Article Posted on 03/21/2019
On January 18th of this year, the IRS finally told us what the rules are. Taxpayers will need to calculate a reduction to QBI for certain deductions reported on the tax return that are not specifically paid by the business. These deductions include 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 taxpayers. But some 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 C and Schedule F taxpayers. 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.