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Hello and welcome to the session this is Professor for hat in this session we’re going to be looking at qualified business income deduction and this is section 199 a of the new tax cuts and Jobs Act of 2019 this topic has covered an income tax course it’s definitely covered on the CPA exam starting 2019 and it will be covered on the enrolled agent exam as always I would like to remind my viewers that shoot to connect with me on a professional level if you have a LinkedIn account please connect with me if you don’t have a LinkedIn account 
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in a partnership or you can operate as an S corp so notice here what happened is this the C chord has a 21% flat rate what about the other ones the other ones they are a different form of business and what happened is they’re going to be taxed at a higher rate because then that’s that those are tax flow entities the income is gonna flow to the tax payer therefore what the government said to level the playing field we should give this group which is less it doesn’t have to be this specific those three groups but any non corporate tax payer any none C corporate tax payer the ability to have a deduction to make the tax rate comparable to the 21 percent because the C code break is flat 21 percent so this is the overall idea is to level the playing field between the C Corp and the non Corp businesses okay so under the tax cuts and Jobs Act of 2017 section 199 a this is the this is the code section was added to the Internal Revenue Code so this is basically a new such new section it allows up to 20% deduction on qualified business income of a non corporate tax payer this deduction is potentially available to individual trusts and state any non corporate any non corporate could potentially have this deduction so what happened if you are an owner and a partnership or an owner an S corporation what’s gonna happen you’re gonna receive a k1 and on the k1 they will tell you what is your income and you will be able to figure out your qualified business income deduction keep in mind this is temporary from 2018 to 2025 and this deduction has a lot of definition limitation and special rules which we’ll be going over in this session not necessarily everything especially we will not be covering all the limitation here and from a from a tax perspective from a form perspective this is where you find qualified business income deduction on the on the 1040 notice it’s right before taxable income so it’s after hei so this deduction is from AGI so notice adjusted gross income is right here line seven and it’s on line nine you have your qualified business income deduction then this is your last deduction before you get to your what’s called that nuts called before you get to your taxable income okay so let’s go ahead and start to dive into the deduction for qualified business income what are the general rule okay the deduction for qualified deduction for qualified business income is twenty percent of qualified business income generated through sole proprietorship a partnership or an S corporation basically those are non corporate taxpayer and hopefully you know those are tax flow entities it means the income goes from the business to the taxpayer okay so what is the general deduction this is the general rule the deduction is the lesser of twenty percent of qualified business income or twenty percent of modified taxable income obviously those two terms need to be ma need to be defined what is qualified business income and what’s modified taxable income in we’re gonna have to we’re gonna have to do so in the next few minutes okay there are three limitations to this twenty percent deduction the first limitation it’s an overall limitation based on modified taxable income basically as long as you modify taxable income is below a certain amount you’re good but once you’ve modified taxable income exceed a certain amount then we have we have different limitation then another limitation that applies to high income taxpayer and the third limitation to applies to certain type of service businesses so you have three type of limitation for the qualified business income in this session we only covered this one we don’t cover two and three the second and the third limitation only applies when the taxable income before before the qualified business income exceeds three fifteen for married filing joint return or 175 500 for all other taxpayers again we don’t have to worry about this in any case section 129 may not exceed 20% of the taxpayer modified taxable income so the maximum will be deduction that you would receive is 20% of modified taxable income so let’s go ahead and define what do we mean by modified taxable income would do me buy qualified business income so what is your modified taxable income well your modified taxable income is your taxable income before the deduction for qualified business income so it’s your taxable income not including this deduction and we have to take out of your taxable income produced by any net gain what do we mean by net capital gain it include both capital gain which is the access long term capital gain over long short term capital losses and any qualified a dividend income so if I have to put this on a formula I would say taxable income and this not including not including qualified business income you don’t include this then you take out of it long-term capital gain and you take out of it qualified dividend and this is what’s gonna give you what’s called modified taxable income and this is what’s gonna give you modified taxable income so this is how you come up with modified taxable income okay so this so in case you are looking what is modified taxable income hopefully I just told you how you compute your modified taxable income then the second thing we’re gonna have to compute obviously is qualified business income what is the qualified business income qualified business income is defined as ordinary income let’s ordinary deduction that’s sure it’s revenue minus expenses what is your revenue from the business minus your expenses from a business from a qualified trade or business now we need to define what’s a qualified trade or business conducted in the United States by a taxpayer so it has to be conducted in the US so what is qualified business income well it also include distributive share of this amount for each partnership or S corporation interest held by the taxpayer so it does include that qualified business income does not include what does execute so this is important certain type of investment income such as capital gain or capital losses that’s excluded dividend that’s excluded interest income unless properly allocable to a trade or business such as lending if you’re in the lending business certain other investment income other investment income note it does include the reasonable compensation paid to a taxpayer with respect to any qualified trade or business so your qualified business income does not include what’s called reasonable expectation or it does not include guaranteed payment made to a partner for services rendered so if we give guaranteed payment that’s not included in the qualified business income we have to take it out of qualified business income okay what is qualified trade or business because that’s another definition that came up what’s qualified trade or business for taxpayer who fall below critical taxable income threshold which we talked about established earlier you know the 315 and 175 a qualified the qualified trade or businesses we we brought in general include any trade or business other than providing services as an employee the taxable income threshold we talked about earlier it has to be below 315 and 175 504 all other tax payers if you are not married filing jointly sorry as a result the deduction is available to sole proprietary independent contractor and non corporate owners of S partnership and LLC’s so all these businesses as long as their income is below this ml and as long as they don’t belong to a specific group of businesses which we’re going to talk about later then they qualified it’s qualified trade high income taxpayer who are engage in the business involving the performance of services and certain things specified field or subject to certain restriction we’ll talk about this later just know that it include all businesses except few businesses which we’ll talk about later when we’ll talk about the limitation okay tax paid with multiple businesses what happened if you have more than one business and many tax payers they have more than one business the deduction for qualified I’m so sorry the deduction for qualified business income must be determined separately for each qualified trade Orban so you treat each one separately then you then this independent calculation then combined to becoming qualified business income amount then these combined amount then compared to the overall modified taxable income so you just add them all together then you compare them to the overall take a look at this example assume a B is a single taxpayer who does not itemized deduction and operates a sole proprietorship over the year her business generated one hundred and forty thousand of business income and forty thousand of deductible expenses in two thousand of interest income from her business deposit she has no other reason sources of income Abby’s AGI is 102 okay so let’s compute her modified taxable income let’s compute her or let’s start with qualified business income qualified business income what is the qualified business income well it’s one hundred and forty thousand minus forty thousand equal to one hundred thousand simply put I don’t include the interest as qualified business in so that’s her qualified doesn’t sync up right let’s let’s go a step further and multiply it by 20 percent that’s 20,000 the next thing I need to compute is our modified taxable income or modified taxable income how do we compute the modified taxable income we’re gonna take adjusted gross income which is we are giving adjusted grossing adjusted gross income minus the standard deduction which is because this individual says it’s single the standard deduction is 12,000 equal to 90,000 now we are not given any information we’re not we’re not given any capital gain here therefore her modified taxable income is $90,000 multiply this also by 20% and that’s gonna give us 18,000 now what we have to do is to choose between the lower of 20% of modified taxable income or 20% of qualified business income obviously modified taxable income is lower which is 18,000 therefore what we do is we’ll take adjusted gross income which is 90,000 minus 18,000 which was gonna give us 72,000 and that’s the taxable income so simply put what happened is this additional 18,000 qualified business income deduction gave the taxpayer a lower taxable income by 72,000 this is the benefit of the qualified business income deduction and this is the solution for it okay assume the same fact in example 10 except that Abby has has no interest income but two thousand of qualified dividend income okay no interest but two thousand of qualified dividend Abby’s hei remain 102 in her taxable income before the qualified business income is same thing 102 minus 12,000 however Abby’s modified taxable income is now 88 why because what’s gonna happen is we’re gonna take taxable income before the deduction then we’re gonna subtract net capital gain that include qualified income therefore we’re gonna deduct 2,000 therefore her modified taxable they equal to 88 now we’ll take 88 times 20% and 100,000 which is the qualified business income times 20% that’s 20,000 obviously this should be less this shouldn’t be seventeen thousand six hundred we’re gonna take this as a deduction so it’s gonna be ninety thousand minus seventeen thousand six hundred which are taxable income a B stacks of all income will be seventy-two thousand four hundred let’s take a look at this example in 2018 Megan Carlson is a saying of tax payer report qualified business income of one hundred and ten and modified taxable income of 78 what’s the qualified business income deduction well guess what we’re given both numbers of you’re giving both numbers hopefully you’ll get something like this on the CPA when they’re starting the destice well some people take 110 in seventy eight thousand are given you both are given you qualified business income and they’re giving you the modified taxable income so this is qualified business income and this is modified taxable income and I will multiply this by twenty percent I multiply this by twenty percent and I know this is gonna be lower therefore if I take 110 times 20% that’s gonna give me twenty two thousand if I take seventy-eight thousand times twenty percent it’s gonna give me fifteen thousand six hundred therefore it’s fifteen thousand six hundred now let’s take a look at another example Charlotte is a partner and sales manager for city partners a domestic business that is not specified trade that’s not a specified service trade or business so it’s but qualifies basically during the tax here she receive a guarantee payment of 250 from the partnership for her services to the partnership is that sales manager in addition a distributive share of Sidi partnership ordinary income was one hundred and seventy five thousand what is the qualified business income so they’re asking us what’s the qualified business income well guess what you have to know that guarantee business payment not qualified business income let me go back and show you you wanna make sure you memorize this okay qualified business income does not include capital gains capital losses dividend interest income certain certain other investments reasonable compensation guaranteed payment you want to make sure you memorize this you know that those are not included in qualified business income so what’s the hurt one what’s the qualified business income the qualified business income is only the amount for from the K one which is one hundred and seventy five thousand okay so basically what’s gonna happen at some point she’s gonna come up with 175 times twenty percent then she’s gonna figure out her modified taxable income times twenty percent take the lower of these two and that’s gonna be the qualified business income deduction now I’m trying to simplify this as much as possible I did not get to the limitation yet eventually eventually I will get to the limitation in the next sessions 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