MTM and the QBID
Mark-to-Market and the Qualified Business Income Deduction
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 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
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the amount of W-2 wages paid with respect to the trade or business and/or
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the unadjusted basis immediately after acquisition of qualified property held for use in the trade or business.
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​However, those are details beyond the scope of this discussion
Mechanics
For a flow-through entity, such as a partnership or S corporation, the process is pretty easy. Both of those entities produce a Schedule K-1 reflecting the amount and type of income reported to each individual partner or shareholder, respectively. Since you are trading as a mark-to-market trader, you would not be classified as a passive partner or shareholder. Thus, if the entity has income, that income would flow to Schedule E, and if the result was a gain, the QBID would be applied. If it is a loss, then it would be netted against other QBI or there would be no QBI.
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For a MTM trader taxed as a sole proprietor , the process is more complicated and somewhat dependent on one's tax software.
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The transactions themselves are reported on Form 4797 and/or Form 6781, depending on if one is trading Sec 1256 contracts. Expenses are reported on Schedule C. The trick is to get Form 8995 to net the Form 4797 and Schedule C in order to apply the QBID to the correct net income. Amounts from Form 6781 flow to Schedule D and would not be applicable to the QBID, except as an adjustment.
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Most professional tax software - that used by CPAs - would accommodate this combination but popular online or off-the-shelf tax software may not.
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Click here to see an example Form 4797-Schedule C-Form 8995 >>>