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cottrell73
New Member

Why is my QBI deduction showing as <10% and not 20% for a covered profession under the first tier income limit? It is off by $5400!

For an AGI of approximatedly $47,000 for a self-employed profession included in the QBI deduction by tax code (insurance agent) Turbo Tax is only giving a $4190 deduction instead of $9500.  How do I get this fixed????

1 Reply
DanielV01
Employee Tax Expert

Why is my QBI deduction showing as <10% and not 20% for a covered profession under the first tier income limit? It is off by $5400!

It is how QBI is calculated if all of your income is self-employment.  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, including your standard or itemized deductions), and whichever amount is lower is the QBI deduction.  

I'll make your example $50,000 to make the math a bit easier to follow.  Your net Schedule C is 50,000, and your SE tax is $7500 (for arguments sake), so 1/2 of the SE tax is 3750 and subtracting it from that income is 46250, which makes the first half of the formula a QBI deduction of $9250.  However, you are married filing joint with no other income, so after your 24,000 standard deduction your taxable income is 22250.  Your QBI will be 4450, 20% of your taxable income.

To understand why this is, I will reference 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 

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