UBIA Limits Section 199A Deduction: What is UBIA & How Does it Work?
UBIA is the basis in a partnership’s property, and it can work to limit a partner’s section 199A deduction.
- UBIA, and
This limitation will be relevant to taxpayers or partners who own real estate as part of their business, especially those that qualify for the deduction under the safe harbor.
W-2 wages/UBIA limitation
Section 199A generally allows a deduction equal to 20% of the amount of a taxpayer’s qualified business income (QBI).
However, there is a wages/capital limit on the deduction. Its second piece, the UBIA limitation, is a capital limit that depends on the basis of qualified property.
- 25% of the W–2 wages for a business, plus
- 2.5% of the UBIA.
When determining UBIA, section 199A regulations require a section 743 adjustment to inside basis after the sale of a partnership interest.
Unadjusted Basis in Qualified Property Immediately After Acquisition (UBIA)
UBIA means “unadjusted basis in qualified property immediately after acquisition.” It is the unadjusted basis of a partnership’s property after the sale or transfer of a partnership interest.
UBIA generally refers to what is called the inside basis, i.e., the basis in partnership-owned property.
After a sale or transfer of a partnership interest, and before any section 743 adjustments, the inside basis of partnership property remains the same as before the transfer.
The individual or pass-through entity that directly conducts a qualified business must determine UBIA for a partner’s section 199A deduction.
Sidenote: Section 754 election to make section 743 adjustments
Partnerships can elect, under section 754, to adjust inside basis after a sale or transfer. This is known as a section 754 election. As a result, a new partner’s adjusted inside basis will equal its cost basis in the partnership interest.
Partnerships make this election to avoid timing issues for gains or losses on the sale of partnership property.
If an election is made, an adjustment is made to a new partner’s inside basis after a sale or transfer of a partnership interest under section 743(b). These adjustments are commonly referred to as section 743 adjustments.
Calculating UBIA and section 743 adjustments
When determining UBIA for the section 199A deduction, a partner must make a section 743 adjustment after a sale. This rule applies even if the partnership has not made a section 754 election.
Treasury regulations help taxpayers measure the UBIA when the taxpayer seeks a deduction under section 199A.
Example of UBIA calculation
Treasury regulation §1.199A-2 provides an example for computing a partner’s share of UBIA when the partnership has not made a section 754 election.
A partnership owns a business that generates qualified business income (QBI). The partnership has no liabilities and owns one property. The property has:
- tax basis of $750,000, and
- inside basis of $900,000.
The partnership has not made a section 754 election. Therefore, section 743 basis adjustments generally are not required when there is a transfer of a partnership interest.
The partnership is owned in equal shares by A, B, and C.
A sells its one-third interest in the partnership to T for $350,000. T has an outside basis in the partnership interest of $350,000.
The UBIA limitation must include a section 743 adjustment
Thus, when T determines its limitation on the section 199A deduction, T includes a section 743 basis adjustment. The adjustment is calculated as if the partnership’s UBIA was equal to its basis in the property immediately after the sale of the partnership interest.
So, T determines its basis adjustment as though the UBIA were $900,000, T’s share of the UBIA being $300,000.
T subtracts its $300,000 UBIA from its outside basis of $350,000. The difference of $50,000 is T’s basis adjustment. This amount is added to T’s $300,000 share of the inside basis with a result of $350,000.
T’s UBIA limitation on the section 199A deduction from the partnership is $350,000.
Be prepared to determine UBIA
The wages/UBIA limitation may limit a partner’s section 199A deduction allowed from a partnership allocation.
The UBIA limitation is relevant for taxpayers and partners in partnerships who own real estate.
By Lisa Lopata, J.D.