Free Essay. Qualified Business Income (QBI) Under the 2017 Tax Cuts and Jobs Act (TCJA)

In late December 2017, President Donald J. Trump approved one of the iconic tax reforms that Americans have ever witnessed in their lifetime; the tax cut and Jobs Acts of 2017 (TCJA). However, the change was ineffective until the eve of 2018. This made many Americans worried and uncertain about their future, particularly regarding their taxes (August 2018). The primary adjustments in the reform include tax bracket rates reduction, qualified business income (QBI), regulation of personal exemptions, increment in the child tax credit, medical expense deduction, and alteration to tax exclusion and deduction (Bailey, 2018). Consequently, the most interesting reform in the tax cuts and jobs acts of 2017 is the qualified business income. This reform aims at subjecting numerous domestic businesses to the deduction.

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Overview of the Qualified Business Income Deductions

The qualified business income is interpreted as the summation of the quantity of the eligible items related to income. The items are graded based on gain or loss and are subjected to deduction. Nonetheless, a qualified business income (QBI) obliges numerous taxpayers to deductions due to several domestic businesses, which include partnerships, sole proprietorships, and S corporations. Furthermore, the QBI, also termed section 199A deduction has the potential to reach 20 percent (Bailey, 2018). Moreover, the QBI concept is applied to particular estates and trusts that operate as business entities.

The pass-through entities refer to legal units where the income flow to the business owner acts or investors is free. In most cases, a pass-through entity is considered as a critical structure within the business environment, particularly in ensuring that the effect of double taxation does not occur among the owners of the business owners (August 2018). Hence, the taxation procedure of a pass-through entity is designed to consider the owners of the business separately.

Components of Qualified Business Income Deduction

According to the tax cuts and jobs acts 2017, the qualified business income is made up of two primary components. The components include the Real estate investment trust (REIT) dividends and public trade partnership (PTP), and the QBI components (Bailey, 2018). The primary role of the two components of the QBI is to enlighten owners of various businesses on deductions in an attempt to make the companies successful.

The QBI deduction component takes into consideration 20% of the total QBI, basically emanating from small businesses. The businesses are either owned by an individual or owned through partnerships (August 2018). Nonetheless, other entities like trusts, estates, and S corporations make crucial contributions to the QBI component of deduction. Generally, the QBI component depends heavily on the taxpayers' income. Nonetheless, the component is faced by numerous challenges like the unpredictable nature of some businesses and inconclusive averaging the wages classified as W-2, the wages are often affiliated to eligible businesses (Bailey, 2018). Also, the unadjusted basis experienced shortly after acquiring an authorized business influences the QBI component since it leads to a substantial decrease in the QBI component.

The public traded partnership and the real estate investment components of the QBI equally translates to 20% of the total surpluses in REIT; the sources of the excesses include the income obtained from the publicly traded partnership, and the regulations carried on investment companies (Bailey, 2018). However, the publicly traded partnership and the real estate investment component of the qualified business income is highly flexible due to no regulations on either the UBIA or the W-2 wages. As a result, the cumulative amount of revenue generated from the publicly traded partnership is subjected to deductions and significantly relies on the taxpayers' gross income.

Effects of Pass-Through Entities in the Qualified Business Income

The most crucial role played by the pass-through entity is to minimize the chances of double taxation occurring within a business entity. The pass-through entities ensure that the deduction or the taxation are exclusively made to the owner of the business (August 2018). Although the pass-through entities are designed to assist businesses in avoiding double taxation, the overall effect on the respective companies is that they result in low-profit margins. This is because the classified companies under the pass-through entities have a number of partners restricted.

The Types of Pass-Through Entities According To the Tax Cut and Jobs Act Of 2017

The pass-through entities are divided into three broad groups, which include partnership, sole proprietorship, and the S corporations. The sole proprietorship relates to businesses that are owned by a single individual, and the business owner is not obliged to fill out separate tax returns (August 2018). However, the business owners are expected by the reforms of the tax cut and jobs act 2017 to make detailed reports regarding the net income of their businesses. As a result, the whole income realized by the business owners is subjected to taxation, as stipulated in the self-employment contribution act.

Partnerships refer to business entities with more than one owner. Consequently, the business partners are required to file combined tax returns as dictated by the reforms of the tax cut and jobs act of 2017. The reforms further elaborate that only the partners who base the report of their net income on Schedule E are entitled to the accrued profits allocation (August 2018). Nonetheless, according to the new tax policy, companies having limited liabilities can decide to be taxed as a single entity composed of numerous partners. The partners with ordinary membership comply with the SECA tax, which takes into consideration their entire net income (August, 2018). Contrastingly, business entities with a restricted entry of members are subject to partial taxation of SECA tax applying to particular payments representing compensation of labor services.

The S corporations are the legalized domestic corporations that file their tax returns through the use of S corporation files. Nonetheless, the profits of these corporations are mainly channeled through the personal income tax of the stakeholders (August 2018). However, under the tax cut and jobs act of 2017, the number of shareholders is restricted to a maximum of 100 stakeholders. Moreover, the tax policy strictly states that the shareholders should be citizens of the united states of America with the only exclusion that none Americans should have lived in America for a considerable amount of time (Bailey, 2018). Nevertheless, the S corporations are unique as the members are not obliged to observe the SECA tax determined by their accumulated benefits. Consequently, the new tax reforms expect the members to compensate themselves, as stated in the social security tax.

Calculation of the QBI Deductions According To the Tax Cut and Jobs Act Of 2017

It is essential to consider the fact that the taxpayers' deductions can only be a maximum of 20 percent of the QBI before any deduction is made. The determination of QBI deduction through calculation involves four core steps (Bailey, 2018). The first step is the determination of the QBI associated with each pass-through identity. The information to be obtained is outlined in schedule C or K-1 policies. The second step entails the deductions; during this stage, the taxpayers; income is limited to 20 percent in case the limit is superseded. The taxpayers' income is categorized as either the upper limit or phase-in range.

The taxpayers' income is classified as phase-range when it exceeds $157 500, thus hitting the upper limit of $207 500. Partnership phase-in range is achieved when the income exceeds $315 000, entering the upper limit of $415 000 (Bailey, 2018). The third step is only applied if the taxpayer is affiliated with several pass-through records, each with QBID. The taxpayer identifies the cumulative relevant QBID. The final step needs the taxpayer to use the overall limitations as stated in the QBID to obtain the correct deductions; the taxpayer then uses the Form 1040 to report the deductions.

Limitations to the Deductions

The main limitation to the deductions is that the taxpayers do not expect their deductions to surpass the stated 20 percent. Thus, the limitation of the tax has to fall within the expected range leaving the taxpayer with substantial income (Bailey, 2018). Otherwise, challenges arise when evasion of tax is rampant. Nonetheless, the resulting deductions may be less than 20 percent in a case where the taxpayer earns more than $157 000 or is engaged and collectively files an income of more than $315 000 (August, 2018). The other limitation lies in the fourth step, where taxpayers may limit their deductions to comply with the restriction. In case of high income, QBI deductions are limited to 50 percent to the respective W-2 wages. However, taxpayers hardly aggregate all the necessary components enlisted in the QBI sources.

Conclusion

In conclusion, the tax cuts and jobs act 2017 entailed several tax reforms. However, the most crucial reform is in the QBI which ultimately results in domestic businesses being subjected to the deduction. Nonetheless, the QBI elaborates on various pass-through entities like sole proprietorships, S corporations, and partnerships; it further explains how the entities are expected to file their tax returns.

References

August, Jerald David. "Tax Act First Look: The Complex New World of the Qualified Business Deduction Rule: Implications for Partnerships, S Corporations, and Sole Proprietorships." The CPA Journal 88.1 (2018): 22-29. Retrieved from https://search.proquest.com/

Bailey, W. A. (2018). Mechanics of the New Sec. 199A Deduction for Qualified Business Income: Here's a Step-by-Step Guide to Calculating the New Deduction for Passthrough Businesses and Determining Who Qualifies for the Break. Journal of Accountancy, 225(4), 44. Retrieved from https://www.questia.com/