Advising Domestic Business Ventures: Section 199A and Qualified Business Income (“QBI”)

Share this Article
Facebook Icon LinkedIn Icon Twitter Icon
Jason B. Freeman

Jason B. Freeman

Managing Member

214.984.3410
jason@freemanlaw.com

Mr. Freeman is the founding member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney.

Mr. Freeman has been named by Chambers & Partners as among the leading tax and litigation attorneys in the United States and to U.S. News and World Report’s Best Lawyers in America list. He is a former recipient of the American Bar Association’s “On the Rise – Top 40 Young Lawyers” in America award. Mr. Freeman was named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas for 2019 and 2020 by AI.

Mr. Freeman has been recognized multiple times by D Magazine , a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service. He has previously been recognized by Super Lawyers as a Top 100 Up-And-Coming Attorney in Texas.

Mr. Freeman currently serves as the chairman of the Texas Society of CPAs (TXCPA). He is a former chairman of the Dallas Society of CPAs (TXCPA-Dallas). Mr. Freeman also served multiple terms as the President of the North Texas chapter of the American Academy of Attorney-CPAs. He has been previously recognized as the Young CPA of the Year in the State of Texas (an award given to only one CPA in the state of Texas under 40).

Freeman Law advises domestic and international ventures with corporate and tax compliance.  Clients with flow-through entity structures may need to consider the impact of section 199A.  Planning for section 199A may significantly impact a client’s bottom line and investor returns.  This resource provides additional background on the concept of Qualified Business Income (“QBI”) for section 199A purposes.

 

Section 199A was enacted as part of the Tax Cuts and Jobs Acts of 2017, P.L. 115-97 (the “TCJA”).  Its rules are currently effective for tax years beginning after 2017 and before 2026.  Qualified Business Income (“QBI”) is a central concept in the calculation of a taxpayer’s section 199A deduction.  For a more in-depth Insight on section 199A, see our other resources, such as A Practical Roadmap Through Section 199A and Advising Domestic Business Ventures: Section 199A and Flow-Through Structures.

QBI is defined as the net amount of qualified items of income, gain, deduction, and loss with respect to any trade or business of the taxpayer.  QBI specifically excludes (that is, does not include) certain items.  We can start with those items.  QBI does not include:

Moreover, QBI does not include reasonable compensation paid to the taxpayer by any qualified trade or business for services provided, nor any guaranteed payment described in section 707(c) paid to a partner for services provided to a trade or business.  QBI also does not include—to the extent provided in regulations—any payment described in section 707(a) to a partner for services provided to the trade or business.  Finally, QBI does not include any qualified REIT dividends or qualified PTP income.

Now, what items are specifically included in QBI?  QBI includes all other items of gross income, gain, deduction, and loss to the extent such items are:

There are also a number of special rules.

Section 751(a) or (b). For partnerships, if section 751(a) or (b) applies, then gain or loss attributable to assets of the partnership giving rise to ordinary income under section 751(a) or (b) is considered attributable to the trades or businesses conducted by the partnership, and is taken into account for purposes of computing QBI.

Guaranteed Payments.  Income attributable to a guaranteed payment for the use of capital[1] is not considered to be attributable to a trade or business, and is therefore not taken into account for purposes of computing QBI; however, the partnership’s deduction associated with the guaranteed payment is taken into account for purposes of computing QBI if the deduction is properly allocable to the trade or business and is otherwise deductible for Federal income tax purposes.

Section 481 Adjustments. Section 481 adjustments (whether positive or negative) are taken into account for purposes of computing QBI to the extent that the requirements of the regulations and section 199A are satisfied—but only if the adjustment arises in taxable years ending after December 31, 2017.

Previously Disallowed Losses. Generally, previously disallowed losses or deductions (including under sections 465, 469, 704(d), and 1366(d)) allowed in the tax year are taken into account for purposes of computing QBI. However, under the proposed regulations losses or deductions that were disallowed, suspended, limited, or carried over from taxable years ending before January 1, 2018 (including under sections 465, 469, 704(d), and 1366(d)), are not taken into account in a later tax year for purposes of computing QBI.

Net Operating Losses. Generally, a deduction under section 172 for a net operating loss is not considered with respect to a trade or business and therefore, is not taken into account in computing QBI. However, to the extent that the net operating loss is disallowed under section 461(l), the net operating loss is taken into account for purposes of computing QBI.

[1]Guaranteed payments for the provision of services are addressed above.

 

Business Tax Planning Lawyer

Need assistance in managing the business planning processes? Freeman Law advises clients with corporate and other entity formations and reorganizations. Restructuring entities—through conversions, mergers, and liquidations—can involve particularly complex tax and regulatory considerations. Freeman Law provides experienced tax and business counsel, helping our clients achieve their organizational goals in a tax-efficient manner. Schedule a consultation or call (214) 984-3410 to discuss your corporate structuring or business and tax planning concerns.