What does the new 199A deduction mean for real estate professionals?

IRC Section 199A or “QBID” Qualified Business Income Deduction is a new deduction available to “pass-thru” entities

The QBID aims to provide a substantial tax benefit to individuals with “qualified business income” from a partnership, S corporation, LLC, or sole proprietorship. This income is sometimes referred to as “pass-through” income.

The deduction is (very roughly) equal to the lesser of 20% of your qualified business income (think net taxable income from your business) or 20% of your overall taxable income as calculated on your 1040.

More Specifically

The deduction is 20% of your “qualified business income (QBI)” from a partnership, S corporation, or sole proprietorship, defined as the net amount of items of income, gain, deduction, and loss with respect to your trade or business. The business must be conducted within the U.S. to qualify, and specified investment-related items are not included, e.g., capital gains or losses, dividends, and interest income (unless the interest is properly allocable to the business). The trade or business of being an employee does not qualify. Also, QBI does not include reasonable compensation received from an S corporation, or a guaranteed payment received from a partnership for services provided to a partnership’s business.

The deduction is taken “below the line,” i.e., it reduces your taxable income but not your adjusted gross income (AGI). It is, however, available regardless of whether you itemize deductions or take the standard deduction.

In general, the deduction cannot exceed 20% of the excess of your taxable income over net capital gain. If QBI is less than zero it is treated as a loss from a qualified business in the following year.

See our full presentation we presented to Fremont Bank on this topic to learn more, or contact us to discuss your questions.