how to exclude capital gains from QBI calculation

[mickey]

I have a client who sold his home and will have capital gains.

He also gets a k1 that has QBI.

I believe capital gains is excluded from calculating QBI.

How do you tie these into each other?  Meaning what form would you use to exclude the capital gains

so it doesn't affect the QBI calculation?

Thank you

[jeffmcpa2010]

I am not sure without working through it how the house affects the QBI - doesn't seem like it should but until you run it through sometimes you don't know.

First you should check - Does your client qualify for the home sale exclusion of the first $250,000 of gain. (you fill that out on the home sale worksheet) ?

[Just-Lisa-Now-]

look at the 8995...do you see the house sale listed?

[TaxGuyBill]

I think you are referring to the "taxable income" threshold.

Is the capital gain not showing up on line 12 of Form 8995?

[mickey]

My client's taxable income is lower than his capital gains on form 8995A.

So it did not calculate the QBI deduction.

For example - in general terms: 

Taxable income including capital gains = 800000

Taxable income excluding capital gains = 40000 (due to large stock donation of $250K)

Capital gains from the house + others were 900000

Just to see what the software would do I overrode the capital gains and put zero.  

Then it gave him the QBI deduction.

Just wondering about the reasoning behind this as per tax code.

[TaxGuyBill · Accepted solution]

The program is doing it it correctly.  Capital gains lower the 'taxable income' threshold.

The deduction is the LOWER of (a) 20% of QBI or (b) 20% of 'taxable income' (after subtracting capital gains).

As for the reasoning behind it, that is how Congress wrote the law.  See §199A(a).

https://www.law.cornell.edu/uscode/text/26/199A

[mickey]

After reading all the replies from everyone, and further read the tax code, I came to the conclusion that

the government doesn't want you to double dip.  It means if the taxable income is greater than the capital gains, you have zero to multiply by the 20%.  My client's situation is just that, i.e. $700K in taxable income and $900K in capital gains.

Thank you all.  I think we found our answer.  Bummer but that's the law.