the section of the Code governing the deduction. All deductions attributable to a trade or business should be taken into account for purposes of computing QBI except to the extent provided by section 199A and these regulations. Accordingly, §1.199A-3(b)(1)(vi) provides that, in general, deductions attributable to a trade or business are taken into account for purposes of computing QBI to the extent that the requirements of section 199A and §1.199A-3 are otherwise satisfied. 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. 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, and state and local taxes are attributable to a trade or business as such guidance is beyond the scope of these regulations.


To be sure, the new Section 199A deduction is taking some time to understand all of the nuance involved in the deduction.  However, the good news is that it is an extra deduction on our return that was not available before

This FAQ explains in more detail  (click on the View the entire answer, and then the embedded link  How is the deduction calculated? (Not for the faint of heart!):  https://ttlc.intuit.com/replies/7019998 

[Edited 02/22/2019 15:48 PST]

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Employee Tax Expert

Is TurboTax QBI deduction incorrect for sole proprietor with solo 401K contribution? Recent IRS guidance suggests that QBI is calculated before solo 401k contribution.

It is correct.  The 20% QBI deduction calculation compares the difference between net business income , which is 20% of your Schedule C net income, minus any other deductions attributable to your Schedule C income, (which encompasses deductions such as the solo 401K deduction, Self-Employed Health Insurance Deduction attributable to the business, and 1/2 of SE tax being deducted on your return) and 20% of your Taxable Income  (which encompasses all other deductions and income amounts you claim on your return)  Whichever amount is lower is the QBI deduction.  

Why is TurboTax using this calculation?  Although there has been recommendations that these deductions not be considered for QBI considerations, here is what the IRS decided in their final regs.  What follows comes directly from their final regulations, which you can access through the link below.  I will be quoting from pages 43 and 44 of the regulation:  Final Regulations on Section 199A deduction (PDF) (Italics are added to show IRS official procedure on this provision) :

5. Treatment of Other Deductions

Section 199A(c)(1) provides that QBI includes the net amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer. Commenters requested additional guidance on whether certain items constitute qualified items under this provision. Several commenters suggested that deductions for self-employment tax, self-employed health insurance, and certain other retirement plan contribution deductions should not reduce QBI. One commenter reasoned that qualified retirement plan contributions should not reduce QBI because they should not be treated as being associated with a trade or business, consistent with the treatment when calculating net operating losses under section 172(d)(4)(D). The commenter also suggested that while self-employed health insurance is treated as associated with a trade or business, such expense should likewise not reduce QBI for purposes of simplification in administering the rule. Another commenter suggested that QBI should not be reduced by these expenses because they are personal adjustments. One commenter also requested guidance on whether unreimbursed partnership expenses, the interest expense to acquire partnership and S corporation interests, and state and local taxes reduce QBI.

The Treasury Department and the IRS have not adopted these recommendations because they are inconsistent with the statutory language of section 199A(c). Whether a deduction is attributable to a trade or business must be determined under the section of the Code governing the deduction. All deductions attributable to a trade or business should be taken into account for purposes of computing QBI except to the extent provided by section 199A and these regulations. Accordingly, §1.199A-3(b)(1)(vi) provides that, in general, deductions attributable to a trade or business are taken into account for purposes of computing QBI to the extent that the requirements of section 199A and §1.199A-3 are otherwise satisfied. 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. 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, and state and local taxes are attributable to a trade or business as such guidance is beyond the scope of these regulations.


To be sure, the new Section 199A deduction is taking some time to understand all of the nuance involved in the deduction.  However, the good news is that it is an extra deduction on our return that was not available before

This FAQ explains in more detail  (click on the View the entire answer, and then the embedded link  How is the deduction calculated? (Not for the faint of heart!):  https://ttlc.intuit.com/replies/7019998 

[Edited 02/22/2019 15:48 PST]

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Is TurboTax QBI deduction incorrect for sole proprietor with solo 401K contribution? Recent IRS guidance suggests that QBI is calculated before solo 401k contribution.

Thank you for the response, however it does not fully answer the question.  This question applies to a married, filing jointly tax return.  Total taxable income (AGI, including spouse W2 income, less solo 401K contribution) significantly exceeds the QBI.  If the 20% QBI deduction is applied to the lesser of the QBI or taxable income, shouldn't the deduction be applied to the schedule C net income?

Example:  Jack and Jill are filing a joint tax return.  Jack is a sole proprietor and has schedule C net income of $50,000.  Jack made a $15,000 solo 401K contribution, which reduces AGI as reported on 1040 line 7.  Jill has W2 income of $100,000.  Total taxable income is $135,000 (Schedule C - solo 401K + W2).  Shouldn't the QBI deduction be $10,000 (20% x $50,000 schedule C net income [since it is less than $135,000 taxable income])?
  
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Employee Tax Expert

Is TurboTax QBI deduction incorrect for sole proprietor with solo 401K contribution? Recent IRS guidance suggests that QBI is calculated before solo 401k contribution.

That is a correct calculation, so check one thing on your return if you can.  Where is the deduction for the solo 401-K contribution being reported, and are you truly a sole proprietorship or a single-member S-Corp?  There is a difference, and that difference affects how QBI is calculated here.  
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Is TurboTax QBI deduction incorrect for sole proprietor with solo 401K contribution? Recent IRS guidance suggests that QBI is calculated before solo 401k contribution.

Thank you Turbo Tax Daniel for your quick response!  I am a sole proprietor and not a single-member S-Corp.   The deduction for the solo 401-K contribution is reported on Schedule 1, line 28.  This is treated as a reduction of taxable income in line 7 of the 1040.  
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Employee Tax Expert

Is TurboTax QBI deduction incorrect for sole proprietor with solo 401K contribution? Recent IRS guidance suggests that QBI is calculated before solo 401k contribution.

@dilbertdonald TurboTax is still calculating this correctly, but for a different reason than what I originally mentioned.  Please note my edited answer with quotes from the IRS final regulations.
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Is TurboTax QBI deduction incorrect for sole proprietor with solo 401K contribution? Recent IRS guidance suggests that QBI is calculated before solo 401k contribution.

Nice job Turbo Tax Daniel.  I greatly appreciate your thoroughness in researching this question!
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Employee Tax Expert

Is TurboTax QBI deduction incorrect for sole proprietor with solo 401K contribution? Recent IRS guidance suggests that QBI is calculated before solo 401k contribution.

Thank you as well.  I was sent information in the research that backed the position you stated, so I had to go to the IRS final regulations.  That's the only way to get the real answer on this one.  It is a new provision that is still a work in progress for CPAs and tax preparers, and I'm sure there will be many more questions on this to come.
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Is TurboTax QBI deduction incorrect for sole proprietor with solo 401K contribution? Recent IRS guidance suggests that QBI is calculated before solo 401k contribution.

The final 199A IRS Regulations state Gross Income--not "Adjusted Gross Income, or Net Profit"  I think Turbo Tax is deducting 401K, HSA, and SE off Schedule C Net Profit rather than Schedule C Gross Income (Sch C Line 7).  IRS doesn't state anything about Adjusted Gross Income in the final 199A Regulations.  Please address this.
 
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Employee Tax Expert

Is TurboTax QBI deduction incorrect for sole proprietor with solo 401K contribution? Recent IRS guidance suggests that QBI is calculated before solo 401k contribution.

401K, HSA, and SE that is attributable to the business does reduce QBI income (which is what the final regs cited above discuss).  On top of that, if your only income is self-employment, the QBI is compared to the taxable income amount, which could be your self employment minus standard or itemized deductions, which further reduces the QBI deduction.  

If the 401K is from an employer (not the self-employment), then you are correct.  An HSA could be either attributed to the business if the HDHP that qualifies it is being used for the Self-Employed Insurance Premium Deduction.  But if neither are linked to your self-employment, then they should not reduce the QBI.  1/2 SE tax deduction does reduce QBI.
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Is TurboTax QBI deduction incorrect for sole proprietor with solo 401K contribution? Recent IRS guidance suggests that QBI is calculated before solo 401k contribution.

I am referring to a self employment 401k that has an elected deferral amount for the self employed person as an employee, and also a profit sharing component as the employer.  Is the elected deferral amount linked to the self employment to reduce QBI, or just the Profit sharing portion?
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Employee Tax Expert

Is TurboTax QBI deduction incorrect for sole proprietor with solo 401K contribution? Recent IRS guidance suggests that QBI is calculated before solo 401k contribution.

Yes, the self-employment 401K is linked to the business.  
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Is TurboTax QBI deduction incorrect for sole proprietor with solo 401K contribution? Recent IRS guidance suggests that QBI is calculated before solo 401k contribution.

On the Jack and Jill example you gave above it sounds like you are saying Jack's QBI is $10,000 based upon $50K self employment income.  However, when I do the calculation in Turbo Tax, the QBI is $7,000 based upon $35K SE Income ($50K- $15K Solo 401K contribution = $35K x .20 = $7,000.  Where did you get the $10,000 QBI Deduction?
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Is TurboTax QBI deduction incorrect for sole proprietor with solo 401K contribution? Recent IRS guidance suggests that QBI is calculated before solo 401k contribution.

Is it possible to provide clarification on my question about your Jack and Jill example?