If you are a Partner or Shareholder and file Schedule K-1 on your individual tax return, you may be able to claim the Qualified Business Income Deduction (QBID) on that income.
The deduction allows an individual to deduct up to 20 percent of their qualified business income (QBI), plus 20 percent of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income.
However, only certain types on income listed on Schedule K-1 will qualify for QBID. The amount which qualifies should be determined by the Partnership and will be reported to you on form 1065 or form 1120-S.
How is the qualified business income reported?
- If you receive Form 1065: Income which can be used to calculate QBID will be listed in box 20 with code Z for Section 199A information. Codes AA through AH reflect your share of the partnership's net section 199A deduction. Additional information can found in the Partner’s instructions .
- If you receive Form 1120-S: Income which can be used to calculate QBID will be listed in box 17 with code V for Section 199A information. Additional information can be found in the Shareholder’s instructions. Please be sure to review this Schedule K-1 1120-S Box 17 Code V article as well.
Why doesn’t all Ordinary Business Income reported on Schedule K-1 qualify for the QBID?
Items from a pass-through entity are required to be separately stated due to the potential of unique treatment on one or more owners' returns. Items not included in current year taxable income are not included in QBI. Therefore, additional details will also need to be provided for the owners. If, for example, in addition to ordinary income the owner is allocated a section 179 deduction, since the 179 deduction may be limited, the detail would be required for the owner to properly determine the current year QBI.
The Schedule K-1s for 2018 and forward have new codes for the QBI deduction items. The partnership needs to provide each partner with their share of QBI items, W-2 wages, UBIA of qualified property, and other information necessary for partners to compute their deduction. The same rules apply for S corporations.
What if my K-1 does not report the qualified business income in the correct box?
If a partnership or S corporation fails to provide this information, the final regulations provide that each unreported income of positive QBI, W-2 wages, or UBIA of qualified property attributable to the entity's trades or businesses will be presumed to be zero. This means that a partner or shareholder may be unable to claim a QBI deduction on the entity's income if the entity fails to report the information. It is recommended that taxpayer follow-up with a pass-through entity if they do not provide the necessary information. For additional information you can refer to the IRS Frequently Asked Questions.