UBIA and its relationship to the Qualified Business Income Deduction (QBID)

Navigating tax laws can be a challenge even for the most seasoned professionals. The Internal Revenue Service (IRS) has enacted complicated rules that are rarely static.  They fluctuate when governmental regulations and acts are implemented or modified to reflect new policies. One example is the 2017 Tax Cut and Jobs Act (TCJA), which amended the Qualified Business Income Deduction (QBID) (see Section 199A of the Internal Revenue Code (IRC)). With these new changes to QBID, questions arose regarding how the Unadjusted Basis Immediately After Acquisition (UBIA) would work in practice. 

What is Unadjusted Basis Immediately After Acquisition (UBIA)?

Essentially, an unadjusted basis is the original cost to purchase an asset, which includes the price to acquire the asset and any expenses and liabilities associated with the purchase. The term is typically used in business accounting jargon and is similar to the concept of “cost basis”  or “inside basis.”  Unadjusted basis is also the starting point of determining depreciation on an asset.

“Depreciation” is an accounting term used to describe allocating the cost of a tangible asset over its life. It allows for the deduction of higher expenses from the unadjusted basis in the first years after purchase, and lower expenses as the asset depreciates. UBIA is better understood as a concept directly related to taxes.   

What Does UBIA Mean In Taxes?

The IRS defines the UBIA as the basis of qualified property on the placed in service date. Qualified property is described as any tangible property held in connection with any identified trade or business. The UBIA equals the cost of tangible property subject to depreciation, if the following criteria regarding the property are satisfied: 

  • Held by and available for use in the trade or business at the close of the tax year;
  • Used at any point during the tax year in the production of the trade or business; 
  • Depreciating period for UBIA purposes has not ended before the close of the tax year, which is either 10 years after the property is placed in service or the last day of the last full year of the property’s normal depreciable period, whichever is later.  

Figuring out UBIA is a complicated process. Conferring with a business accounting firm can help clarify the UBIA concept.

What is UBIA Used For?

The UBIA is routinely used in the calculation of the QBID, sometimes called the Section 199A deduction. The Section 199A deduction allows for owners of sole proprietorships, partnerships and S corporations to exclude from taxable income up to 20% of income considered to be qualified business income. 

Depending on the taxpayer’s taxable income, the QBID is subject to multiple limitations, including the UBIA.  The deduction is limited to the greater of 50% of W-2 wages paid by the business, or the sum of 25% of W-2 wages paid by the business plus 2.5% of the business’s UBIA. The process to determine if a business qualifies for the QBID deduction is complicated and consulting a business tax accountant is recommended. 

How Is The UBIA Calculated?

The UBIA of qualified property generally equals the cost of tangible property subject to depreciation. When calculating UBIA, discussion centers around what is considered qualified property. Commonly, qualified property is any tangible property that is used in the trade or business and for which a depreciation deduction can be claimed. 

The depreciable period ends on the later of 10 years after the property is first placed in service. Improvements to property already in service are treated as separate qualified property.  Once the asset’s 10-year window has expired, it is no longer included in UBIA, even if it is still being used in the business. Typically, the UBIA amount is the assets original basis. The UBIA amount does not take into account annual depreciation.

Where do I Enter UBIA Qualified Property on a Tax Return?

The UBIA is entered from section 199A statement on to IRS Form 8995-A.  

The QBID presents an excellent tax savings opportunity for taxpayers.  However, the QBID has limitations, specifically concerning the UBIA, which is important to understand.  Enlisting the help of the talented team of tax and accounting professionals at Cg Tax, Audit and Advisory is a great business decision to understand UBIA and its tax implications.

Contact Cg information about UBIA and filing 2021 tax returns.

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