I received a notice from the IRS this month:
We changed the amount claimed as your Qualified Business Income Deduction because there was an error in the computation.
The difference is in the thousands for the deduction (lower), and in the hundreds for what I owe (higher). I reread the instructions, redid the worksheet, and now I think I missed something. On page 34 of the general instructions for 1040 for 2018, Determining Your Qualified Business Income:
Your qualified business income includes items of income, gain, deduction, and loss from your trades or businesses that are effectively connected with the conduct of a trade or business within the Unites States. . . . It also includes other deductions attributable to the trade or business including, but not limited to, deductible tax on self-employment income, self-employed health insurance, and contributions to qualified retirement plans.
In other words, I should have reduced my Business Income by the amounts of business-related deductions to get the QBI. I neglected to do that for the self-employment tax deduction. That was my mistake. They don't explain how they computed the change to my numbers, but after tinkering a while their numbers agree perfectly with the theory that the IRS thinks I should also remove the standard deduction from my Business Income before calculating the QBI deduction.
That's a big difference. The standard deduction for single taxpayers is $12,000 for 2018, so that can lower the QBI deduction by $2400 (20%).
I don't think this is correct. The instructions say to include
deductions attributable to the trade or business and then explicitly
deductible tax on self-employment income. But nowhere does it mention the standard deduction. It seems to me a stretch that the standard deduction should also be removed from the QBI. How can that be attributable to my business when the same amount applies to all (single) taxpayers?
(Called the number in the letter. After 50 minutes on hold a guy transferred me to another department. Estimated wait time 30-60 minutes. Hung up. Now I intend to write.)