Mike Tucker is a leading author for Surgent CPE, writing and presenting on a variety of incredibly valuable topics for thousands of CPAs, EAs, and financial professionals every year. Here he covers some client questions from the latest best-selling webinar, Section 199A NEW Developments: What You Need to Know to Prepare 2018 Tax Returns in Light of the IRS Final Regulations (S19U).
- If a client has an SSTB, is the answer to the question “Is the business qualified for QBI?” “No”, or is it “Yes, but it’s subject to phase out and you may be able to trust the tax software to calculate it correctly”?
If the taxpayer’s taxable income is between the top and bottom thresholds ($157,500/$207,500 or $315,000/$415,000 depending on filing status) then the taxpayer’s Section 199A deduction is gradually phased-out. With respect to tax software, once the software companies fully integrate the final Section 199A regulations into their existing software, they will generally get it right. But it is good to check at the beginning of tax season by actually doing the calculations yourself.
- Can an optometrist with eyeglass sales and shared employees have QBI on the eyeglass sales if the accounting records are not separate?
An optometrist can benefit from the Section199A deduction in such circumstances; but you must be very careful. An optometrist is an SSTB. Unless the SSTB income is less than 10% of the total income, the eyeglass sales would be treated as an SSTB. The way to avoid this is to have two separate trades or businesses. This can involve one entity with separate books and records for the optometry practice and the eyeglass sales. Another approach would be to have two separate entities each of which with separate books and records.
- What about a business that assesses computer & security needs and then installs the equipment and provides training? Is there a way to determine if this is an SSTB?
You want to make sure that this business is not in the Specified Service Trade or Business of Consulting. We would want to know much more about the facts here. What is the taxpayer really doing? Is the taxpayer selling computers and other equipment? Is the taxpayer training the customers’ employees? Consulting is separate from selling or training. Look to see how the taxpayer invoices. If the taxpayer is invoicing for consulting, consider whether to change the invoicing language to reflect what the taxpayer is really doing, which is selling equipment or training employees.
- If a vet sells food and other non-medical items, can this be reported separately so that it qualifies as QBI apart from the medical income?
We actually cover an example like this in the webinar materials that the IRS included in the final regulations. That IRS example says that providing veterinary services and selling pet food are, or at least can be, two separate businesses, assuming they have separate books and records. If you do not have separate books and records, unless a de minimis rule applies, both activities would be treated as one, which would in the aggregate be an SSTB.
- A partnership with multiple unit rental complexes would seemingly, just from a standpoint of maintenance hours, qualify as a rental activity that arises to a trade or business. A vast majority of these organizations generate a net loss. QBI loss?
This is a terrific comment. The final regulations seem to stress the benefits of making the elective safe harbor; but many clients will have net losses from their real estate investments. If you treat the activity as a trade or business, the loss offsets QBI from other trades or businesses, thereby reducing the Section 199A deduction. So, the option to make the elective safe harbor should be considered from this perspective.
- What publication do you suggest reading concerning Section 199A?
I don’t think anything beats reading the final regulations. When we put our materials together, that’s where we went. Of course, there are many good publications that have articles about Section 199A, but for us nothing beats reading the final regulations themselves, in part because they include lots of IRS composed examples, which are very insightful in terms of understanding this complex area of the law.
- Does meeting the safe harbor for rental properties cause the rental to be considered subject to S/E tax?
This is a question to which commentators give different answers. Bottom line, issuing 1099s probably can’t hurt and may help substantiating the trade or business argument.
- Does the election to group activities for passive activity rules satisfy the grouping rules for 199A, or do you have to file separate elections to group?
The passive activity loss limitation rules are separate and distinct from the Section 199A rules. Hence, grouping for Section 469 purposes has nothing to do with Section 199A. Bottom line, separately group for Section 199A purposes.
For a full overview of the final Section 199A regulations and the insights necessary to fully understand this complex guidance, register for Section 199A NEW Developments: What You Need to Know to Prepare 2018 Tax Returns in Light of the IRS Final Regulations (S19U).
Michael J. Tucker is an employee of Surgent and a consultant for the accounting firm of T.M. Byxbee Co. in Hamden, CT. He is the author of many professional articles and a veteran TV and live-seminar presenter. In addition, he heads up Surgent’s webinar efforts, where he writes and hosts many of the webinars Surgent sponsors and presents. Mr. Tucker was a professor at Quinnipiac University in Hamden, CT and worked with KPMG Peat Marwick and Deloitte & Touche. Mr. Tucker received his J.D. from New York University, his LL.M. from Georgetown University Law Center, and his Ph.D. from the University of Houston.