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Does self-employed DB contribution reduce qualified business income

hgtc
Level 5

self-employed client has Defined Benefit contribution.  But, in Lacerte, this DB contribution does not reduce QBI from net profit in Schedule C.  Is this correct?

For example, he has $100,000 net incomes and contribute $60,000 to his DB in 2018.  Lacerte show QBI for $96,900 (just reduce 1/2 of self-employed taxes), and he will have 20% QBI deduction on this $96,900.

I thought retirement plan contribution should be back out of QBI.

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Kathi_at_Intuit
Employee
Employee

This was implemented in an update on 3/19. I just checked my Lacerte and I do see when I click on the WKS for line 9 that the Defined Benefit is reducing QBI.

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18 Comments 18
George4Tacks
Level 15
@Kathi_at_Intuit Is this being looked at?

Answers are easy. Questions are hard!
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hgtc
Level 5
I checked those similar questions below.  But, my question is on "calculation of incomes subject to QBI".  Do you know if self-employed DB contribution should be deducted from Sch C income before QBI calculation?
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George4Tacks
Level 15
Look at https://proconnect.intuit.com/tax-reform/entity-selection-calculator/

Answers are easy. Questions are hard!
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Ember123
Level 4
For a sole proprietor with no employees who makes contributions to both a profit sharing plan and a defined benefit plan Lacerte deducts the profit sharing contribution in arriving at QBI but not the defined benefit contribution. Perhaps Lacerte is doing this because the DB contribution calculation is not based solely on Schedule C income but takes into account other factors such as age and DB account balance. I have not found any definitive guidance on this in any income tax regulation, IRS guidance, etc.
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Kathi_at_Intuit
Employee
Employee

This was implemented in an update on 3/19. I just checked my Lacerte and I do see when I click on the WKS for line 9 that the Defined Benefit is reducing QBI.

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itonewbie
Level 15

DB contribution to a qualified plan for the self-employed individual is deductible on Line 28.  Deduction for contributions for employees are, on the other hand, deductible on Sch C.

It does not appear Lacerte/PTO are taking the DB contribution into account even though it does correctly take into account SEP-contribution deductions.  This is clearly a glitch that should be fixed.

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Still an AllStar
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itonewbie
Level 15
@Kathi_at_Intuit @Intuit Austin This is a glitch in Lacerte/PTO.  Could you please take a look and give us an update?  Thanks!
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IntuitAustin
Intuit Alumni
Catching up and looking into this one as well @itonewbie

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Kathi_at_Intuit
Employee
Employee
I have checked on this and this is what I have found, since the defined benefit is not reliant on business income to calculate the deduction on schedule 1 line 28 it should not reduce the QBI. If you have anything that states otherwise -- publication, regulations, revisions, or instructions, please give them to me and I will report this to our development for review.
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hgtc
Level 5
Kathi, Defined Benefit is a qualified retirement plan under sec 404.  So, it should follow the same as 401k or SEP.  For your reference, here is a post in community web.

 Why is my total Qualified Business Income (QBI) being reduced for one-half self-employment (SE) tax, SE health insurance, and/or certain other retirement plan contributions?

Solution:
The total Qualified Business Income is reduced by these amounts based on Section 199A Regs.  This information can be found beginning on page 43, in the section for '5. Treatment of Other Deductions' which states;
  
The Treasury Department and the IRS have not adopted these recommendations because they are inconsistent with the statutory language of section 199A(c). Whether a deduction is attributable to a trade or business must be determined under the section of the Code governing the deduction. All deductions attributable to a trade or business should be taken into account for purposes of computing QBI except to the extent provided by section 199A and these regulations. Accordingly, §1.199A-3(b)(1)(vi) provides that, in general, deductions attributable to a trade or business are taken into account for purposes of computing QBI to the extent that the requirements of section 199A and §1.199A-3 are otherwise satisfied. Thus, for purposes of section 199A, deductions such as the deductible portion of the tax on self-employment income under section 164(f), the self-employed health insurance deduction under section 162(l), and the deduction for contributions to qualified retirement plans under section 404 are considered attributable to a trade or business to the extent that the individual’s gross income from the trade or business is taken into account in calculating the allowable deduction, on a proportionate basis. The Treasury Department and the IRS decline to address whether deductions for unreimbursed partnership expenses, the interest expense to acquire partnership and S corporation interests, and state and local taxes are attributable to a trade or business as such guidance is beyond the scope of these regulations.
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itonewbie
Level 15
@Kathi_at_Intuit DB contribution, as explained, is subject to net earnings from the trade or business.  It is attributable to a qualified trade or business and should reduce QBI as per the preamble and explanation for the Final Regs.

What have you found that says otherwise?  Whether a deduction is to be taken as an above-the-line deduction is not relevant.  The sole consideration is whether that item is attributable at a qualified trade or business as determined by the existing code section and regulations.

We always end up providing citations to back up what we believe is the correct tax treatment but Intuit either will not or cannot provide any citation to back up its position or rebut ours.

Hope to get a clear update from your team soon.
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Kathi_at_Intuit
Employee
Employee
@itonewbie @hgtc I have spoken with another one of our developers and they agree if the defined benefit falls on the same line as the SEP/SIMPLE, it should reduce the QBI. I have written this up and will be able to attach you both to this so that you will receive an update via email when one becomes available. I have asked @Intuit Katie to look at this for PTO to see if this needs to reported for it.
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itonewbie
Level 15
Thanks, @Kathi_at_Intuit.  Would you have an ETA for this?
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hgtc
Level 5
Thank you.  Due to DB amounts, there will be big tax differences.
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Kathi_at_Intuit
Employee
Employee
@itonewbie just checked on this. There is no ETA as of yet. I will keep an eye on it.
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Ember123
Level 4
What's an ETA?
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abctax55
Level 15
Estimated Time of Arrival
** IRonMaN ** is FREE 🙂
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Kathi_at_Intuit
Employee
Employee
Let me check on this.
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