Tax Prep Dispatch: QBID: Now What?

The qualified business income deduction (QBID) is one of the most complex provisions of the Tax Cut and Jobs Act. Early on, there was some confusion about the specifics of the computation. Regulations issued on January 19 clarified the details and as a result, tax preparation software companies updated their QBID computation. TaxSlayer updated the QBID computation on February 6. As a result, some Schedule C-EZ/C returns prepared prior to the February 6 update were filed with an incorrect QBID. IRS SPEC recently issued a Volunteer Tax Alert (VTA-2019-02) addressing this issue.

What’s This Really About?

Let’s review the basics. The QBID is the lesser of:

20% of qualified business income

-OR-

20% of taxable income before QBID. (That’s 20% of AGI minus any capital gains or dividend income, less standard or itemized deductions.)

The devil is the definition of qualified business income. Originally, it was assumed that qualified business income was just net Schedule C-EZ/C income and that’s the way TaxSlayer did the computation. But it turned out to be a bit more complex. For VITA clients, qualified business income is net income from Schedule C-EZ/C, minus the total of three adjustments: deductible part of self-employment tax, the self-employed health insurance deduction and the adjustment for self-employed SEP, SIMPLE and qualified plans. 

Let’s put it another way. Qualified business income is:

  • Net income from Schedule C-EZ/C (Schedule 1, line 12)
  • Minus deductible part of self-employment tax (Schedule 1, line 27)
  • Minus adjustment for self-employed SEP, SIMPLE qualified plans. (Schedule 1, line 28)
  • Minus the self-employed health insurance deduction (Schedule 1, line 29)

Who Is Affected?

Any VITA tax return with Schedule C-EZ/C income that was prepared before February 6 may be affected. Note: That date may vary for returns prepared on other softwareCheck with your software provider for details.

Exception: Any return with zero taxable income before QBID is not affected. For those taxpayers, the QBID was, and remains, zero. That is, if Form 1040, line 7 (AGI) is less than Form 1040, line 8 (standard deduction or itemized deduction), then the QBID is zero and the software change will not make any difference.

For affected taxpayers, the revised QBID will be less than the QBID on the original return. In most cases, this will mean that additional income tax will be due.

What Should VITA Sites Do?

VITA sites should search for affected returns and notify the taxpayers. Let them know that their QBID is not correct and advise that the taxpayer can file an amended return to correct it.

VITA programs are encouraged to use the TaxSlayer Site Production Detail Report to identify affected returns and determine if an amended return is warranted.

  • Use the report to identify Schedule C-EZ/C returns prepared before February 6.
  • First, create and save (or print) a pdf of each return.
  • Then open each return to initiate recalculation of the QBID.
  • Compare the original return and the recalculated return.

If the QBID changes, an amended return is warranted. Notify the taxpayer of the change, including the additional tax due and offer to prepare a 1040-X. Or perhaps just send the completed Form 1040-X to the taxpayer with mailing instructions. Note that the decision on whether to file an amendment is up to the taxpayer.

Examples

Example 1: Married filing jointly, net income on taxpayer’s Schedule C is $11,000. Spouse earned $32,000 wages. Taxpayers are taking the standard deduction.

Net income from Schedule C minus ½ self-employment tax. Multiply the answer by 20%.

  • $11,000 - $778 = $10,222
  • $10,222 X 20% = $2,044

(The computation on the original return would have been $11,000 X 20% = $2,200.)

AGI minus the standard deduction. Multiply answer by 20%.

  • $42,222 - $24,000 = $18,222
  • $18,222 X 20% = $3,644

Compare the results. The smaller is the QBID.

  • $2,044 is less than $3,644 so their QBID is $2,044.
  • Their taxable income is $18,222 - $2,044 = $16,178

On the original return, the comparison would have been the smaller of $2,200 and $3,644.

QBID before February 6: $2,200. Correct QBID: $2,044.

This taxpayer has $156 additional taxable income and owes $15 income tax on their amended return.

Example 2: Married filing jointly, net income from Schedule C is $21,000 and wage income is $1,500. Taxpayer is taking the standard deduction.

Net income from Schedule C minus half of self-employment tax. Multiply the answer by 20%.

  • $21,000 - $1,484 = $19,516
  • $19,516 X 20% = $3,903

(The computation on the original return would have been $21,000 X 20% = $4,200)

AGI minus the standard deduction. Multiply answer by 20%.

  • $21,016 - $24,000 = $0
  • $0 X 20% = $0

Compare the results. The smaller is the QBID.

  • $0 is less than $3,903 so their QBID is $0.
  • And their taxable income is $0.

On the original return, the comparison would have been the smaller of $4,200 or $0.

QBID before February 6: $0. Correct QBID: $0.

The taxpayer’s original return is correct. When taxable income before QBID is zero, no amended return is needed.

Example 3: Single, net Schedule C income $24,000, wages $1,000.

Net income from Schedule C minus half of self-employment tax. Multiply the answer by 20%.

  • $24,000 - $1,696 = $22,304
  • $22,304 X 20% = $4,461

(The computation on the original return would have been $24,000 X 20% = $4,800)

AGI minus the standard deduction. Multiply answer by 20%.

  • $23,304 - $12,000 = $11,304
  • $11,304 X 20% = $2,261

Compare the results. The smaller is the QBID.

  • $2,261 is less than $4,461, so her QBID is $2,261.
  • His taxable income is $11,304 - $2,261 = $9,043

On the original return, the comparison would have been the smaller of $4,800 and $2,261.

QBID before February 6: $2,261. Correct QBID: $2,261.

The taxpayer’s original return is correct. In most cases, when the taxable income before QBID is less than 20% of the Schedule C income, no amended return is needed.

Summary

  • Some Schedule C-EZ/C tax returns prepared early in the season (before February 6 for TaxSlayer returns) may have incorrect QBID.
  • VITA sites can identify affected returns and determine any additional tax due.
  • Many Schedule C-EZ/C returns, including returns with zero taxable income before QBID, will not be affected.
  • VITA sites can notify affected taxpayers and offer to prepare an amended return to correct the QBID.

So here we are going into the final push of the filing season and now we have a new task. Oh, boy! But most programs will have few, if any of these cases. There were only 3,054 nationwide. And there is no requirement to do them before April 15, although the sooner the better. Hey, a summer project!

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