QBI and Charitable Contributions

Question

I have a client that will not be itemizing and will take advantage of the standard deduction. Lacerte is not deducting the K-1 charitable contribution from QBI. If I go into the system and force a Sch A, then Lacerte will deduct it from QBI. I can’t find anywhere in the instructions that says you don’t subtract charitable contributions from QBI if the taxpayer isn’t benefiting from the Sch A deduction. Does any know? Thank you!

rbynaker · Accepted Answer

I'm assuming that's Lacerte's interpretation of 199A(c)(3)(A)(ii):

The term “qualified items of income, gain, deduction, and loss” means items of income, gain, deduction, and loss to the extent such items are - included or allowed in determining taxable income for the taxable year.

Advise your client to stop making charitable contributions from a business entity. Distribute the money to the owner(s) and have them make the donation directly. I'm not convinced that I agree with the IRS's position that pass-thru donations reduce QBI, but it's easy enough to get around.

itonewbie · Answer

Lacerte, like many other tax preparation software, program their tax logic based strictly on IRS instructions. Treating charitable contributions as a qualified item of deduction is a page Intuit has taken from the filing instructions of F.8995/F.8995-A:

..To figure the total amount of QBI, you must consider all items that are related to the trade or business. This includes, but isn’t limited to, charitable contributions, unreimbursed partnership expenses, business interest expense, deductible part of self-employment tax, self-employment health insurance deduction, and contributions to qualified retirement plans...

You mentioned that charitable contributions were subtracted from QBI even though the taxpayer elects to take standard deduction. If that is the case, it doesn't sound right because §1.170A-10(a)(2) is applicable only to the determination of charitable contribution carryover.

@rbynakerreferred to §199A(c)(3)(A)(ii). I would also go back to paragraph (1), which states the following:

199A(c)(1)In general.—The term "qualified business income" means, for any taxable year, the net amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer. Such term shall not include any qualified REIT dividends or qualified publicly traded partnership income.

To understand what is considered qualified items of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer, we need to refer to §1.199A-3. Specifically, for charitable contributions, we'd look to subsection (b)(1)(vi) which covers other deductions. The texts underlined are consistent with the comments published by the IRS in Section IV(A)(5) of TD 9847. It is noted by many that charitable contributions were never named as an example of qualified items in the preamble or the comments on the final regulations:

(vi)Other deductions.—Generally, deductions attributable to a trade or business are taken into account for purposes of computing QBI to the extent that the requirements of section 199A and this section are otherwise satisfied. For purposes of section 199A only, deductions such as the deductible portion of the tax on self-employment income under section 164(f), the self-employed health insurance deduction under section 162(l), and the deduction for contributions to qualified retirement plans under section 404 are considered attributable to a trade or business to the extent that the individual's gross income from the trade or business is taken into account in calculating the allowable deduction, on a proportionate basis to the gross income received from the trade or business.

By nature, charitable contributions allowable under §170 are unrelated to a trade or business and not business expenses under §162. Hence, none of these contributions should be subtracted from QBI. You may also like to read the AICPA's response to the IRS about its guidance on §199A deduction, including the subtraction of charitable contributions against QBI: https://www.aicpa.org/content/dam/aicpa/advocacy/tax/downloadabledocuments/20200304-aicpa-comments-on-section-199a.pdf

In the meantime and until the IRS updates the filing instructions, pass-through may not want to make to make those contributions at the entity level, as Rick suggested, or consider filing the return with disclosure.

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