QBI pearn,searn & scorp

[feenberg]

I looked at the code and found a flag that caused the taxsim calculation of QBI to match some of Martin's code that we have since decided needed to be changed. I turned off the flag, and now taxsim will treat all pass-throughs:

pbusinc
sbusinc
pprof
sprof
scorp

and sole-proprietors:
pearn
searn

as worthy of the QBID and all subject to FICA and the Medicare tax on high earners. The issues that stand out are:

1. scorp income split isn't available, and is split 50/50, an issue for FICA and some state income tax.
2. there is no way to include business income that isn't QBI with an uneven income split.

At this point I don't want to fix these issues before we are satisfied that both Taxsim and the emulator are in much better shape. That would mean very few outstanding issues when tested on a large sample of PUF taxpayers. Otherwise I will get confused and I don't want to risk making taxsim an unusable mess.

[PavelMakarchuk]

@feenberg just to clarify, now taxsim by default treats the inputs above as qualifying business income? This will be harder for us to match as we don't include flags for pearn and searn to be included in the QBI.

I have a PR #380 excluding everything but pbusinc and sbusinc from QBI which would have matched the previous TAXSIM version.

I would prefer making changes in the emulator to match taxsim before the flag but let me know which version of TAXSIM you are looking to use and I will adjust the PR accordingly

[feenberg]

My feeling is that taxsim is wrong. pearn and searn should be subject to the QBI deduction. I will change taxsim if you agree. However, I do think that pprofinc and sprofinc should also be QBI, but subject to a clawback. That ignores the dependence on business assets and wages. Do you disagree?

[PavelMakarchuk]

My feeling is that taxsim is wrong. pearn and searn should be subject to the QBI deduction. I will change taxsim if you agree. However, I do think that pprofinc and sprofinc should also be QBI, but subject to a clawback. That ignores the dependence on business assets and wages. Do you disagree?

@feenberg Not sure if I completely understand but I don't believe that pearn and searn should be subject to the QBI deduction. I am looking at section c 4 of the legal code:
https://www.law.cornell.edu/uscode/text/26/199A#c

We use pearn and searn primarily as employee W-2 wages. If we include those in the QBI definition then we will not have any option to differentiate between those and pass-through business income. Almost every household will be subject to QBID unless their income is entirely derived from interest, dividends or capital gains.

[feenberg]

On Thu, 17 Jul 2025, Pavel Makarchuk wrote: PavelMakarchuk left a comment (PolicyEngine/policyengine-taxsim#382) > My feeling is that taxsim is wrong. pearn and searn should be subject to the QBI deduction. I will change taxsim if you agree. However, I do think that pprofinc and sprofinc should also be QBI, but subject to a clawback. That ignores the dependence on business assets and wages. Do you disagree? @feenberg Not sure if I completely understand but I don't believe that pearn and searn should be subject to the QBI deduction. I am looking at section c 4 of the legal code: https://www.law.cornell.edu/uscode/text/26/199A#c We use pearn and searn primarily as employee W-2 wages. If we include those in the QBI definition then we will not have any option to differentiate between those and pass-through business income. Almost every household will be subject to QBID unless their income is entirely derived from interest, dividends or capital gains.

I don't think we lose anything by doing it that way. I will modify the Taxsim documentation to inform users of this distinction. Dan

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