I know, I know – you have been hearing so much about how we needed guidance, or we don’t know what is going to qualify for the 20% Qualified Business Income (QBI) deduction and please give us some help.
So, as you may have heard, we received some help – in the form of 184 pages of regulations. Shockingly, 184 pages is not enough to get us all to the finish line – we still have questions.
While there may be many areas with some ambiguities and actual remaining questions, here are just a couple of them.
A client may have had losses from a passive activity that were not allowed to be taken, due to limitations on a variety of things, including no passive income to offset the passive losses. (By the way, this is from the Tax Reform Act of 1986, which was the biggest tax overhaul until the current one!)
Anyway, these are cumulative losses, never expire and can be used. But the losses were never required to be tracked by year, and so, the losses for several years may be all included in one amount.
Passive losses incurred before January 1, 2018 do not reduce QBI. Passive losses incurred after January 1, 2018 do. So, now we need to trace these amounts separately. Okay, okay – so, we need to keep track of separate losses – what is the big deal? Well, which losses do you use first? The pre-January 1, 2018 losses or the post-January 1, 2018 losses? Do we get to decide based upon what is the most beneficial outcome to the client?
Basis and at-risk limitations
So, let us say that your losses are not passive, as described above, and so, are fully deductible. But you do not have enough basis or are not at risk to have taken these losses. So, of course, then they were not fully deductible. I know, clear as mud. Anyway, now you generate enough income to take these previously disallowed losses. Guess what – the income you earned from your QBI activity is reduced by these previously disallowed losses. But like the passive losses above, we now need to keep track because losses before January 1, 2018 will not reduce QBI. So, yes, we are going to need to start tracking the dates on these losses separately as well.
But tracking losses, and deciding which losses to use first, are not the same. While common sense may tell you that first-in, first-out would apply, it is not stated. And there are other instances in the tax arena in which FIFO does not apply.
So, we will finish up the 2017 tax returns, do the planning we can on the 2018 income and see what we learn, if anything, in the next several months.
Donna H. Laubscher, CPA