8589 / How is UBIA calculated for purposes of the Section 199A pass-through tax deduction, and why is this calculation important?

(x)  50 percent of W-2 wage income or

(y)  the sum of 25 percent of the W-2 wages of the business plus 2.5 percent of the unadjusted basis immediately after acquisition (known as “UBIA”) of all qualified property.²

Therefore, for businesses that exceed the annual threshold levels, calculation of UBIA becomes important.

UBIA of qualified property must be calculated for each individual trade or business before any aggregation rules are applied. Each partner or shareholder must be allocated his or her proportionate share of UBIA of qualified property.

Under the proposed regulations, if partnership property was no longer depreciated each year (i.e., if the property had been held for less than 10 years, but its recovery period had ended), each partner’s share was determined as though a hypothetical sale had occurred for cash at the property’s fair market value (i.e., how gain would be allocated under IRC Section 704(b) and IRC Section 704(c)). This was modified by the final regulations, which now provide that each partner’s share of the UBIA of qualified property is determined in accordance with how depreciation would be allocated for section 704(b) book purposes under Treasury Regulation § 1.704-1(b)(2)(iv)(g) on the last day of the taxable year. In the S corporation context, the shareholder’s share of UBIA of qualified property is proportionate to the ratio of shares held by the shareholder compared to total S corporation shares outstanding on the last day of the year.³

In general, if property was purchased or produced by the pass-through entity, UBIA is generally its cost basis under IRC Section 1012 as of the date the property is placed into service.⁴ If the property was inherited and placed into service by the individual inheriting the property, UBIA is the property’s cost basis under Section 1014 (i.e., the fair market value of the property as of the date of the decedent’s death), and the final regulations provide that a new depreciable period for the property begins as of the date of the decedent’s
death.⁵

See Q for a discussion of how acquisition of the property via a like-kind exchange of involuntary conversion impacts the calculation. How W-2 wages are calculated for purposes of the QBI deduction is discussed at Q and Q . See Q for an explanation of exceptions to the UBIA and W-2 wage rules.