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QBI Tax Treatment for Traders

QBI Tax Treatment for Traders

Traders or merchants who qualify for the trader's tax status (TTS) as a sole proprietorship, S-Corp or partnership (including hedge funds), wonder if they should use the tax treatment of "qualified business income " (QBI) in tax returns for 2018. I see a reason to include such treatment, but there are conflicts and unanswered questions, which makes it uncertain at this point. The QBI registries of Section 199A include "trade" as "specified service trade or business" (SSTB) and the QBI indicates the ordinary profit or loss of Section 475. However, the interaction of Section 199A with 864 (c) may cancel this and deny the tax treatment of the QBI to traders resident in the United States.

The treatment of QBI can be a problem for all TTS operators, not only for those who have chosen the ordinary profit or loss of Section 475. For example, a single proprietary TTS operator who submits an Annex C would report expenses for losses commercial like the loss of QBI, which could reduce the aggregate QBI of other assets, thus reducing a general deduction from the QBI. There are also traces of QBI losses.

Many TTS managers and hedge funds do not want QBI tax treatment because they did not choose Section 475 and QBI excludes capital gains, Section 988, foreign currency income, dividends, and interest income. Hedge fund counters seem to prefer the reason for Section 864 for not using QBI treatment for TTS funds.

A company or S-Corp must report QBI Annex K-1 items to "Other Information" in box 20 for Associations and Boxes 17 S-Corps, including the section on loss or income 199A, and factors related to 199 A as wages W- 2 and qualified property.

Given the uncertainty over the tax treatment of the QBI, operators are required to present fiscal extensions for 2018 for companies and S-Corps before March 15, 2019, and individual extensions before April 15, 2019.

An election to Section 475 of 2019 is due to these extension terms. Section 475 provides insurance against tax losses: exemption from debiting sales losses for the laundering of securities and avoiding the limitation of the capital loss of $ 3,000. There is a possibility that the trader is entitled to a deduction from the QBI on the yield of 475, so consider this possibility when making decisions. 

Section 864 can deny the QBI treatment to TTS marketers

Taking a closer look at the confusing language in the interaction of Section 199A with Section 864 (c), which could deny the treatment of QBI to TTS traders. The final records of section 199A imply that if commercial or industrial activity is not an "effectively connected income" (ECI) in the hands of a non-resident under section 864 (c) alien, then it is not QBI for a resident taxpayer Business or US trade

Historically, Section 864 has been applied to non-resident foreigners and foreign entities to determine US income including the ICE in section 864 (c). The reading section 864 makes sense considering non-resident foreigners. However, it becomes confusing when 199A overlaps the language at the top of Section 864 for the benefit of determining the QBI for US residents. 

The work of Section 864 is to show non-resident foreigners how to distinguish between the origin of the United States (effectively connected income) and the source of foreign income. A vital element of Section 199A is to limit a deduction from the QBI to "domestic or business affairs" rather than to foreigners. 199A also uses the term "negotiations or qualified business." It seems that the authors of 199A used modified Section 864 to determine the "national QBI."

Section 864, "Trade or business in the United States"  does not include:

Section 864(b) - Trade or business in the United States.

Section 864(b)(2) - trading in securities or stock.

(A): Securities and stock

(i) In general, Stocks or securities traded through a resident broker, a commissioner, a custodian or another independent agent.

(ii) Negotiation on the taxpayer's behalf. Negotiate shares or securities of self-employed taxpayers, either by the taxpayer or his employees or through a resident broker, commission agent, guardian or another agent, and if that employee or agent has the authority to make decisions for that Transactions purpose. This clause does not apply in the case of a trader in shares or securities.

(C) Limitation. Subparagraphs (A) (i) and (B) (i) (for products) apply only if, at any time during the fiscal year, the taxpayer has an office or other fixed offices in the United States through or from the address in which operations on shares, securities or goods are carried out, as the case may be. "

Example of (ii) above: a non-resident alien "negotiates his account" with a US brokerage firm. The non-resident does not have an office in the United States, but that does not matter since the limitation 864 (b) (2) (C) does not apply to (ii), a merchant of your account applies only to (i). Although this trader may qualify for TTS, he does not have a "business or trade in the United States" and therefore does not have a QBI as a non-resident foreigner.

Notice how the records in Section 199A refer to Section 864:

Section 199A (c) (3) (A) (i) establishes that for the purpose of determining QBI, the term qualifying elements of income, profits, deductions and losses indicates elements of income, profits, deductions and losses to the extent that such articles are actually related to the conduct of a commercial or commercial activity in the United States (in the sense of section 864 (c), determined by the replacement of "commercial or qualified activities (within the meaning of section 199A") by "foreign resident person" or "foreign company" in every place where it appears).

The reference above is for section 864 (c) ECI and not for 864 (b) (2) trade or business in the United States for securities or commodity trading. Could this imply that a TTS dealer resides in the United States? He has a QBI treatment for trade within the United States.

Income from services excluded by Section 864 (b) (1) (the provision of personal services to a foreign employer, or Section 864 (b) (2) of the Code (which deals with securities or commodities) does not as it can never be an effectively connected in the hands of a non-resident alien.

Code 864 (b) (2) generally treats foreigners, including companies, who trade shares, securities, and commodities for their account or through a broker or other independent agent who does not participate in a commercial transaction in the United States. Therefore, if negotiation or commercial activity is not involved in a company or business in the United States due to the Sec. Code "864 (b), the elements of income, profits, deductions or losses of such assets or business will not be included in the QBI because those items would not be linked to the conduct of a US company or business ".

In 199 A, the first reference to section 864 is found under the heading "Interaction of sections 875 (1) and 199A".

Section 875 (1) Associations; beneficiaries of agricultural holdings and trust funds: (i) a foreign non-resident or foreign company is considered engaged in an activity or commercial activity in the United States if the company of which that person or company member is involved, and a person non-resident foreigner or a foreign company that is the beneficiary of a property or a trust that engages in any commercial or commercial activity in the United States will be considered part of such business or activities in the United States. "

An example of Section 875 (1): considers a US association in the consulting sector. They own residents in the United States and non-resident foreign investors. Annex K-1 for partner’s reports revenue to line 1 which, according to Article 875, paragraph 1, is an ICE for non-resident members. The non-resident alien must submit a Form 1040NR to report this ECI and may be eligible for a QBI deduction, as it is a "commercial or national activity," determined at the entity level.

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