Clarity is Needed on QBI and Farm Income Averaging

Published on: 13:24PM Apr 23, 2019

The IRS released on April 19 some additional information on Qualified Business Income Deduction and the interplay of Farm Income Averaging reported on Schedule J.

Here is the direct quote from the release: "In figuring the amount to enter on Form 1040, line 9, Qualified Business Income Deduction, income, gains, losses, and deductions from farming or fishing should be taken into account, but only to the extent that deduction is attributable to your farming or fishing business and included in elected farm income on line 2a of Schedule J (Form 1040). "

As usual, this release is open to interpretation. Does this mean that a farmer can only deduct the 20% QBI deduction related to farm income elected for farm income averaging on line 2a of Schedule J. A farmer computes the amount of farm income that is available for inclusion in farm income averaging and then elects the amount that will be used in the calculation.

However, in many cases the farmer does not want to elect any farm income to use on Schedule J since their taxable income in the previous three years is much greater than taxable income in the current year (especially with the lower current rates).

Based on a literal reading of the release, it appears that the IRS is indicating you can only take the 20% deduction on income "elected" for Schedule J. We believe this is wrong and will try to determine if this really what the IRS means.

We will keep you posted.