QBI Deduction - Side Gig Former Employer

[investing444]

I left full time employment with a former employer in February 2016 (i.e., no W-2 since 2016), but I have provided part time consulting to the former employer since leaving in February 2016 until present (2020; receive 1099-MISC). I have full time job elsewhere. Do I qualify to take the QBI Deduction on 2019 taxes (i.e., am I past the the 3 year QBI limit)? 

[VictoriaD75]

It depends. If you are considered a Specified Trade or Business (SSTB), you may be subject to an income limitation on the QBI deduction. 

The W-2 wages considered in the QBI deduction are wages paid to employees by you as the business owner. This does not include wages you received prior to becoming a consultant. Depending on the nature of the work, as a consultant, it is likely that you are considered an SSTB. 

An SSTB is a trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners. The principal asset of a trade or business is the reputation or skill of its employees or owners if the trade or business consists of the receipt of income from endorsing products or services, the use of an individual's image, likeness, voice, or other symbols associated with the individual's identity, or appearances at events or on radio, television, or other media formats. The SSTB exception does not apply for taxpayers with taxable income below the threshold amount and is phased in for taxpayers with taxable income above the threshold amount. For 2018, the threshold amount is $321,400 for a married couple filing a joint return, or $160,700 for all other taxpayers. The threshold amounts will be adjusted for inflation in subsequent years.

The SSTB limitation discussed does not apply if a taxpayer's taxable income (before the QBI deduction) is at or below the threshold amount, the deduction is the lesser of:

1. 20 percent of the taxpayer's QBI, plus 20 percent of the taxpayer's qualified REIT dividends and qualified PTP income' or
2. 20 percent of the taxpayer's taxable income minus net capital gain.

TurboTax will calculate your QBI deduction amount.

QBI Deduction

[ericinmaryland]

It is my understanding that converting to 1099 for your current/last employer disallows QBI

[MaryK4]

Yes, that is correct- former employees doing similar work but as an independent contractor are automatically disqualified.

@ericinmaryland

[RTNJ]

Hi 

If I have a w2 job  with another employer who pays me income1 (salary )

and 

I also open up my own LLC  and I work for my LLC  that produces extra income2

Does  QBI threshold  limits consider only the income from LLC (or)income from my other  job also will 

[Hal_Al]

Q. Does  QBI threshold  limits consider only the income from LLC (or)income from my other (W-2) job also?

A. Only the LLC (your business).  The W-2 job is not business income.

[RTNJ]

Reference to this article shows otherwise . please correct me if I interpret it incorrectly .

This link  states that - to qualify for QBI  , total taxable income ( not just business income )  should be under a certain threshold .  These deductions are applied on total taxable income    (  after standard deductions )  only if it falls under threshold limit . Kindly confirm once  please 

https://www.nerdwallet.com/article/taxes/qualified-business-income-deduction

[Hal_Al]

Yes, you interpret it incorrectly .

For YOU to qualify to claim the QBI deduction,  your total taxable income ( not just business income )  must be under a certain threshold .  

But the  deduction, itself is calculated on only your business income. For for example, a retired person with a $60,000/year pension and a sideline making him $5000 could only calculate the QBI on the$5000.  The same applies to you.  You can't count you W-2 income in the QBI calculation.

The opposite example is a guy with a $5000 side line and and $165,000 retirement would not be allowed  any QBI deduction because his total income is too high.

[RTNJ]

Thank you . 
last follow up questions . I

for married and filing jointly. Let’s say 

a)If our combined wages from w2 of other employers is  500k and 

b) our own business net income is  300k 

we can completely claim 20% of 300  as a deduction (I.e 60k is non taxable ) and only 240 k is taxable .  Since 300k is still with in threshold limit . Is that right  

[Hal_Al]

Q. we can completely claim 20% of 300  as a deduction (I.e 60k is non taxable ) and only 240 k is taxable .  Since 300k is still with in threshold limit . Is that right?

A. No, even though your business income is only $300K,  your total income is over the $329,800 limit for joint filers to qualify.

[RTNJ]

I am confused . In the previous message you mentioned 

“You can't count you W-2 income in the QBI calculation.”

so how are you saying my total income is over 329,800 

In my example :

our combined  w2 income from other job from other employer  is 500k 

and our business income is :300k

[Hal_Al]

Q. so how are you saying my total income is over 329,800? In my example :

our combined  w2 income from other job from other employer  is 500k and our business income is :300k

A. $500,000 + 330,000 = $800,000  which is more than $329,800.

[RTNJ]

Understood . Thanks for response . my  last question . Below

In this link below  instructions on form 8995 wages are not considered QBI ( so in my example 500k are wages and they should be not considered as QBI) . Isn’t it 

https://www.irs.gov/instructions/i8995#en_US_2021_publink100020789

QBI doesn’t include any of the following:

• Wage income -except “Statutory Employees” where Form W-2, box 13, is checked

[Hal_Al]

You say you understood, but you keeping repeating the same question.  So, I must not be explaining it very well.

One more try:

1. Wages are not "business income" and are not included in calculating the QBI deduction.

2. Wages are part of your  total income and are included when determining whether you are eligible to take a QBI deduction. If you are eligible, the QBI deduction is 20% of business income, not 20% of total income. 

[RTNJ]

All clear now . Thanks a lot for all your answers . Really helpful 😊😊