QBI calculation when S Corporation Shareholder Health Insurance is on W2

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Message Board QBI calculation when S Corporation Shareholder Health Insurance is on W2

This topic contains 6 replies, has 3 voices, and was last updated by Anne Tesoro 2 months, 1 week ago.

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  • #141306
    Anne Tesoro
    Participant

    My tax software, Lacerte, is not reducing QBI by the shareholder medical insurance included on the the W2 and deducted as an adjustment to AGI. This seems logical since the medical insurance was already deducted at the S Corp level via it’s inclusion in wages but it does not seem to be addressed in the regs. Is it correct to not deduct it in arriving at QBI?

  • #141367
    Anne Tesoro
    Participant

    Update – I think Lacerte is calculating this incorrectly. I spoke with them and they seem to agree and are looking into it. They are doing the same thing with partnership income ( not deducting the S.E. Health or the Pension in arriving at the 20% deduction). It’s possible that their most recent update created this issue.

  • #141379
    Sandy Weiner
    Participant

    Thanks for the update! Let us know if you hear more.

  • #142016
    Anne Tesoro
    Participant

    I just spoke with Lacerte again. I was told that they “currently think” that, for partnerships and S corps, the insurance shouldn’t be deducted from QBI before applying the 20% because the entity is taking a deduction for the insurance included as wages or G/C. This doesn’t make sense to me because the wages or G/C is being picked up as income on the 1040 so there’s a wash on the deduction and the income. This puts the Individual in the same place as if it were a Schedule C with a deduction for the insurance in arriving at AGI. For a schedule C, Lacerte deducts the health insurance from QBI before applying the 20%. Why should an S Corp shareholder or a Pship partner get a different result than a Schedule C. I requested this be escalated and Lacerte provide us with a basis for their “current thinking”. I’ve spoken with several people there and get the feeling that things are a mess.

  • #142305
    Andrea Wellman
    Participant

    I was having a similar problem for an LLC (SE Health) in Proseries (also Intuit product) but your follow up comparison to Sch C actually made me think about this slightly differently.

    In your example above, the difference between an S Corp shareholder and a Schedule C sole proprietor is that in the S Corp, the cost of the health insurance was deducted to arrive at income on line 1.  Whereas on Schedule C, neither the SE health insurance nor the retirement plan contributions (for the sole proprietor) are deducted on the actual Schedule C.  Instead, those deductions are on the face of the 1040 (or rather they were, they’re now on Schedule 1).  In the Schedule C case, the net income on Schedule C would be reduced by those two Schedule 1 adjustments to arrive at QBI.  That would be commensurate with Lacerte’s approach that the same costs when born by the S Corp are already deducted to arrive at the income flowing through to line 1 therefore do not need to be deducted again.

    In the Quarterly Tax Update last week, there was an example of  Ruth, a partner in a partnership that generates $85k of qualified business income.  In the example she also has Schedule C income to show that expenses must be proportionately applied to multiple sources of SE income.  Ignoring that for a minute, the conclusion in the example is :

    Under the final IRC §199A regulations, Ruth’s QBI from the partnership is calculated
    by starting with the $85,000 flowing through to Ruth on Schedule K-1, then reducing it by
    the one-half SE tax proportionately allocable to the partnership, the SE health insurance
    attributable to the partnership’s group insurance plan, and the qualified retirement plan
    contributions attributable to the partnership’s retirement plan.

    The only clarification that I would make here is that the $85,000 of QBI is Ruth’s <span style=”text-decoration: underline;”>line 1</span> income.  Her health insurance is deducted as part of her guaranteed payment on line 4 and her retirement plan contributions are disclosed on line 13 R.  Thus in this case, neither of these deductions have already been taken from line 1 which is why she is required to reduce her $85k by those two adjustments.

    Hopefully, the Regs are not requiring taxpayers to reduce QBI by the SE deductions twice!

    In my LLC situation with Proseries, however, I believe the calculation is incorrect.  Just like Ruth in the example, the QBI to my client flows on line 1 of the LLC K-1.  Had the LLC covered health insurance, it would have been included in the guaranteed payment on line 4.  In this case, I believe the SE Health should further reduce the QBI from the LLC.  That would apply if the LLC covered the insurance and included it in guaranteed payment or (as in my case) the LLC member bought his insurance on the exchange and it isn’t included anywhere in the LLC results.  Either way, the SE Health should reduce QBI once and it is not doing that currently.

  • #142312
    Anne Tesoro
    Participant

    I’ve gone over it more and done more analysis. I’m beginning to think my analysis is flawed and that Lacerte is correct. A schedule C taxpayer has no deduction for the SE Health at schedule C and instead deducts it as an adjustment to income. An S Corp K1 does have a deduction for the SE Health insurance in arriving at ordinary income on the K1. The taxpayer with the S Corp also has the health insurance deduction as an adjustment to income but this is offset by the W2 income for it. This puts the S Corp overall income in parity with the schedule C overall income. So, in arriving at QBI subject to the 20%, Lacerte deducts the insurance for the schedule C income but not for the S Corp income. That’s because the net is the same for the Schedule C after considering the income adjustment for health insurance as it is for the S Corp K1 income.

  • #142313
    Anne Tesoro
    Participant

    Also, I should have added. Lacerte has said they do not plan to change their calculation, they think it is correct.