Hi John, so good question… and I think what I said in respond to Harry’s query turns out to be right. But this clarification: Employee elective deferrals would already have reduced QBI because they’ve been deducted from the business’s income.

For example, it makes no difference to the QBI whether or not some employee making $40,000 elects to defer part of their income. Either way, the full $40,000 gets deducted (indirectly) on the business tax return.

Also this clarification: If the business owner operates as a sole proprietor, the total owner contribution to the 401(k) does make a difference. I.e., the full owner contribution (both profit sharing and “employee” elective deferral) reduce QBI and so reduce the QBI deduction. This is what many of us tax nerds thought after reading the prop regs, I think.

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Steve says

February 9, 2019 at 10:17 am

Hi Harry,

I think Reg. Sec. 1.199A-3(b)(vi) says you adjust for other deductions that take into account the gross income from the trade or business. And that you allocate other deductions proportionally if you need to allocate.

I.e., I don’t read the final reg to say that you would only adjust for deductions that “take into account the gross income” AND “work proportionally”.

This becomes clearer if one sees the entire paragraph–something I should have done above:

(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 selfemployment 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.

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For a sole proprietorship, could it be that the reason the “proportionate basis” qualifier is there is to differentiate between profit sharing contributions made by the employer which are calculated as up to a 25% proportion of business profits and employee elective deferrals which are capped $19K flat?

To me that would make sense, in that employer profit sharing contributions to employees other than the proprietor would have already reduced net business income via Line 19 on Schedule C, and to maintain consistency with that 199A-3(b)(vi) requires you to also reduce Schedule C net income for QBI purposes by the amount of employer profit sharing contributions made for the proprietor.

Employee elective deferrals made by employees with W2 wages paid by the sole proprietorship have nothing to do with the QBI calculations, why should employee elective deferrals made by the proprietor from the net business income on Schedule C reduce QBI? The logic being that once a wage is paid or a net business profit is determined, whether the receiver of those earnings in either form elects to contribute to a 401K it shouldn’t impact the amount of the wage (or net profit for QBI).

Thanks very much!

Agree that housing can also be viewed as the right “pure consumption” choice… but it can be looked at purely as an investment that produces an annual return. Whether a particular house is a good investment or a bad investment depends on the actual percentage…

Jim Collins is a great writer, by the way. I enjoy reading his work. Also, I think he makes some good points in his blog post, which I’ll point to here just for reader convenience:

https://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/

But a couple of points to highlight: First, the primary benefit of home ownership will be the net rent savings. Second, as noted in the article, relatively recent research indicates that in most countries, most of the time, housing beats equities. I linked to this other blog post of my in the article which compares equities, housing and bonds, but I’ll link to it again:

http://evergreensmallbusiness.com/rate-of-return-of-everything-study-in-line-charts/

I don’t think I forgot to include benefits or costs… I specifically said you wanted to be thorough in your analysis,

When you or I do our return calculations we need to count all of the economic benefits. And all of the economic costs.

Also I agree with you that housing burdens someone with considerable risk.

When I bought my house in 1967, the guideline was to spend no more than 25% of your family income on a house. That guideline has since gone up, but if people stick to that guideline it would be harder to get into trouble. But then perhaps no one would be able to buy a house in today’s market.