Solo 401k & 199A QBI Tax Deduction

Every Checkbook Solo 401k investor is impacted by the tax innovation introduced by The Tax Cuts and Jobs Act. The key provision of Tax Reform for Solo 401k adopters to focus on is the new IRC 199A 20% Qualified Business Income – QBI – tax deduction. By definition Solo 401k and QBI go hand-in-hand – and  a Solo 401k can help you maximize the value of this impactful tax deduction.

What is the Qualified Business Income Deduction?

  • Section 199A of the Internal Revenue Code provides many taxpayers a deduction for Qualified Business Income from a qualified trade or business operated directly or through a pass-through entity. Income earned through a C corporation or by providing services as an employee IS NOT eligible for the deduction.
  • Eligible taxpayers may be entitled to a deduction of up to 20% of Qualified Business Income (QBI) from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust or estate.

What is Qualified Business Income (QBI)?

  • QBI is the net amount of qualified items of income, gain, deduction and loss from any Qualified Trade or Business. A Qualified Trade or Business is any trade or business, with two exceptions:
    • Specified Service Trade or Business (SSTB), which includes a trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of its employees. This exception only applies if a taxpayer’s taxable income exceeds $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers.
    • Performing services as an employee.

Is the W-2 wage paid to an S-corp owner treated as deduction eligible Qualified Business Income (QBI)?

  • The statute provides that wages paid by an S Corporation to a shareholder are NOT treated as QBI to the shareholder.

I have income from a Specified Service Trade or Business (SSTB). How does that affect my deduction?

  • The SSTB limitation does not apply to any taxpayer whose taxable income is below the $315,000/$157,500 threshold amounts discussed. If the taxpayer’s taxable income exceeds the phase-in range, NO deduction is allowed with respect to any SSTB.

Are there any limitations or “phase-outs” for the QBI deduction, other than those that apply to Specified Service Trade or Business (SSTB)?

  • For taxpayers with taxable income that exceeds $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers, the deduction is subject to limitations such as the type of trade or business, the taxpayer’s taxable income, the amount of W-2 wages paid by the qualified trade or business and theUnadjusted Basis Immediately After acquisition (UBIA) of qualified property held by the trade or business.

How do S corporations and partnerships handle the deductions for their owners?

  • S corporations and partnerships are generally not taxpayers and cannot take the deduction themselves. However, all S corporations and partnerships report each shareholder’s or partner’s share of QBI, W-2 wages, UBIA of qualified property, qualified REIT dividends and qualified PTP income on Schedule K-1 so the shareholders or partners may determine their deduction.

How can a Solo 401k Plan help me maximize my QBI deduction for 2018?

  • A Solo 401k Plan can be used to reduce the income of a Specified Service Business owner below at least the upper end of the phase-out threshold (where the QBI deduction is lost entirely), and ideally low enough to claim the full QBI deduction (which means taxable income below $157,500 for individuals, or $315,000 for married couples).
  • Likewise, the substantial tax deductions available through Solo 401k contributions could be beneficial to a non-SSTB whose QBI deduction has been limited by the wage and UBIA caps that apply to those whose income exceeds $315,000/$157,500 threshold amounts.