United States: IRS Provides QBI Deduction Changes Just In Time For Filing

The IRS has released final regulations and additional guidance on the QBI deduction just before the first tax season where taxpayers can claim the deduction. The new guidance provides some clarity on who qualifies for the QBI deduction and how to calculate the deduction amount.

QBI deduction in action

The QBI deduction is up to 20% of QBI received from a PTE, subject to certain limitations. QBI is equal to the net amount of income, gains, deductions and losses, but excludes reasonable compensation, investment items and guaranteed payments to partners.

QBI is determined for each qualified business and the net amounts are aggregated. If the net amount is below zero, it is treated as a loss for the following year, reducing that year's QBI deduction.  The deduction can never be more than 20% of a taxpayer's taxable income (excluding income subject to capital gains rates).

Other limitations apply if a taxpayer's taxable income exceeds a threshold amount—$315,000 for joint filers or $157,500 for all other filers. The limits phase in over $100,000 of income for joint filers and $50,000 of income for all others.

First, for certain specified service trades or businesses (SSTBs), an owner does not receive the deduction. SSTBs include, among others, businesses involving law, financial, health, brokerage and consulting services, as well as any business earning endorsement fees or similar income from the "reputation or skill" of an employee or owner.

Second, all businesses are subject to a limit based on wages and depreciable property. Under this limit, the deduction cannot exceed the greater of

  • 50% of the business's W-2 wages; or
  • 25% of the W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified business property (QBP).

The UBIA of qualified property generally is the purchase price of tangible depreciable property held at the end of the tax year. Partnerships and S corporations must determine the amount of the W-2 wages and UBIA allocable for each partner or shareholder for the year.

The QBI deduction applies to taxable income and does not impact adjusted gross income (AGI). It is available to taxpayers who itemize deductions, as well as those who do not itemize and those paying the alternative minimum tax.

See our other alerts about the QBI deduction here: " IRS Proposes Pass-Through Deduction Regulations" and " Combining Businesses and Netting Losses for the Section 199A Pass-Through Deduction"

New Guidance for rental real estate owners

One of the lingering questions related to the QBI deduction was whether owners of rental real estate were operating a "trade or business," such that the net rental income could qualify for the deduction. A taxpayer must "regularly" and "continuously" engage in an activity before a court will treat it as a trade or business.

There is no exact rule for qualifying under this test, so the IRS provided a safe harbor when it issued Notice 2019-07. Certain real estate enterprises can rely on the safe harbor to qualify as a "business" for purposes of the QBI deduction until a different rule is issued.

The owner can elect the safe harbor if the owner attaches a signed statement to her return that certifies:

  • Separate books and records are kept for each rental real estate enterprise;
  • For taxable years 2018 through 2022, at least 250 hours of services are performed each year for the enterprise, then the rule is 250 hours in any three of the prior five years; and
  • For tax years beginning after 2018, the taxpayer maintains contemporaneous records showing the hours of all services performed, the services performed, the dates they were performed and who performed them.

The 250 hours of services may be performed by owners, employees, contractors and agents. Time spent on maintenance, repairs, rent collection, expense payment, provision of services to tenants and efforts to find tenants all count toward the 250 hours. Investment-related activities, such as arranging financing, procuring property and reviewing financial statements, do not count toward the 250 hours.

Be aware that rental real estate used by a taxpayer as a residence for any part of the year is not eligible for the safe harbor. Also it is not available for property leased under a triple net lease. For these purposes, a triple net lease is one that requires the tenant to pay all or some of the real estate taxes, maintenance, insurance and any building fees.

Aggregation of multiple businesses

It is not unusual for small business owners to operate more than one business. The proposed regulations included rules allowing an individual to aggregate multiple businesses that are owned and operated as part of a larger, integrated business for purposes of the W-2 wages and UBIA of qualified property limitations, thereby maximizing the deduction. The final regulations retain these rules with some modifications.

For example, the proposed rules allowed a taxpayer to aggregate trades or businesses based on a 50% ownership test, which must be maintained for a majority of the taxable year. The final regulations clarify that the majority of the taxable year must include the last day of the taxable year.

Unlike the proposed regulations, the final regulations also allow a PTE to do the aggregation, assuming it meets the ownership test and other tests. When the PTE chooses to aggregate, the owners must follow suit.

A taxpayer who does not choose to aggregate in one year can choose to do so in a future year. On the other hand, once aggregation is chosen, the taxpayer must continue to aggregate in future years unless there is a significant change in circumstances.

The final regulations generally do not allow an initial aggregation of businesses to be done on an amended return, but since this is the first filing season where taxpayers can take the QBI deduction, the IRS will permit taxpayers to make initial aggregations on amended returns for 2018.

UBIA in qualified property

The proposed regulations adjusted UBIA for transactions where no gain or loss is recognized. These non-recognition transactions include contributions, like-kind exchanges and involuntary conversions. Under the final regulations, UBIA of qualified property generally remains unadjusted as a result of non-recognition transactions.

Property contributed to a partnership or S corporation in a non-recognition transaction usually will retain its UBIA on the date it was first placed in service by the contributing partner or shareholder. Partnerships may also benefit from certain special basis adjustments resulting from distributions or sales of partnership interests. These adjustments are made when the partnership has made a 754 election or has a substantial built-in loss.

The UBIA of property received in a like-kind exchange is generally the same as the UBIA of the relinquished property. The same rule applies for property acquired as part of an involuntary conversion.

SSTB limitations

Many of the comments the IRS received after publishing the proposed regulations sought further guidance on whether specific types of businesses are SSTBs. The IRS, however, declined to provide additional guidance because the determination of whether a particular business is an SSTB often depends on its individual facts and circumstances.

Nonetheless, the IRS did establish rules regarding certain kinds of businesses. For example, it states that veterinarians provide health services. It also retained the rule that real estate and insurance brokers are not SSTBs. They also provide an example of a surgical center that, with the right facts, is not providing "health services" for purposes of this deduction— meaning income from the center is qualified.

The rules preventing the so-called "crack and pack" strategy were also retained. The strategy would have allowed entities to split their non-SSTB components into separate entities that charged the SSTBs fees. When a qualified business provides property or services to a related-party SSTB, a portion of the business (based on gross receipts) is also treated as an SSTB.

The final regulations make changes for businesses with some income that qualifies for the deduction and some that is from an SSTB. The owner or PTE can separate the different activities by keeping separate books to claim the deduction on the eligible income.

For example, insurance brokerage commissions qualify for the deduction, but wealth management and similar advisory services do not. A financial services business could separate the bookkeeping for these functions to permit owners to claim the deduction on the qualifying income.

REIT investments

In addition to the deduction based on qualified business income, the same code section provides a deduction for up to 20% of a taxpayer's combined qualified real estate investment trust (REIT) dividends and qualified publicly-traded partnership (PTP) income—including dividends and income earned through PTE.

The new guidance clarifies that shareholders of mutual funds with REIT investments can apply the deduction. The IRS is still considering whether PTP investments held via mutual funds qualify.

Proceed with caution

These new provisions can be very valuable, but are also very complex. In addition to providing benefits, the new law lowers the threshold for imposing penalties for taxpayers that incorrectly calculate the deduction. We can help you avoid penalties and answer all of your questions regarding the QBI deduction.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions