UBIA is the basis in a partnership’s property, and it can work to limit a partner’s section 199A deduction.
If a partner recently bought their partnership interest, the partner may find their section 199A deduction limited by a percentage of both:
- UBIA, and
- wages.
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.
Specifically, a taxpayer’s section 199A deduction may be limited to the sum of:
- 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.
