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The QBI deduction calculation does not seem correct. QBI is being reduced by deductible portion of SE tax

I would expect that the QBI used to determine the 20% deduction is equal to the business net profit on Schedule C. However, on the QBI component worksheet and the QBI deduction simplified worksheet the net profit has been reduced by the deductible portion of my self employment tax. This does not seem correct

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15 Replies
DanielV01
Expert Alumni

The QBI deduction calculation does not seem correct. QBI is being reduced by deductible portion of SE tax

It is correct.   The 20% QBI deduction calculation compares the difference between 20% of the QBI (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 other deductions and income amounts)  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 2/11/2019 12:39 PST]

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The QBI deduction calculation does not seem correct. QBI is being reduced by deductible portion of SE tax

While I appreciate the quick response, after several hours of research of IRS FAQ's, regulations and various posts, I cannot find a single thing that supports this position. So I remained confused
DanielV01
Expert Alumni

The QBI deduction calculation does not seem correct. QBI is being reduced by deductible portion of SE tax

I understand, and it's a very complicated calculation.  I'll try to give two examples.  In example 1, you are self-employed and earned 40000 of net self-employment income.  Your AGI (which includes your se tax deduction, and se health insurance deduction) is $32,000.  Your QBI deduction is the lesser of 20% of AGI ($6400) or 20% of your qualified business income. (8,000).  This is why your QBI deduction is $6400.  
Example 2.  Same amount of self-employment, but you also have a job paying $10,000 in wages reported on a W-2.  Since now your AGI is $42,000, you will get the full 8,000 of QBI deduction.

Your deduction will never be more than 20% of your taxable income.  That having been said, it is quite a nice deduction for the self-employed and pass-through entities.  I hope this helps you.
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The QBI deduction calculation does not seem correct. QBI is being reduced by deductible portion of SE tax

Thanks for the response.  I fall under example 2 with an AGI higher than my QBI (profit from Schedule C) due to W2 wages for my spouse. However, the TurboTax calculation reduces both AGI and my QBI by the deductible portion of the SE tax. Based on your example I would think only AGI should be reduced by that amount and I should get a 20% deduction for the entire business profit on Schedule C.

The QBI deduction calculation does not seem correct. QBI is being reduced by deductible portion of SE tax

To clarify, AGI was not reduced by the deductible portion of the SE tax, rather the deductible portion was included in the determination of AGI. But my QBI was reduced by that amount in the TurboTax calculation.
DanielV01
Expert Alumni

The QBI deduction calculation does not seem correct. QBI is being reduced by deductible portion of SE tax

@toddrub46  TurboTax is calculating the QBI correctly, but for a different reason than I originally posted.  Please see my edited response.
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The QBI deduction calculation does not seem correct. QBI is being reduced by deductible portion of SE tax

Thanks Daniel

The QBI deduction calculation does not seem correct. QBI is being reduced by deductible portion of SE tax

I received a notice from IRS saying I made an error on the QBI deduction.  TurboTax Calculated the QBI deduction differently than IRS.  IRS took my AGI on line 7, Form 1040 and deducted the standard deduction of 12,000. Then they multiplied that result by 20% and inserted that on line 9 on the 1040 form as the QBI deduction.    Turbotax came up with the QBI deduction by taking my Schedule C, line 31 profit and deducting 1/2 self employment tax from the profit.  Then that result was multiplied by 20% and inserted into line 9 on  Form 1040. 

Now I owe hundreds of dollars and interest to the IRS.  Intuit:  What do you have to say about this?  Who made the error? Please explain.

The QBI deduction calculation does not seem correct. QBI is being reduced by deductible portion of SE tax


@atomshlaom wrote:

Now I owe hundreds of dollars and interest to the IRS.  Intuit:  What do you have to say about this?  Who made the error? Please explain.


You are going to have to contact Customer Support with respect to this issue (in terms of the accuracy guarantee as it relates to the specific calculation).

 

See https://ttlc.intuit.com/community/using-turbotax/help/what-is-the-turbotax-phone-number/00/25632

The QBI deduction calculation does not seem correct. QBI is being reduced by deductible portion of SE tax

@DanielV01 , can we get an update to  @atomshlaom 's post regarding the difference between the IRS calculation and TurboTax's calculation, as it relates to TY2019? How is TT now calculating QBI? Thx.

(fyi, @ColeenD3 )

DanielV01
Expert Alumni

The QBI deduction calculation does not seem correct. QBI is being reduced by deductible portion of SE tax

@cbco7  Regarding the question and response you see surrounding @atomshlaom's post, that was an issue in the 2018 version of TurboTax.  I can say that another expert will soon give you additional information on this year's edition.

 

 

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DavidS127
Expert Alumni

The QBI deduction calculation does not seem correct. QBI is being reduced by deductible portion of SE tax

TurboTax is correctly calculating the QBI deduction for Schedule C in 2019 using the IRS rule described in Q6 of the IRS FAQ website at this link a portion of which is pasted here with emphasis added:

 

“A6. 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.”

The question about deducting half of your Schedule C self-employment tax is answered for Q21 at that same IRS FAQ websi..., a portion of which is pasted here with emphasis added:

 

“A21. ……….In addition to the profit or loss from Schedule C, QBI must be adjusted by any other items of gain or deduction related to the business, including but not limited to gains from Form 4797, the deductible part of self-employment tax, self-employed health insurance, self-employed SEP, SIMPLE, and qualified plan deductions.

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The QBI deduction calculation does not seem correct. QBI is being reduced by deductible portion of SE tax

@DavidS127 thank you for the reply. Does the 2019 TT Home and Business edition generate a worksheet for the QBI calculation that you described, and if so, what is the correct search phrase to use in Forms view? The two worksheets with "QBI" in their names do not appear to contain various items with the calculation. Thank you.

DavidS127
Expert Alumni

The QBI deduction calculation does not seem correct. QBI is being reduced by deductible portion of SE tax

Yes, you can see the calculation of QBI income and deduction for your Schedule C in the Forms mode of your TurboTax Home and Business (icon at top right in blue bar).

 

In Forms mode, find the schedule Schedule C, and then scroll down past the Part V to find the Qualified Business Income Deduction Smart Worksheet.  Questions E-K in that smart worksheet makes the QBI income calculations for that business. 

 

Those "smart worksheet" amounts "flow" to the separate QBI Component form for that business, and then to the QBI Ded Summary form to make the final QBI deduction calculations.

 

@cbco7

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