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MTM and the QBID

Mark-to-Market and the Qualified Business Income Deduction (Sec 199A)

If you are here then you have read a little about the Mark-to-Market election and its various advantages and disadvantages.

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Another advantage - created by the Tax Cuts and Jobs Act in 2017 - was the possibility of using the newly created Qualified Business Income Deduction when reporting your MTM trades on your tax return.

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Simply put, the QBID is possibly worth a 20% deduction on your Form 1040 reflected as an addition to your Itemized or Standard Deduction.  The 20% is the amount of your net gain multiplied by 20%.

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This deduction is available for all entities trading as MTM Traders with the exception of C Corporations - so basically all flow-through entities, including those traders trading as a sole proprietor.

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Lets see why and how this works ...

Statutory Creation

Qualified Business Income was created and described in Sec 199A of the Tax Cuts and Jobs Act ("TCJA") as:

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Income from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust or estate.

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There are statutorily-defined threshold amounts that may limit a taxpayer's deduction based upon:

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  • the type of trade or business engaged in

  • the amount of W-2 wages paid with respect to the trad or business and/or

  • the unadjusted basis immediately after acquisition of qualified property held for use in the trade or business.

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Tax Return Example - MTM in Flow-through Entity

This tax return illustrates how the net gains from a taxpayer's MTM Trading S Corp flows through to his Form 1040 and produces a deduction pursuant to Sec 199A, the QBID.

Assumptions:

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Spouse W-2 wages of $60,000

Interest of $1529 and dividends of $750 from the S Corp

Flow-through net gains from the S Corp of $50,000

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Included forms  in this illustration:

  • Form 1040 p1

  • Schedule 1

  • Schedule E p2

  • Form 8995

Form 1040 icon.jpg

Tax Return Example - No Entity

This tax return illustrates how the net gains from a taxpayer's MTM Trading sole proprietorship (Schedule C) flows through to his Form 1040 and produces a deduction pursuant to Sec 199A, the QBID.

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EXAMPLE COMING SOON

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If you prepare your own tax return using one of the popular online return websites, you may not be able to accomplish this.

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