There are several key terms used in the §199A regulations. It is essential to become acquainted with these terms and, when applicable, their abbreviations.
Qualified business income (QBI) - QBI is the net total of qualified items of income, gain, deduction, and loss related to any trade or business.
Trade or Business – Trade or business is defined under §162(a), as an activity in which a taxpayer is involved with continuity and regularity and that the taxpayer’s primary purpose for engaging in the activity is for income or profit. A trade or business of performing services as an employee is not considered a trade or business for purposes of §199A.
Qualified trade or business – A domestic trade or business, in which a taxpayer is involved in the activity with continuity and regularity and that the taxpayer’s primary purpose for engaging in the activity is for income or profit.
Domestic Business – Qualified items of income, gain, deduction, and loss are only included in the calculation for QBI if they are connected to the conduct of a trade or business within the United States and Puerto Rico. QBI from sources within Puerto Rico must be taxable in the United States for the tax current tax year to be considered to purposes of calculating the individual taxpayer’s QBI
Individual - The term individual is used throughout the proposed regulations to refer to an individual, trust, estate, or other taxpayers eligible to claim the §199A deduction. More research is needed to determine how QBI may apply to grantors and beneficiaries of trusts and estates.
Specified service trade or business (SSTB) - A specified service trade or business is defined in §1202(e)(3)(A) as those performing in the service fields of health, law, engineers, architects, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of the trade or business is the skill of one or more of its employees. §199A has modified this definition slightly by removing engineers and architects, and by amending the final sentence to reference the skill of one or more of its “employee-owners” instead of “employees.”
W-2 wages – For purposes of QBI W-2 wages include the total of:
wages paid to employees for services performed
wages subject to income tax withholding
elective deferrals (example – 401(k) plans)
Threshold amount – Threshold amount refers to taxable income, calculated without consideration of the QBI deduction. The 2018 threshold for Married Filing Jointly (MFJ) taxpayers was $315,000, and all other filing statuses were $157,500. The threshold amount will be indexed for inflation for tax years after the tax year 2018. For 2019 the inflation-adjusted threshold is $321,400 for MFJ taxpayers, $160,725 for Married Filing Separate returns, and $160,700 for Single and Head of Household returns. Phaseouts start at these amounts.
Real estate investment trust (REIT) - A company that owns and possibly operates, income-producing real estate. REITs own various categories of commercial real estate, such as office buildings, apartment buildings, hotels, shopping malls, warehouses, hospitals, and timberlands.
Qualified REIT dividends – Qualified REIT dividends are dividends received from a real estate investment trust that are not capital gain dividends under §857(b)(3) and aren’t qualified dividends under §1(h)(11), plus those received from a regulated investment company (RIC).
Qualified property - Qualified property is tangible depreciable property held at the end of the tax year and was used during the year to produce QBI. The depreciable period must not have ended before the end of the individual's or RPE's tax year. Land and inventory are not depreciable; therefore, are not qualified property
Qualified PTP income – Qualified PTP income or losses include the taxpayer’s share of qualified items of income, gain, deduction, and loss received from a PTP. Qualified PTP income may include gain or loss realized on the disposition (Permanently withdrawn from use in a trade or business or from the production of income) of the taxpayer’s partnership interest that is not treated as a capital gain or loss.