In a couple of earlier posts, we had indicated that you need to reduce your Qualified Business Income (QBI) by the related self-employed (SE) tax deduction. This is fairly easy when there is only one business and no sales to a cooperative before its fiscal year-end.
What happens when a farmer has other business income and/or sells to a cooperative before the fiscal year-end. In that case, you will need to allocate the SE tax deduction on a pro-rata basis to each item of QBI and back out the portion related to non QBI income. The tax software likely will not know about the sales to the cooperative before the fiscal year-end, therefore, you will need to override the amount of SE tax deduction it is using to reduce QBI.
Here is an example:
Farmer John has Schedule F income of $200,000 (half allocated to sales before the fiscal year-end). He also has a Schedule C that shows $100,000 of net income. SE tax is calculated at $25,000 (rounded). The deduction that shows up on the return is $12,500. One-third of this deduction is attributable to the farm income before the fiscal year-end which is not QBI, therefore, we only deduct 2/3rd of $12,500 or $8,333 against QBI. This results in total QBI of $191,667 ($300,000 minus $100,000 before fiscal year minus $8,333 of SE tax deduction).
The SE health insurance deduction works a little different. In order to get that deduction, typically one business needs to pay the health insurance and it needs to have net taxable income. Therefore, that deduction will be allocated specifically to the business that paid it.
Also, since the health insurance for owners paid via an S corporation or partnership is in the form of compensation, it will not reduce QBI since it is not part of QBI. Only Schedule C or Schedule F health insurance will reduce QBI. You may need to override your tax software.
We are still finding that our tax software is not calculating everything related to QBI correctly. We believe it is imperative that you have your own spreadsheet to calculate QBI factoring in the correct amount of SE tax deduction and SE health insurance or retirement plan contributions.
It will get easier next year, but 2018 will continue to be a work-in-progress.