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DLK59
Returning Member

QBI question regarding previous employer

I am going to post this question over here hoping to get an opinion.  At the end of Oct 2023 I retired from my employer as a member of the executive team over manufacturing.  As a member of the executive staff, my role included the operational end (costing) of annual budgets, setting the capital plan, developing continuous improvement plans, and personnel management of the plant leaders and operations corporate staff.  Beginning in November of 2023, I began consulting with my previous employer through my sole proprietor LLC.  My services, billed by the hour, are for project specific assignments that are manufacturing or technical in nature.  My assignments are provided to me by my successor, the current VP of Manufacturing.  I received a 1099-NEC for my services in 2023.  In no way am I providing services related to my previous and only role with this company and I do not report or take direction from the CEO as I previously did.  My role is a combination of project management/corporate engineering and strictly project based.  I am only working part time and I determine my schedule.  There are no other clients at this time.

 

At the moment I claiming a QBI deduction on my business income while being within my 3 year timeframe.  Other than personal investment income, my primary source of income was a W-2 and a 1099-NEC from the same company.  Am I raising the risk of an audit if the deduction is claimed?  Does anyone on this discussion group have an opinion on claiming the QBI deduction?   I will file tomorrow.

 

Thank you,

DLK59

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3 Replies

QBI question regarding previous employer

REG 1.199A-5(d)(3)

(i)Presumption. Solely for purposes of section 199A(d)(1)(B) and paragraph (d)(1) of this section, an individual that was properly treated as an employee for Federal employment tax purposes by the person to which he or she provided services and who is subsequently treated as other than an employee by such person with regard to the provision of substantially the same services directly or indirectly to the person (or a related person), is presumed, for three years after ceasing to be treated as an employee for Federal employment tax purposes, 

you state that the services you now provide are substantially different than what you did as an employee., therefore, you should qualify for the QBI. Various rules could limit the deduction. Form 8995 is used to compute the deduction. Getting a W-2 and 1099-NEC from the same employer in the same year may increase your audit risk but by how much no one can tell you. 

 

(ii) Rebuttal of presumption. Upon notice from the IRS, an individual rebuts the presumption of this section by providing records, such as contracts or partnership agreements, that provide sufficient evidence to corroborate the individual's status as a non-employee.

DLK59
Returning Member

QBI question regarding previous employer

Thank you Mike for the prompt reply given this is a last minute question.  The last time I did this type of work through my LLC, I was between PE deals and this rule did not exist so I was not prepared for the question.  I will talk to them about additional documentation but given I provided almost a year notice of my retirement, my replacement was hired, and now that individual is doing all my previous duties, I feel comfortable also.  My work is continuing in 2024 with them so want to get this right to maximize deductions while this rule lasts.

 

 

iibeach
New Member

QBI question regarding previous employer

I finished preparing my son's 1040 today and his situation is similar to yours (executive position, consulting in the same field he left) except that he resigned instead of retiring. I did take the QBI and, for what it's worth...the TT "thermometer" that shows your predicted audit risk says his is very low. Of course there are other factors that impact that risk. 

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