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IRS explains how the new 20% pass-through tax deduction for small businesses works

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We're almost 13 months into the largest tax reform measure enacted in more than 30 years and one thing is clear. The Tax Cuts and Jobs Act (TCJA) is in no way tax simplification.

In fact, taxpayers and the professionals they pay to help make filing less taxing in every sense of the word have been struggling with just what Congress meant in way too many of the tax bill's hastily drafted provisions.

Big business bill, with small biz break and confusion: Although the TCJA contains many changes that will make filing returns this year interesting for individual taxpayers, it primarily was designed as a way to lower the United States' corporate tax rate.

The area that got the most attention, both pre- and post-passage, was a new tax break for small businesses, which lawmakers on Capitol Hill didn't want to be seen, at least politically, as shorting when it came to tax benefits.

But you know what they say about good intentions and that road's ultimate destination.

Known as the qualified business income (QBI) deduction, or section 199A by tax geeks who refer to the law's Internal Revenue Code location, this TCJA component has been particularly frustrating for the potentially affected filers, tax professionals looking to help them and even, I'm sure, the IRS as it worked to make the laws application more usable for everyone.

This new law allows many owners of sole proprietorships, partnerships, S corporations, trusts or estates to deduct up to 20 percent of their qualified business income.  Eligible taxpayers can also deduct up to 20 percent of their qualified real estate investment trust (REIT) dividends and publicly traded partnership income.  

The QBI/section 199A deduction took effect for the 2018 tax year, meaning that this filing season is the first in which eligible taxpayers will be able to claim it.

Just how to do that, though, has, as I noted, been bedeviling affected filers and tax professionals from the provision's get-go.

No longer!

Business break guidance has arrived: Last week we got some good 199A news. The Treasury Department and IRS issued final regulations and three related pieces of guidance on the implementation of the QBI/199A deduction.

Those of interested in the new tax break got further good news when one of the sharpest tax minds around decided to break down the IRS' 199A announcement.

Tony Nitti, a CPA, tax partner in WithumSmith+Brown's National Tax Service Group and @nittiaj on Twitter, has compiled a comprehensive look at the new 20 percent pass-through deduction.

I also deferred to him when the IRS issued its interim 199A regs last August, so it's only logical and fitting that Nitti's latest QBI deduction tutorial via his Forbes column gets this week's Saturday Shout Out.

In this latest piece, Nitti looks at what the final 199A regulations have to say, highlights the key changes from the proposed regulations and offers a quick refresher on the small business tax break's statutory background.

Yes, it's long. 12,000 plus-or-minus words long. Did I mention it's far from simple?

But if the new section 199A deduction applies to your business, it will help reduce your tax bill.

So to paraphrase Nitti's final admonition in his column, get to work checking out his detailed explanation on how to determine its effects on your small business and apply them in this year's filing.

Or better yet, make sure your tax professional sees his column!

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Comments

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Donald R Payne

The only reason I thought something was wrong with the H&R personal tax program is that when I experimented with entering different amounts for our K-1s, I still came up with the same tax percentage. Mixed in with W2 income and social security income the K1 incomes should have changed the overall %. After trying to talk to someone through 5 phone calls I finally got a person who said I needed to look at the K-1 QIB form, then that since our K1s did not show anything for Box 17, V (199A) that their program would not recognize the "Qualified Business Income" deduction. He sent me to a hidden spot on their website where I could chat with someone for "Tax Rules Questions". I then spent a very disappointing 2 hours on chat, or waiting for chat, with 3 people from H&R Block. They were supposed to be the tax experts. At the end of the 2 hours the one fellow said he's no expert. He suggested I do what I asked his opinion about, overriding entries in my company's K-1s to include the 199V and 199W amounts. Now I have to re-file my business taxes and I'm praying I did the correct thing regarding the QBI deduction for my personal taxes. It seems to me that having me override entries because their Interview doesn't ask the right questions is bordering on incompetence. I pity anyone who filed a personal tax return thinking they were getting that new 20% tax credit and didn't get it because there was no information about filling out the K-1 correctly on the business tax program.

Guy

It's now April 1st and HR Block software still does not work. It's not recognizing income from schedule K-1. I called HR Block yesterday, and after 2 hours on hold I spent 30 minutes explaining what should happen and why their software wasn't working (not connecting the worksheets). I don;t think the people I talked with understand. Guess I'll have to override the program and file by paper. Hope the gentleman from HR Block cited in this article gets the feedback from customer service that the program isn't working

Matt

I am trying to take the 199A deduction for my S corp Income, but H&R Block's Software is not recognizing my income from my K-1.

FastIncNow

Finally, the moment has arrived which most of the businesses were waiting for. A final word on the most controversial Tax Cuts and Jobs Act”. It was actually overwhelming for the Internal Revenue Service to get this Section 199A into action after so many negative remarks going around.

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