# (How to Calculate the 20% 199A QBI Deduction) - Very Detailed (20% Business Tax Deduction Explained)

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Let's, Go ahead and go to the the example, now let's, go let's go for it here because chipper. Its income, this see this two hundred thousand it's above, the, one hundred and fifty seven thousand, dollar range as where the phase-in, starts, to to come into play so, chippers income, is. Two, of two hundred thousand, dollars as taxable income is a. Is, how much above the hundred fifty seven thousand five hundred, its. Forty, two thousand, five hundred dollars, above, the. The, phase-out range okay, so his, deduction, begins. To phase out once, he's over one, hundred and fifty seven thousand five hundred and so you're gonna see here and hope you guys can to read that can read this okay says, chippers taxable income is forty two thousand five hundred dollars above the phase-out range so as you guys can see that's the calculation we just did so. So. Chippers deduction, phase-out, percentage, is eighty, five percent. Because. Forty, two so I should I should mention here that the, deduction for. A single, filer for. Somebody who filed single, it maxes. Out at two hundred and seven. Thousand five hundred that's, where this deduction would completely, phase-out if you're, in a specified service, trade, or business which. In this example chipper. Is so. Between two hundred and seven thousand five hundred and one. Hundred fifty seven thousand. Five hundred that's. A fifty thousand dollar range and so once chippers, income, exceeds. This. To 207. Five hundred he, gets no deduction. Whatsoever. And this. Is why it's important to go back and understand all those rules in the other video because if you don't understand it it's not these calculations, like I said it won't make sense as you guys can see here's how the calculation, plays out so, chippers deduction, and rewatch this video as much as you need to guys and study this worksheet chippers, deduction phase-out percentage is eighty five percent because, forty. Two thousand, five hundred divided, by fifty thousand, which is the, spread of the phase-out range for a single filer is eighty. Five percent okay, so we know his phase-out range is eighty five percent so let's let's, see how this is calculated. So it's thus the limited \$1.99, a deduction, is calculated, as false. So. We know his qualified, business income is. \$225,000. Right because that number 225. Thousand is coming from right here we. Know his phase-out percentage, is eighty five percent because, that number is coming from right here. So. The amount of the phase-out is one, hundred ninety one thousand, two hundred fifty, dollars so what this does is it's going to reduce his qualified, business income and it's going to change how we look at things now so. The qualified business income of two hundred twenty-five thousand, dollars now, we subtract. Out the phase-out. Amount of one hundred ninety one two fifty, so, now it's basically revising. His qpi deduction, hurry his KPI income its revising, his qbi income, at this point so, now he's, got a new qualified, business income of thirty three thousand seven fifty so.

Now His. Qualified. Business income deduction, is calculated, on this, amount, so initially when we looked at this we, saw that his taxable, income was. Lower than his, qbi but once we revised, it because. His income, is above, these, phase-out limitations. His. Qbi, after, it's reduced, for the amount of the phase-out, his. Revised Cuba is now lowered, the thirty three thousand seven fifty is now obviously, lower, than. His taxable, business Inc are his taxable income up here so, that's why we now have to use this. Amount to, calculate, the twenty percent deduction on that so. Now we take twenty percent times a thirty three thousand seven fifty and chippers. One ninety nine a deduction, is now, six thousand, seven hundred fifty dollars I know. That's a lot to follow but. It's gonna serve you well to study these in your own time it's gonna make a lot more sense it's, really hard to get, this across in a video very, clearly without, you guys really knowing the rules and really studying, these calculations, for yourself in each tab I've included some, of the limitations. That we were talking about like the income phase-out limitations, so, you can see I'm not pulling, these numbers out of thin air if they're just coming from the rigs and the rules. Now. Let's move on to example 5 this is the final example I want to share with you in this video and what. We're gonna do in example. 5 is when. A taxpayer. And when their income is over the, qbi deduction. Phase-out, ranges, and when. They're in a non, specified. Service trader business so, they're not in a service business and. They're. Their. Income. Is well over the deduction, phase-out ranges so what does that all mean well, when when their income is over the qpi deduction, phase-out it basically, means if we scroll down here it. Means their income is above these amounts. But. Now normally if like I like, I said recently if they're in an SS b or a specified, service business their, deduction, would be they would have no deduction at all at this point they're out of luck no chance of giving any toward adduction but. Because. They're not in a specified service trader business because, in this example chipper, is once again he's a manufacturer. Chipper. Operates as a sole proprietor and he files a Schedule C on his tax return he. Manufacture, his birdcages once again his, bird cages are not considered, a specified, service trader business and this is shippers only business so let's come back down here because, shippers, not in a specified service business he, gets to apply some other rules that might allow him to take the deduction so, now we're looking at this box right here where it says w-2, and on adjusted basis limitations, phase in so.

Let Me zoom in on this a little bit so you guys can see that so. There's. Two tests here first, if the limit is the greater of 50%, of w-2 wages or. 25%. Of w-2 wages plus. Two and a half percent of an adjusted, basis so take a good look at that guys pause the video and now let's go to the top and work our way down to see how this is all calculated, and this will make a lot more sense once you see it in calculation, form so let's go up to the top and read the facts for this example, okay. Okay, so once. Again shippers filings has a single. Chippers. Net qualified, business income is two. Hundred ninety thousand, dollars and. Chipper. In this example pays wages, of eighty thousand, dollars, chipper. Owns one. Hundred, and ninety thousand. Dollars in assets within his business. Chippers. Tax a link before the qbi deduction, is, 260. Thousand, dollars and, chipper. Has to keep it a little bit more simple to. Keep us a little bit more simple we're. Gonna say that he has no capital gains zero. All. Right let's see how this deduction. Plays, out first we need to do some, calculations. To cut to figure out what the limitations are on on chippers deduction, because, chippers income is so high because, his income is well above the phase-out range so, first we're going to do the 50% of w-2 wages test so. We know chipper, paid eighty thousand, dollars in wages right because that number is coming from right here, so. We do 50%, of w-2 wages so. That's \$40,000. Right for teeth out our 80 thousand times 50% is 40,000, now. We're gonna need to look at test 2 test 2. Is 25%. Of w-2 wages which. Is 80,000, times 25 percent plus, 2. And a half percent of an adjusted, basis, in assets, so, in this example remember chipper had a one hundred ninety thousand, dollars in assets. Within, his business okay so. You would take we take two and a half percent times, that which, gives him four thousand, seven hundred and fifty dollars. So. We add up the 25 percent of wages paid and the two and a half percent of on. Adjusted, basis in assets and we get 24,000. 750. Now, remember we get to take the greater of the. Greater up for this first part because, down here the. Rule stay the. Limit is the greater of of these of whichever, one of these is higher so. Obviously, if you pass math class \$40,000. Is higher so, that's the number we're gonna work with in this example so let's let's go down to this is step one now. Let's come down to step two and let's figure this out now what we need to do is figure out what the max qpi, deduction, would be so. We, know that chippers, qualified. Business income is two hundred ninety thousand, and remember that two hundred ninety thousand comes from up here right there, so. We take 20% of that so. 20%, of two hundred ninety thousand is fifty. Eight thousand, dollars folks so now we're going to take the lesser, of the max qualified, business income action or, the. 50% of wages and we're. Taking the 50% of wages here because, this was the greater of the numbers in step 1 if, this, number if this test had, come out higher we. Would be using that example down here instead but because of the \$40,000. And if if 50% and wages higher we're gonna use that amount so just want to make that clear and with the lesser of the \$58,000, or, the \$40,000, which is less, \$40,000. Is less than 58 thousand dollars clearly, all, right that's step 2 now we're gonna go into the step 3 and we're gonna start, to finalize this calculation. So that was step 2 now let's go on to step 3 and we're getting close to being done with this calculation, now.

2018-12-31 20:53

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Hey, Mike...I'll have to listen to this when I'm fresh :-), while watching the last trading day of the year.

Happy new year TSX . Hope you have a great one. Are you one of those people who shoots bullets in the air once the clock strikes mid-night ;)

Hey Mike,

Happy Temp thank you so much! I seriously cannot believe how much the channel has grown this year. I think on Jan 1 of this year we were at 800 subscribers. Happy new year to as well. I hope you and your family have a great time. I still have a few more days off so I'm looking forward to it :) Always happy to produce educational content for you guys. Its a lot fun. Here's to 2019

Ya, I've just gone bald. I had to literally pull out all my hair!!!!!

This tax subject and video guarantees hair loss

Haha Mr Jules! Hows it going brother! Hope you enjoyed the holidays. This tax subject will make you want to pull your hair out while running over burning coals at the same time lol. Sorry for putting you guys through hell on this one, but I really do appreciate all the support. I shouldn't have any more tax videos that are this complex for a long-time. The rest should be much easier to follow and digest going forward. This just happens to be the most complex new tax subject within the new tax laws. You will have to bill me for the hair loss lol.

Same here

Definately will have to keep studying on this tax deduction calculations thanks for simplifying as much as possible this is great!! Will be rewatching the 1st and this part until I am able to understand this calculation methods.

Hi Maria! Happy to hear you enjoyed the video. I think I took like 3 or 4 classes on this stuff before any of it started to make sense. I believe it takes some self-study to really make it sink in. I found reading a Forbes article by Tony Nitti helped as well. To be honest i'm still learning some of this stuff haha. Here is the link to the Forbes article which seemed to help me a lot with the initial understanding of things: https://www.forbes.com/sites/anthonynitti/2018/08/09/irs-provides-guidance-on-20-pass-through-deduction-but-questions-remain/#4b76362a2ff8

Time Stamps: •Example 1 (Simple) - Calculation for a non specified service trade or business taxpayer (No capital gains) - 2:20 •Example 2 (Simple) - Calculation for a non specified service trade or business taxpayer (WITH capital gains) - 6:50 •Example 3 (intermediate) - Calculation for a Specified Service Trade or Business taxpayer (no capital gains) Income is between the phaseout limitations - 8:22 •Example 5 (Advanced) - Calculation for a NON Specified Service Trade or Business taxpayer (no capital gains) Income is above \$207,500 - 15:39 Aggregation of multiple businesses - 24:00

Thanks so much for your support on this series everyone. More importantly…thank you for helping this community grow to over 11,000 subscribers strong! I really appreciate you Crushing that like button like you have been doing so this information can reach more people. This one is a long one so I’ve included time stamps to help you navigate the video. Make sure you watch Part 1 first before watching part 2. Think of this like a free class on the 199A deduction.

Thanks Bud, I have my drinks ready to go :)

+Money and Life TV Thanks, Mike, much appreciated. Enjoy the shortened work week, and Happy New Year to you too, my friend.

Does the gain on the sale of business equipment qualify as QBI?

Hi Braydon, great question. I'm not 100% sure off the top of my head, but i'm more certain than not that it would qualify. As defined here: Qualified business income is defined as the net amount of qualified items of income, gain, deduction and loss with respect to a qualified trade or business that is effectively connected with the conduct of a business within the United States. Since the gain on the sale of the equipment is connected with the business activity in my opinion it would qualify as QBI. Hope that makes sense.

can you have a negative business qualified income ?

+Money and Life TV thanks for the quick response great video ... I can't imagine a business can't write a loss against the wage income no?

Great question aaa. Yes, you can. In that case no QBI deduction sadly. I'm not 100% sure off the top of my head, but I believe the loss may carryforward, but I could be wrong.

No problem. The business will still get a deduction for the wages paid, but will not be able to take the QBI deduction in this case to the best of my knowledge. The loss will most likely carryforward to next year based on the facts you are describing. Think of the loss from the business and the QBI deduction as two separate things. Hope that helps :)

Thanks Ruth! Sometime the link gets broken. Not sure why. Try this : https://www.dropbox.com/s/36phs8rgsidw075/199A%20calculation%20examples%20%28protected%29.xlsx?dl=0

This is great I really appreciate you!

Thanks so much I appreciate your support.

Thanks Mike for this wonderful video, it would definitely help me in doing tax returns.

Awesome! Very glad to hear that. Thanks :)

Thank you so much. I subscribed to your channel. I'll be watching your videos over until I get it.

Thank Julio! Highly appreciated. Thanks for the support. I'll have a lot more tax and financial/investing videos to come.

Thank you.

No problem Karthick. Happy to hear to this helped.

Thanks for the clear explanation Mike! If the only W-2 wages (S-corp) are paid to the owners in a Non SSB...can 50% of W-2 wages be deducted when income level exceeds phase out?

Hi MM great question. I believe the officer/owner wages would still count to the best of my knowledge. You might do an online search as well to clarify but I think the answer is yes.

Hey, Mike, great video, I took the advantage of your months study. LOL. Just have one question here. When you calculated phase out percentage, you were using the Taxable Income Before QBD (200,000), but when you calculated phase out amount, you were using the the Total QBD (225,000), I got a little confused, can you have it further explained?

AFDD2-1.6 hi afdd can you clarify at what point in the video you are referring to? What example was I on at this point? If you remember

Well, my head has stopped spinning and I understand a little more than I did yesterday. Thanks for the great presentation. I simply don't know why your head didn't explode while you were researching this.

R B Arnold hows it going man? Every-time I studied this stuff I felt like I had to have alcohol nearby to take the edge off haha. Lots of aspirin got me through this presentation . I spent way too much time studying this stuff. Thanks for your feedback I really appreciate it.

Thanks Carl!

This is a very complicated question and there is no one answer. It goes like this currently. Section 1245 property sales, which includes most depreciable assets like machinery, vehicles and patents/copyrights, AND recaptured depreciation, -are considered ordinary income--BUT most recaptured depreciation is considered a tax preference item. Generally, these are not considered capital gains. Section 1231 property, which includes land, timber, buildings and attached machinery, when sold at a gain are capital gains BUT if sold at a loss, are considered ordinary income. This is NOT-I EMPHASIZE NOT-an all inclusive explanation. The section 199a law says one thing but title 26 gives conflicting information. Best to be conservative for now.

thank you

No problem Bruno. Thanks for watching :)

+Money and Life TV I read the instruction again, and got the point. Thank you for this wonderful vid.

What about the regular expenses of the QBI, is't okay to deduct or only 20% is allow?

Very informative video, thanks so much. Question for ya: at 15:13 so you're saying instead of using the lesser of the two (which in this case is 200k taxable income), Chipper has to use the revised QBI \$33,750 to calculate the 20%?? Is it just because he is a SSTB? or because he is over the income limit for QBID? or is it both? What if he is over the QBID income limit but NOT an SSTB? Also, how does the SEP IRA play into this? Would contributions to your SEP IRA reduce either your taxable income or your QBI? Would appreciate your help!!

It just seems so horrible that his total to calculate the QBID went from 200k to 33,750... He might as well have made less than 200k.. ie. 157k so he could qualify for a larger QBID

Hi Angelita, i'm assuming you are referring to the normal business expenses? If so, yes those are all deducted before QBI deduction is taken into account.

Ya its a weird deduction isn't it? Pretty sure aliens invented this deduction.

Hi Daniel fantastic questions. Re: your questions. 1. Yes, Chipper has to used the revised QBI amount of \$33,750. 2. It is a bit of both because he is in a specified service trade or business AND his income above the limit. 3. Good question on the SEP. The SEP would be an income adjustment on the return. It wouldn't directly impact your net business income and QBI, however, it would reduce your overall taxable income which could impact how you calculate QBI.

Thank you, thank you, thank you for explaining this!

Did anything change in January 2019 since you created these two videos?

Hi Mohamed fantastic question. Yes there was one update i'm aware of. The IRS released further guidance on 199A for rentals. Can be found here: https://www.irs.gov/pub/irs-drop/n-19-07.pdf Enjoy :)

No problem Karena. Thanks :)

As far as I know of yes, but i'm not 100% certain so always feel free to check out the IRS.gov website for further guidance on 199A.

+Money and Life TV so it only has to do with rentals, everything else is the same?

Thank you for all this knowledge.

Thanks Sarah! Just sharing as much as I can at the moment. I still feel like I don't know many pieces of it, because it is so complex, but at least I feel like I have a good handle on the basics.

Great explanation! I think I have it figured out, but got a little confused when you talked about aggregation. My husband and I file MFJ, I am a self employed accountant consultant and have Net Income of \$63K from that and we have an LLC that holds rental property with net income after depreciation of \$5K but we sold a rental property for a cap gain of \$7K. I come up with a QBI deduction of about \$3K. Sound correct?

Hi Bziviski, thanks for watching i'm glad you enjoyed the video. To be honest this deduction has so many factors involved it is not possible for me to know whether or not your calculation is correct unless I had your full tax return in front of me with all of your records. However, based on your numbers 3K sounds kind of low. You should be getting either 20% of your net business income or 20% of your taxable income minus capital gains. I would think your QBI deduction would be between 5,000 to \$10,000 but like i said it is impossible for me to know. You might consider consulting with a CPA in your area, or figure out how the software (assuming you are using software) is arriving at that \$3,000 amount.

My husband does not work, so my consulting income and our rental income is all we have other than \$300 of interest income

Great explanation Mike! I enjoyed the video. Question for you - I have an S Corp, does my W-2 income count as QBI?

Hi Kandice, great question. Yes, and no. As an owner of the business youur wages would help you get more of a QBI deduction if your income is above the threshold amounts discussed in this video. Of course what your wages would not do is they would not increase your Qualified business income. Of course you still get to deduct your wages from the total business income, but that is totally separate from this whole QBI deduction thing. Hope that helps, and I hope that makes sense.

+Money and Life TV Hi Mike - Yes, the wages deducted from business income from a P&L calculation. I guess I need to work thru the numbers once I have my K1 schedule. Thank you!

No problem Kandice. They have really taken complexity to a whole new level with this deduction.

This is excellent! I have a question though. If the business is qualified service business and the shareholder got a W2 for lets say 5k, the total income from the business is 25k, what would be the QBID? Total income for the tax payer is below the phase out for a single filer. I’d appreciate your help.

Hi Muneeb thanks for asking. In this very general example you are proving above if the person's net business income was less than their total taxable income than their QBi deduction would be roughly \$5,000 (25,000 net business income x 20%) =\$5,000 Hope that helps.

My question comes for an explanation for section 199a on irs.com. Do you quality for the 20% deduction if it comes from an S corporation schedule K-1 (ordinary business income), then filed a non passive income form schedule E, then filed income with Form 1040 to pay yourself.

Hi Ro, good question. Income from an S-corp could potentially qualify depending on the type of business involved. I think you would just need to look at all the facts and circumstances, and decide based on your overall income, the type of business, etc if it sounds it would meet the rules of "qualified business Income" in order to get the deduction.

You did just fine. This was far more effective than my prof, who I am paying \$1200 a quarter for. For constructive feedback, I would add that some of the graphics and humor do more harm than good to someone with a limited attention span like myself. The more you can stay in one place, the better. Your speaking and explanation is great and this is all pretty simple. Thank you for your help.

Beephex1, thanks so much for the feedback. Very much appreciated.

You are awesome! Have my questions on the first one.

On the contrary, I think your humor is right on and delightful. You kept me watching to the end of your video. Words or topic associations STB...STD as bad is effective & easy to remember otherwise tax info is known to be such a boring topic. You're creative & fun teacher.

That means a lot. Thanks Pat!

Does can this deduction be taken by a 1099 contractor (I get paid 1099 and I am a healthcare professional operating as sole proprietor(llc).by the way make below 150k annually..thanks

My brother and I are a 1065 taxed as an S-Corp and we draw a wage but also pay out wages to employees, what do I use to calculated the credit on my personal tax return?

Hi Karrissa, for the calculation all wages are taken into account including the wages you paid yourself. Is your income above the phaseout amount of \$315,000 if married filing joint? If your total taxable income is under the phaseout thresholds mentioned in the video though than you need not worry about factoring in wages. You can simply calculate it based on the lower of 20% of your net business income or the lower of your taxable income. I'm hoping you are using computer software to help you prepare your return. I do not recommend preparing this calculation by hand. I hope that points you in the right direction. Certainly rewatch the video if necessary and part 1 to get a better grasp of the rules. I had to try to learn this stuff multiple times before proceeding, and i'm still learning new aspects re: the deduction.

I understood just fine! I'm not a business owner but I have referred your video to someone that is. You made those calculations seem fairly easy to understand. Thank you for going with your gut on the 2:34 mark and already sensing the future confusion we were just beginning to experience lol

Thank you so much! THE EXCEL SHEET IS AMAZING! I am currently studying for REG and the explanation in the book I am studying isn't very clear.

Hi Thalia, so happy to hear this spreadsheet is helping. Its nothing fancy, but I hope it helps get the concept across. The QBI deduction is quite complex.

i had my tax done last week, i own just 1 rental house property, my tax planner said that i can't get QBI because i should have a rental property license. is it true? am i eligible for QBI deduction? thanks

Hi Editha, i'm not sure where the rental license requirement is coming from. Never heard of that to be honest. Your rental may or may not qualify for QBI depending upon how involved you personally are in the property. If you do the repairs, are the one managing it, than you could argue that you would qualify, because you are treating at as an active trade or business. Did your rental make money? If not it wouldn't matter regardless if you took QBI or not, because you would get no deduction. Rentals are a very gray area of this deduction. Some people take an aggressive stance and claim they qualify for the deduction and others do not so it just depends. I may do a video later this year on the QBI deduction for rentals.

Thanks for such great video on 199A, this was my first experience with your channel and enjoyed it. It is very easy to assimilate and you keep us awake unlike other so called instructors. Again thanks a lot and I look forward to going thru your entire set of videos over time.

C Baez, hows it going sir? Thanks so much for the support. I try my best to make this technical jargon more fun to learn. I'll be making a lot more videos on taxes, finances, investing, etc throughout the year so stay tuned :)

Sir thanks so much for making easy to understand the complex QBI

Thanks!

Outstanding explanation and examples. Hats off. You gained one subscriber. Your channel is very informative. Keep up the good work

Thank you Mr Anglada! I greatly appreciate the support. Even though tax season is over i'll still be making some new tax related videos throughout the year as well as many other videos so stay tuned :)

Great explanation. Thank you!

+Money and Life TV I own several rental units in southern California in several cities. All these cities require me to get a business license for each rental. I have to pay an annual fee on each property. I don't think this is a requirement from the IRS, but it kind of makes the rental look more like a business in my opinion.

No problem Enrique! Thank you very much.

This is the best video I have seen on this topic. I was hoping you might offer or clarify a situation that is never described in examples. At least not plainly. I believe this is a realistic situation for may. Scenario: Peter has an LLC that has elected S-Corp tax status. He is single.  Peter earns 200K in Gross Business Income.  Peter pays himself \$100K in a salary.  Peter has \$10K in other business expenses.    Is this correct:   NET QBI = (200K-100K-10K) or (90K) NET TAXIBLE INCOME = (200K-100K-10K) – (standard deduction) = ??   In my mind, and in this scenario: Net QBI = Net Taxable Income, without there being other things that drive down the taxable income.

Hi I am intractable. Although It is impossible for me to give you precise numbers it sounds like you are on the right track. The QBI deduction is the lesser of 20% of QBI or taxable income. To calculate your taxable income you would need to take into account the standard deduction. Your taxable income would be (100K Wages + 90K business income - standard deduction of 12K) or 178K roughly speaking......it sounds like you would take the lower of QBI in this example. I would expect your QBI deduction to be 90Kx20% = 18K roughly speaking. There might be some other limitations but I would think your QBI deduction in this example would be between 10K - 18K. It has been awhile since I looked at the spreadsheet now, but that is what I would expect. Hope that helps.

@Money and Life TV I own several rental units in southern California in several cities. All these cities require me to get a business license for each rental. I have to pay an annual fee on each property. I don't think this is a requirement from the IRS, but it kind of makes the rental look more like a business in my opinion.

@Money and Life TV Hi Mike - Yes, the wages deducted from business income from a P&L calculation. I guess I need to work thru the numbers once I have my K1 schedule. Thank you!

@Money and Life TV so it only has to do with rentals, everything else is the same?

@Money and Life TV I read the instruction again, and got the point. Thank you for this wonderful vid.

@Money and Life TV thanks for the quick response great video ... I can't imagine a business can't write a loss against the wage income no?

@Money and Life TV Thanks, Mike, much appreciated. Enjoy the shortened work week, and Happy New Year to you too, my friend.