Limiting the impact of negative QBI

November 1, 2020

By Alex K. Masciantonio, CPA, CPA Letter Daily

Although losses are usually beneficial for tax purposes, losses from passthrough entities potentially adversely affect the 20% qualified business income (QBI) deduction under Sec. 199A. These losses, referred to as negative QBI or qualified business losses, decrease positive QBI from other sources, and the remaining losses carry forward to offset future QBI, thereby reducing the amount eligible for the 20% QBI deduction.

This article examines the treatment of negative QBI and provides planning opportunities to limit the detrimental tax effects. This is especially relevant now that many businesses will incur losses due to the COVID-19 pandemic.

OVERALL NEGATIVE QBI
The first scenario involving negative QBI is an overall loss experienced by a passthrough entity owner. This situation entails a business owner of one or more entities that incur a net negative QBI amount. An overall negative QBI results in zero QBI deduction for the owner.

Under Regs. Sec. 1.199A-1(d)(2)(iii)(B), the negative overall QBI amount carries forward to the succeeding year and is treated as arising from a separate trade or business. Those losses carry over indefinitely until completely offset by positive QBI. The W-2 wages and unadjusted basis immediately after acquisition (UBIA) of qualified property amounts, which potentially limit the QBI deduction, are disregarded and do not carry forward. Example 1 illustrates overall negative QBI.

Example 1: T is the sole owner of two S corporations, A and B. The 2019 QBI information for these S corporations is as shown in the table "QBI Information From Example 1." T's 2019 QBI deduction is zero because there is an overall net qualified business loss of $15,000. The $15,000 net negative QBI amount carries forward and offsets future QBI. The 2019 W-2 wages and UBIA of qualified property amounts are ignored and do not carry forward.

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