The Final Regulations indicated that farmers (and other taxpayers) will need to reduce Qualified Business Income (QBI) for certain deductions reported on the tax return that are not specifically paid by the business. These include the deduction for half of the self-employment tax, the self-employed health insurance deduction, and retirement plan contributions. This will likely reduce the possible Section 199A deduction for almost all farmers (in many cases it would not matter if they have no other taxable income since the 20% of ordinary taxable income would limit the deduction anyway).
With regards to the self-employed health insurance deduction, this may only apply to Schedule F farmers. The SE health insurance deduction for partnerships and S corporations is really a component of either shareholder wages or guaranteed payments to the partner, therefore, it may not reduce QBI.
All of these deductions may need to be allocated between QBI and Non-QBI income on a pro-rata basis if they are not specifically allocated to one business. In some cases, this will mitigate the reduction in QBI.
As as example, assume that a farmer earns $150,000 from a Schedule F and also earns $100,000 from consulting on a Schedule C. The percentage of income related to QBI is 60% ($150,000 / $250,000). He is fully over the threshold, therefore, none of the Schedule C income qualifies as QBI since it is treated as a Specified Service Trade or Business (SSTB). The farm paid for his health insurance of $20,000. He also contributed $50,000 into a retirement plan. His QBI is calculated as follows:
- $150,000 from Schedule F, less
- $30,000 retirement plan contributions, less
- $20,000 related to the health insurance (since the farm paid it, it is not pro-rata), less
- $7,112 for the share of 1/2 of the SE tax deduction ($23,730 of total SE tax times 60% times 50%).
Instead of having QBI of $150,000, the farmer now has QBI of $92,888 or about a 38% reduction.
And we are not going to add in the complication from having any of the farm income being from a cooperative. We are still waiting on guidance for that.