Tax Attic: February 28, 2019

There sure is a lot of political activity coming out of Lansing lately. The changing of the guard at the top of the executive branch, from the Republican party to the Democratic party, has resulted in just what you would think would happen. If the Republicans said “to the right” was the best way to govern and passed laws to that affect, the Democrats now say ”to the left” is a better way to govern and are un-winding as many of the recently passed Republican laws as possible. I wonder what those laws would have looked like in the first place if our legislators, executives, and judiciary, at the state level and below, were all required to be non-partisan? Our Rockford City Charter requires all candidates for City Council to be non-partisan. That doesn’t mean that each Council member doesn’t have an opinion of how to serve. However, it does free each Council Member to make decisions for the good of all Rockford residents as opposed to throwing a party caucus into the equation. Above the local municipality level, while each person elected still has their constituents’ goodwill at heart, each person has to deal with a party as well. That party may just have something to say in the legislative, executive, and judiciary process. I would vote for a referendum calling for all positions at the state level or below be required to be non-partisan. The question is, would it pass?

I believe that’s enough talk about a fantasy world. Let’s discuss the real world of taxation. Last week, I started a discussion on the topic of the IRS Code Section 199. This code section was created by last year’s Tax Cut and Job Act (TCJA). Section 199 created a new term called Qualified Business Income (QBI) and also created a new deduction equivalent to 20% of the QBI. To say the QBI and resulting 20% deduction has created some preparation complicating issues is an understatement. The basic tenet of the QBI deduction is very simple. Calculate the profit of the business and multiple that figure by 20%. The 20% is then used to reduce the income of the taxpayer. Sounds simple enough so what are the issues? First, what is the definition of a “business” for QBI purposes? What businesses qualify for QBI treatment? Believe it or not, there may actually be situations where a non-qualifying entity may claim to be a business in order to get the QBI deduction. Second, are there any adjustments that should be made to the “profit” of the business before calculating the QBI? Will taxpayers be able to manipulate that profit in order to get a larger QBI deduction? Third, in what situations should the QBI deduction be limited? In today’s tax world, almost every deduction or credit has high income phase-outs built into the deduction or credit. What phase-outs, if any, are involved in the QBI calculation?

Next week, I will begin discussing the QBI factors listed above starting with the definition of a business for QBI purposes. Do all businesses, including corporations, partnerships, and self-employed sole proprietorships all qualify? What is the difference between a business and a hobby? The tax treatment of a business is vastly different from a hobby. The following week we will take a look at the definition of profit for QBI purposes. What are the limitations built into the QBI calculation? This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent.

Action Tax Service is a part of Integrity Tax Group.

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