A complete list of what constitutes qualified property for the 199A tax deduction. Remember, ask a local tax professional for assistance if you have any questions about your federal business taxes.

Qualified property is defined as meaning tangible, depreciable property which is held by and available for use in the qualified trade or business at the close of the tax year, which is used at any point during the tax year in the production of qualified business income, and the depreciable period for which has not ended before the close of the tax year (Code Sec. 199A(b)(6)(A)). Qualifying tangible depreciable property would include, for example:    

NOT included would be Sec. 197 intangibles such as:

• MACRS property acquired in Sec 1031 Exchange or involuntary Conversion - Split Basis:

   o Exchanged Basis - Date placed in service will be date the relinquished property was placed in service.

   o Excess Basis – Date the replacement property was placed in service.

• Acquired in Sec 1031 Exchange or involuntary Conversion – Electing Out of Split Basis - Date the replacement property was placed in service.

Generally means cost or other depreciable basis on the date placed in service. (Code Sec. 199A(b)(6)(B)(3)).

It appears, although generally trivial, that when using the home office actual expense method, the home office can be included in UBIA since per Reg 1.199A-2(a)(3) it is “determined and reported” on the tax return.

Where a taxpayer is a partner or shareholder the partnership or S corporation must allocate the UBIA among the shareholders and partners in the same manner as depreciation is allocated to the shareholder or partner. If the qualified property does not produce tax depreciation during the year (for example, property that has been held for less than 10 years but whose recovery period has ended):

For this purpose the term depreciable period means the period beginning on the date the taxpayer first puts the property in service and ending on the later of:

Example #7 – Retail Store - Gary has a retail store that he operates in rented retail space. His property that he used in his business during 2023 is listed in the table above.When looking at the example, remember that the value we use for “qualifying 199A property” is the unadjusted basis. So, depreciation and expensing are ignored for this purpose.  However, property counts as “qualifying property” within its depreciable life or 10 years, whichever is greater. Items 1, 4, 5 and 7 are past their useful lives but only #1 has been in service for a period greater than 10 years. So, all of Gary’s property except item #1 counts as “qualifying 199A property”. Thus, when the wage limitation is computed for Gary, the qualifying property used in the computation will be $18,275.

UBIA Example #8: Richard is a 25% shareholder in an S-Corporation that is not a specified service trade or business. During 2023 the S-corporation had $30,000 of qualified property it used during the year.  Thus, when the wage limitation is computed for Richard, the qualifying property used in the computation will be $7,500 (25% of $30,000).

UBIA Example #9: Joyce owns a non-residential rental property (39-year recovery period). She originally purchased the property 12 years ago for $500,000 and the land value was $200,000. $300,000 ($500,000 - $200,000) would be the qualified property value for Joyce’s rental property.

Sec 199A also includes qualified REIT dividends as pass-through income. However, for this purpose qualified REIT dividends do not include any portion of a dividend received from an REIT that is a capital gain dividend or qualified dividend. On Form 1099-DIV the eligible amount is in box 5.

The term "qualified publicly traded partnership income" means, with respect to any qualified trade or business of a taxpayer, the sum of:

The regulations make it clear that the 199A computation for REITS and publicly traded partnerships (PTPs) is separate from that of the other 199A computations and has no effect on the other’s computation. Thus, should the QBI from REITS and PTPs be negative, the result will be a separate loss carryover and will have no effect on the taxpayer’s computation of the business entity 199A deduction.

Cooperatives must provide the necessary information to their patrons on Form 1099-PATR or an attachment to help eligible patrons figure their deduction. See the Instructions for Form 1120-C, U.S. Income Tax Return for Cooperative Associations, for rules applicable to agricultural and horticultural cooperatives

So even though a taxpayer’s 1040 taxable income is above the phaseout cap, they can still get a Sec 199A deduction for a QTB so long as the business entity paid wages and/or has UBIA from qualified property. Those are the elements that make up the wage limitation.

When a taxpayer’s 1040 taxable income exceeds the phaseout cap the preliminary QBI deduction is limited to the lesser of 20% of QBI or the wage limitation. The wage limitation is the greater of:

However, this limitation is phased in for taxpayers whose taxable income is between the threshold and the cap, resulting in a rather complicated calculation. So, we will study the limitation as it applies to taxpayers whose taxable income exceeds the phaseout cap and rely on the worksheet for those with 1040 taxable incomes between the threshold and the phaseout cap. We start with a taxpayer that is an S corporation stockholder:

Where a taxpayer has an interest in a pass-through activity, the K-1 from the activity, along with any required attachment, will provide the necessary data to compute the 199A deduction for the activity.

If you are the tax preparer receiving a K-1, as opposed to the one who is preparing the K-1, you are not responsible for making the decision of whether the business entity is a qualified trade or business, or a specified service trade or business.Those determinations are made at the entity level, and you as the preparer simply use the information provided with the K-1.The K-1 or an attachment to the K-1 should show the owner’s (stockholder, partner, or beneficiary) share of the information required to compute the 199A deduction for that particular entity.

If the K-1 or attachment doesn’t include the owner’s (taxpayer’s) share of the required data, the owner’s share will be presumed to be zero. (Reg. Sec. 1.199A-6(b)(iii))

Instructions: This worksheet is designed to determine the preliminary 199A deduction for a single business activity. However, it cannot be used for specified service trades or businesses. The results of this worksheet must be combined with the results from other businesses and flow-through income of the taxpayer to determine the combined preliminary Sec 199A deduction for the taxpayer. The combined preliminary Sec 199A deduction is further limited to 20% of the adjusted taxable income of the taxpayer.

CountingWorks has a separate worksheet for use with specified service trades or businesses. Although we believe the worksheets compute the deduction correctly, ultimately, the IRS worksheets or forms will take precedence.

Observations:

Of course, there are negatives: Paying SE tax instead of only the employee share of the FICA and giving up whatever fringe benefits the employer might offer.

At the end of the day, though, whether an individual is an employee, or an independent contractor comes down to the facts and circumstances of the situation, and not which status the individual prefers.

Congress, rather than having a step function, established a gradual transition to the W-2 limitation between the threshold ($364,200 for MFJ, $182,100 for MFS or others for 2023) and the cap ($464,200 for MFJ, $232,100 for MFS and others for 2023).

In order to do this, they had to phase-out the 20% of QBI deduction and phase-in the W-2 limitation. This computation is best understood by example.

QBI Reductions for AGI Adjustments - The final regulation §1.199A-3(b)(1)(vi) (page 43-44 final regs) specifies that solely for the determination of QBI from a trade or business, the following are included as deductions from gross income when determining the activity’s QBI.

Where an individual has multiple activities with qualified business income (QBI) the foregoing adjustments to AGI are proportionately allocated among the business activities.

As the law was originally written, some farmers would have been allowed an overly generous and unfair deduction of 20% of their qualified cooperative dividends, calculated on a gross basis.  This was referred to as the “grain glitch” and was fixed by the Consolidated Appropriations Act, 2018. With the fix, the deduction for a specified agricultural cooperative is calculated and passed through to patrons under the rules for the domestic production activities deduction (DPAD) that existed before the repeal of Code Sec. 199. Thus, the cooperative’s deduction is generally 9% of the lesser of its taxable income, or its qualified production activities income, but limited to 50% of the co-op’s W-2 wages paid that are properly allocable to domestic production gross receipts. Some or all of the co-op’s deduction may be passed through to its patrons (the farmers), which then reduces the patron’s general QBI deduction. The cooperative must provide its patrons with the necessary information on Forms 1099-PATR or an attachment so each patron can figure their deduction. Starting with 2019 this is done on Schedule D of Form 8995-A. Note: The Form 1099-PATR (2020 and later years) includes several boxes that provide the needed information    

Final regulations (T.D. 9947) governing the QBI deduction for Specified Agricultural Cooperatives and their patrons. largely adopt proposed regs issued in 2019 (NPRM REG-118425-18). The final regs are effective on January 14, 2021.

Other than co-op related, are treated the same as any other QTB when computing the 199A deduction.

The preliminary 199A deduction must be determined separately for each individual entity of a taxpayer and the various limitations and restrictions are applied at that level. Then all of the preliminary 199A deductions from the taxpayer’s sources are combined and limited to 20% of the taxpayer’s taxable income reduced by net capital gains.