QBI and 20% passthrough

Can you please explain the statement on the pass-through deducttion tab? "If your QBI is other than ... enter it as a special receipt that is taxable at ordinary income tax."

I will be a sole proprietor consultant providing personal services not related to rental real estate. Assume my gross revenue will be $150K. My total famiy income is well below any thresholds affecting QBI pass-through. My understanding is that all of my revenue is eligible for the 20% deduction. Hence I would record self-employment earnings of $150K and a QBI deduction of $30K.

Where does the taxable special receipt come into play?


FYI: for those who are interested, I found a detailed explanation of the pass-through deduction in the Tax Geek Tuesday column published in Forbes magazine:

Tax Geek Tuesday: Making Sense Of The New '20% Qualified Business Income Deduction'

Also, not directly related to QBI, but related to self-employment, I found a site that calculates the maximum profit-sharing contribution for a Solo 401k. It looks like that would be easy to calculate in a spreadsheet but this page does it for you.

Solo 401(k) Plan Maximum Contribution Calculator

If, and only if, your self-employment income as a sole proprietor is qualified business income (QBI), i.e. not employee compensation, and your taxable income is less than the threshold, then yes your deduction would be $30k.
But, I don't see how self-employment earnings can be considered anything other than compensation and hence not includible in your QBI.

The special receipt is for QBI that is not derived from rental real estate that has been included in ESPlanner as real estate.

Given the complexity and lack of guidance on this topic, I understand why you don't try to calculate anything in the program other than the applying the deduction entered by users.

Consider revising the first sentence in the "Important" warning on the Pass-Thru Deduction tab by incorporating language from your first sentence above. Specifically, the part about "neither rental real estate nor qualified self-employment income". The warning refers only to rental real estate.

Also, I read elsewhere (Bogleheads) that the 199A deduction is limited to 20% of taxable income. That's kind of a circular reference. To determine that I ran calculations without the pass-through deduction, then limited it to 20% of taxable.

I know this isn't a tax advice forum but do you know if that is correct? Assume my QBI is from nothing other than professional services, business expenses are essentially $0 (travel expenses are reimbursed directly) and MFJ gross income is well below phase-out thresholds.

Edit: with a web search I found an answer. Because our MFJ total income is less than $315, there is no limit on the 20% deduction.
Navigating The TCJA’s Pass-Through Deduction

Hmm... re-reading your comment ("... i.e. not employee compensation, ...") does that mean the amount I pay myself cannot be included in QBI calculations for deduction purposes? My understanding is that is true for business ownership forms other than Sole Proprietor. That is, an S-Corp pays me a wage which is an expense to the corp, reducing QBI eligible for pass-through deduction. But, in a sole proprietorship, all (non-RE) income is QBI.

I revised the last sentence because I don't think that self-employment earnings can be QBI. See 26 U.S. Code § 199A (c)(4)(A): https://www.law.cornell.edu/uscode/text/26/199A

I think what you're referring to is that the QBI deduction cannot exceed taxable income.

And I edited mine by referring to your first sentence in the same reply. I had indicated the wrong sentence in my initial post. The revised entry is italicized. (HTML markup on this site apparently does not support strikethrough.)

A recent explanation in Forbes' Tax Geek Tuesday column says self-employment income does qualify, for taxable income < $315K.

I can't find anywhere in 26 U.S. Code § 199A - Qualified business income: https://www.law.cornell.edu/uscode/text/26/199A, that says all income from a sole proprietorship is QBI.

Can you point me to the applicable section?

Also, I don't see where Nitti says self-employment earnings are qualified business income.

As for interpretation of the code I must admit I'm dependent on the assessment of others. No regulations have been published so it's all subject to change based on the interpretation of the regulators.

Nitti's interpretation seems pretty clear, below. I would be subject to the limit of 20% of taxable income before the 199A deduction is applied. (That's simplified for my case because I have negligible LTCG and nothing related to coop dividends.)

Q: That does sound like a bit of a problem. But for now, we should just assume that lawyers, doctors, accountants, etc... are out and can't get the deduction?

A: You should know better than that. Nothing is that simple. Listen up: even if you're in one of those prohibited "specified service businesses," you can claim the 20% deduction, provided your taxable income is less than $315,000 (if you're married filing jointly, $157,500 for all other taxpayers).

OK, I think this is definitive.
Sole proprietors cannot deduct wages paid to them self as a business expense, "2017 Instructions for Schedule C", Page C-9, Line 26. Therefore, sole proprietorships are not subject to the "reasonable compensation" requirement of 26 U.S. Code § 199A (c)(4)(A).
Hence, the entire net profit from a sole proprietorship is QBI and the deduction is 20% of QBI if your taxable income is under the threshold.

I see that as the reason there's lots of traffic on different fora discussing the benefits of changing from LLC or S-Corp to Sole Proprietor. As an S-Corp, QBI is what's left after paying yourself a wage. Hence, a Sole Proprietor gets a bigger deduction for the same income (subject to income limits, etc.).

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