199A and Section 179

Tax preparation software for entity tax returns must compute qualified business income for the purpose of the §199A deduction to be included in the other information box of Schedules K-1.  (If an entity prepares Schedules K-1 without including §199A details in the other information box, the recipient of the K-1 is precluded from taking the §199A deduction on the recipient’s Form 1040.)

Many practitioners have questioned the treatment of the §179 deduction when computing qualified business income for the purpose of the §199A deduction.  Since qualified business income includes items of income, gain, deduction, and loss from the qualified trade or business, the §179 deduction represents a reduction of income when computing qualified business income from a qualified trade or business.

Some early versions of tax preparation software for entity returns computed qualified business income for the purpose of reporting it on Schedules K-1 without reducing the ordinary income of the entity by the §179 deduction claimed by the entity.  Later versions of such software have often corrected this computation and have begun reducing ordinary income by the §179 deduction when computing qualified business income to be reported on Schedules K-1.  Practitioners should be aware of this difference in the computation of qualified business income on Schedules K-1 that can result when the K-1 was prepared by an earlier version versus a later version of entity tax preparation software.

In addition to paying attention to this issue when preparing entity tax returns, practitioners must also consider it when using Schedules K-1 to prepare Forms 1040.  Practitioners should carefully observe whether or not Schedules K-1 report qualified business income that was reduced by the §179 claimed by the entity.  Sometimes, this can be determined by observing the amount of ordinary income and §179 deduction that is reported elsewhere on the K-1.  Other times, this may require requesting more information from the entity that issued the K-1.  (This is especially true if the entity conducts more than one trade or business.)

Once a practitioner observes the way that the Schedule K-1 reports qualified business income, the practitioner must also observe how the 1040 tax preparation software that he or she is using will compute the §199A deduction using the information entered from the Schedule K-1.

Some recently-released versions of 1040 software subtract the §179 reported elsewhere on the Schedule K-1 from the qualified business income reported in the additional information box of the Schedule K-1.  If a practitioner observes that the qualified business income reported in the additional information box of Schedule K-1 has already been reduced by the §179 deduction, then the practitioner will need to adjust the way that the qualified business income is being computed on his or her 1040 software, if that software is subtracting the same §179 deduction again.