QBID in a Trust or Estate return (Form 1041)

The Tax Cuts and Jobs Act (TCJA) of 2017 brought with it the Qualified Business Income Deduction (QBID), which is also referred to as Section 199A deduction. Taxpayers having pass-through income are granted power by QBID to subtract from their AGI, upto 20% of the Qualified Business Income (QBI), with certain limitations. The deduction can be for pass-through income from Partnerships, Sole-Proprietorships, Publicly Traded Partnerships, S Corporations, Trusts and Estates. 

Trusts and Estates having a business or trade are able to claim QBID at the entity level instead of being passed to the beneficiaries. 

When does the trust or estate claim QBID? 

A non-grantor trust or estate can choose to either claim the QBID or grant their beneficiaries the Section 199A information. Items of Section 199A will all be allocated wholly to the estate or trust in the event that the estate or trust lacks Distributable Net Income (DNI) for the tax year. Estates and Trusts are able to calculate their QBID in so far as section 199A items are allocable to them. In the calculation of the Estate or Trust QBID, section 199A items that had been allocated to beneficiaries are excluded. Check out instructions for Form 1041, U.S Income Tax Return for Estates and Trusts for more information. 

Grantor trusts, or those trusts in which an individual is regarded as the owner of either part or the entire trust or estate, calculate the QBID for the part owned as if the owner/grantor had directly received the section 199A items. 

Are there specific rules applicable to trusts? 

The income limitations to taxpayers are the same ones that apply to trusts. Income for 2020 must be below $163,300 while that for 2021 must be below $164,900. The QBI of an estate or trust includes income, loss, gain and deduction related to a trade or business included in the computation of taxable income for the tax year. QBI is inclusive of the estate’s or trust’s percentage in items of income, loss, gain and deduction from business or trade run by partnerships, S Corporations and other trusts or estates. 

Income is regarded as any consistent and continuous activity in which the estate or trust is involved in for profit. Section 162 trades or businesses are included, the only exception being the Specified Service Trades or Businesses  (SSTBs). 

QBID can only be up to either 20% of the QBI or 20% of the income subject to tax minus capital gains. Capital gains are normally a major element of the taxable income of a trust or estate. 

What are the navigation steps? 

A trust or estate can either claim the QBID on the estate or trust, or hand it down to the beneficiaries. 

To claim QBID for a trust or estate

• Go to the Main Menu of the tax return (Form 1041) 
• From the menu, select Deductions 
• Proceed to Qualified Business Income Deduction 
• Then select Taxable Income 
• Capital Gains 
• REIT Dividends - These lines display the amount of income reported in the return for every one of these items. No adjustments are required. However, you can still choose a line and enter the +/- adjustment to adjust any amount 
• Pass-through businesses - The items here display the Sec 199A section of every Schedule K-1 entered in the return. Information entered in the Sec 199A section of the Schedule K-1 will be used in the calculation of the QBI. 
• Aggregation of Business Operations - Every trade or business ought to be treated differently from the others for the purposes of the QBID computation. However, in certain circumstances, businesses may be aggregated. This may be very advantageous, for instance, in the event that one business has a payroll that is higher than the others. The following must be true for businesses to be aggregated: 

1. The tax year end used by all the trades/businesses is the same
2. Each trade/business must be 50% owned by the taxpayer for a large part of the tax year, inclusive of the very last day of that tax year. Ownership may be individually, in a group, directly or indirectly. 
3. There isn’t a Specified Service Trade or Business amongst the ones being aggregated. 
4. The trades/businesses attain at least two of the following factors:

1. The products, property or services of the businesses/trades are either the same or are normally offered together 
2. The trades/businesses use the same business resources such as accounting, HR, IT, Legal, manufacturing, purchasing, and personnel. 
3. They coordinate or rely on either one or several businesses in the aggregated group. 

The decision to aggregate is taken by the taxpayer rather than the preparer, putting into consideration the facts and circumstances in the present and the future. The decision to aggregate is non-revocable and it must be carried on in the successive years unless there is a change in circumstances that disqualifies the aggregation. 

To aggregate businesses: 

• Go to the Aggregation of Business Operations menu 
• From the menu select New 
• Description - Provide a short description of the aggregation’s name 
• Explanation - give a reason for the aggregation (in accordance with the IRC Sec 1. 199A-4). There are not more than 156 characters in two lines. 
• Changed from Prior Year - Provide an explanation for any changes, if at all any, to the aggregation from the prior year because of a trade/business’s formation, acquisition, disposal or ending. 
• Allocate Business to Aggregation - From the list, to include a business in the aggregation, check the box next to it
• In the event that you file Form 8995-A with the return, a separate Schedule B for that form will bear the aggregation information. The aggregation information is to be on a different attachment to Form 8995 in the event that Form 8995 is filed with the return. 
• Prior Year Qualified Business Loss Carryforward - enter all the losses or deductions that were not allowed in the calculation of the taxable income in a previous year, and that can be included in the present year. Based on the produced form, this amount will flow to Line 3 of Form 8995 or Line 2 of Form 8995-A, proportionately allocated amongst all the businesses. The amount will transfer to the form as a negative, regardless of its entry. 
• Prior Year REIT/PTP Loss Carryforward - Enter any REIT or PTP losses or deductions that were never allowed in a previous year and can be included in the present year. Based on the form used, this amount flows to either Line 7 of Form 8995 or Line 29 of Form 8995-A. The amount will transfer to the form as a negative figure. 
• Enter the Domestic Production Agricultural Deduction claimed if the estate or trust is member to an agricultural cooperative. 

Taxx Savage Pro calculates the QBID on Form 8995 or 89950-A appropriately. 

QBID on Schedule K-1

To report QBID items to the estate or trust beneficiary on Schedule K-1: 

• Go to the Main Menu of the tax return (Form 1041) 
• From the menu select Schedule K-1 
• Then Schedule K-1 Input 
• Select NEW then enter the information about the beneficiary if it has not yet been entered.You may also select a beneficiary
• Proceed to Allocable Share items 
• Then to Other Information 
• Then Qualified Business Income, section 199A 
• New - For every business activity, enter the share of section 199A income, W-2 wages, UBIA, REIT dividends and PTP income that belongs to the beneficiary 

Note: UBIA refers to the real cost of all the assets placed in service in the previous 10 years, unreduced by depreciation, Section 179 deduction or bonus depreciation. 

On the Beneficiary's Schedule K-1, Section 199A income will display in Box 14 with Code I having an asteri, showing the QBID information needed by the beneficiary for their individual tax return, included on a statement printed with Schedule K-1. 

Forms used to claim QBID? 

There are two forms that can be used in claiming QBID: 

• Form 8995 - Qualified Business Income Deduction Simplified Computation 
• Form 8995-A - Qualified Business Income Deduction 

Form 8995 is included in the return in the event that the following are true about the estate or trust: 

• It has qualified business income or loss, REIT dividends or PTP Income or loss. 
• Its income, that is subject to tax, prior to QBID is less than or the same as the income limitation 
• It is not a patron in a specified agricu;ltural or horticultural cooperative

Form 8995-A is used in the event that the taxable income of the trust or estate prior to the QBID is more than the income limitation, or in case it is a patron in a specified agricultural or horticultural cooperative.