Is it just me, or have I stumbled across a significant oversight?
I recently took on a new client at my firm, an LLLP that generates income from oil royalties. One of the partners is also one of my clients. I’ve noticed that the previous accountant did not apply the QBI deduction on the individual tax return nor provided QBI information to the partners via the K-1s.
Can anyone think of a reason why an LLLP collecting royalties would not qualify for the QBI deduction? There’s an explicit line on Form 8995 for royalties related to the QBI calculation. I’ve already identified a few minor mistakes from the prior accountant, but this seems like a major issue. I want to ensure I’m not overlooking anything. Unfortunately, the former accountant has retired, so I can’t discuss this with them or seek their rationale.
One response
It sounds like you’ve done some thorough analysis of your client’s situation, and you’re right to question the absence of the Qualified Business Income (QBI) deduction for the LLLP that collects oil royalties. Here’s a few things to consider:
Nature of Income: The QBI deduction is generally available for “qualified trades or businesses” under Section 199A. However, income from certain passive activities (like investment income, which could include royalties) may not qualify. Since oil royalties can sometimes be considered passive income, you should carefully assess whether the income from the LLLP meets the criteria necessary to be classified as QBI.
Royalty Determination: While royalties themselves can be included in the QBI calculation, it’s worth examining the specifics. If the royalties are derived from a trade or business that the LLLP actively participates in, they may qualify. However, if it’s strictly passive income without significant involvement from the partners, that could be a reason for not claiming the deduction.
Non-Resident Partners: If any partners are non-residents or if there are specific arrangements affecting how income is reported, that could complicate eligibility for the QBI deduction.
Prior Accountant’s Approach: It’s possible the previous accountant had a specific rationale based on the entity’s structure or activities that you may not be aware of. Double-check any relevant documentation or agreements that may clarify the nature of the royalties and the business operations.
Documentation and Support: Ensure you have the necessary documentation supporting the active participation in the oil royalty business, which would strengthen the case for claiming the QBI deduction.
If, after evaluating these factors, you still believe the prior accountant made an oversight, it could be beneficial to amend the returns for your client to claim the deduction if they are indeed eligible. It might also be wise to consult with a tax attorney or specialist if you’re looking for additional validation or guidance on this complex issue.