QBI calculation for Sch C - accountants are confused, too

[Michael Plaks]

Guys, we know that 20% applies to the Qualified Business Income (QBI). Let's ignore service businesses, phaseouts and all other complications. Let's take a wholesaler netting $100k. So, he just gets a $20k below-the-line break, right? Not that fast!

The problem for me is this language: Reasonable compensation and guaranteed payments. 
Qualified business income does not include any amount paid by an S corporation that is treated as reasonable compensation of the taxpayer. Similarly, qualified business income does not include any guaranteed payment for services rendered with respect to the trade or business, and to the extent provided in regulations, does not include any amount paid or incurred by a partnership to a partner who is acting other than in his or her capacity as a partner for services.

The intention appears to be to count only K1 "dividend" income and exclude all income subject to SE tax - like reasonable salary under S-corp and guaranteed payments under PShip. Sorta kinda makes sense, even though opens a can of worms. If currently a reasonable salary only affects SE tax, under this concept it will also affect the 20% cut - raising the stakes tremendously.

Here comes my problem. Extending this concept, the entire Sch C should then be excluded from QBI, since it's an equivalent of reasonable compensation for services. In other words, ZERO QBI. No soup for you, Sch C?  That would negate the obvious Congressional intention to include sole proprietorships in this provision. So, that must NOT be the intended result, and nothing in the text indicates that it is.

But... If entire net Sch C is allowed for QBI, but an S-Corp has to establish and subtract a reasonable salary for QBI purposes - this suddenly puts S-Corp at a substantial DISadvantage against Sch C.  Which is also doubtful to be an intention.

Thoughts? @Brandon Hall  @Lance Lvovsky  @Ashish Acharya  @Brian Schmelzlen  @Paul Allen  @Vlad K.  @Basit Siddiqi