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.
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.
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%.
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.
Lets see why and how this works ...
Qualified Business Income was created and described in Sec 199A of the Tax Cuts and Jobs Act ("TCJA") as:
Income from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust or estate.
There are statutorily-defined threshold amounts that may limit a taxpayer's deduction based upon:
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.
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.
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
Included forms in this illustration:
Form 1040 p1
Schedule E p2
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.
EXAMPLE COMING SOON
If you prepare your own tax return using one of the popular online return websites, you may not be able to accomplish this.