QBI and shareholder wages

[GingerM]

I am so confused on where shareholder wages play a part in QBI. 

1120S K1: V 121,482 W 1,180,664 (officer and employees) X 78,663

Form 1040: Do I use the amounts from the K1? Do I adjust for the owner W2s somewhere? There are 2 owners.

 

[Terry D EA]

Below is a breakdown. You don't calculate QBI at the S-Corp level. S-Corps are pass entities and do not pay tax. The QBI is reported from the S-Corp is to be on line 20 of the K-1 form and is the net income/loss that passes thru to the shareholder. Then the actual deduction is calculated at the shareholder level taking into consideration the shareholder's  w-2 wages (not the employee's) and basis for determining the QBI deduction. Of course, it doesn't stop there, then the final determination is 20% of taxable income or QBI which ever is less on the 1040.  Also, remember the limitations on the income levels and filing status.

BTW- NEVER adjust a W-2 form.

Long read but very good examples.

Section 199A allows S Corp shareholders to take a deduction on qualified business income (QBI). QBI per IRC 199A (c)(1) is “the net amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer”. Basically, it is the taxable net income.  The deduction which an S Corp shareholder can take is the lessor of 20% of QBI OR the greater of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of the unadjusted basis after acquisition of qualified property [IRC 199A (b)(2)(B)]. Clear as mud?  Let’s break this down

Here are two S Corps’ information used below as examples; S Corp 1 and S Corp 2. S Corp 1 has one shareholder, Shareholder A and S Corp 2 has two shareholders, Shareholder B own 60% and Shareholder C owns 40%.

 

Example Information for tax year 2018
	QBI	Unadjusted Basis
S Corp 1	$   100,000	$         120,000
S Corp 2	$   180,000	$         200,000
	Shareholder %	W-2 Wages
Shareholder A	100%	$            50,000
Shareholder B	60%	$            30,000
Shareholder C	40%	$            20,000

 

20% of QBI

S Corp 1 Shareholder A will use $20,000 ($100,000 x 20%) for the deduction calculation. The S Corp 2 shareholders will calculate their deduction calculation as follows; Shareholder B will use $21,600 ($180,000 x 20% x 60%) for the deduction calculation while Shareholder C will use $14,400 ($180,000 x 20% x 40%).

50% of W-2 wages

This part is as straight forward as it sounds. Each shareholder must calculate 50% of their wages to use as part of the deduction calculation.  The W-2 deduction calculations would be as follows; Shareholder A $25,000 ($50,000 x 50%), Shareholder B $15,000 ($30,000 x 50%) and Shareholder C $10,000 ($20,000 x 50%).

25% of W-2 wages plus 2.5% of Unadjusted Basis

The first part of this is self-explanatory. The second part is a bit trickier.  The unadjusted basis after acquisition of qualified property, is a calculation of net income without the depreciation expenses and deductions.  For Shareholder A the deduction calculation will be $15,500 [($50,000 x 25%)+($120,000 x 2.5%)].  For Shareholder B the deduction calculation will be $10,500 [($30,000 x 25%) + (60% * ($200,000 x 2.5%))] and Shareholder C $7,000 [($20,000 x 25%) + (40% + ($200,000 x 2.5%))].

 

Section 199A calculations
	Lessor of
		Greater of
	20% of QBI	50% of Wages	25% wages + 2.5% Unadj Basis
Shareholder A	$       20,000	$            25,000	$            15,500
Shareholder B	$     21,600	$            15,000	$            10,500
Shareholder C	$     14,400	$            10,000	$              7,000

 

Example Results

Shareholder A’s deduction will be the 20% of QBI. It is the lessor of $20,000 vs the greater of $25,000 and $15,500.  On the other hand both Shareholder B and Shareholder C will use the 50% of wages for their deduction.  It is the greater of 50% wages and 25% wages plus 2.5% Unadjusted Basis which is also the lessor compared to 20% of QBI.

What does this all mean?

Prior to this deduction, shareholders faced tax rates up to 39.6% for the full amount of business income as the income was taxed at the personal rate. This deduction lowers the amount of taxable income for individual business shareholders with pass through entities.  Thresholds on shareholders’ personal returns will affect the maximum tax benefit each individual can personally take.

A Few Limitations

There are two big limits to be aware of. The first is the threshold limit for the individual shareholders. Per IRC 199A (e)(2)(A) until the threshold limit of $157,500 income for single tax filers and $315,000 income for joint tax filers, the 20% deduction is fully deductible. The income used to calculate includes all sources of income not just the business income.  The amount of the 20% income deduction is phased out ending with $0 income deduction allowed after $207,500 income for single tax filer and $415,000 for joint tax filers [IRC 199A (b)(3)(B)(i)(I)].

The second limit is the type of businesses which are not eligible. IRC 199A(d)(2) specifically defines specified service trade or business as a trade or business as defined by IRC 1202(e)(3)(A) without the words engineering or architect.

[GingerM]

Thank you for your reply. I just finished the Sec 100A with Final Regulations course at Compass Tax. EXTREMELY helpful and I learned a lot. 

[Taxgirl1]

Hello,

I am so confused.  Is the W-2 wages the total wages for all the employees in the company or just the shareholder W-2 wages?  If all W-2 wages are 500,000 and out of the $500,000, $100,000 of the W-2 wages were for the sole shareholder in an S corp, which W-2 wages are they referring to?  The total of $500,000 or just $100,000?  Do you need to make any adjustments for the Shareholders wages of $100,000?

 

Thank you