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7 April, 10:54

Susan, a single taxpayer, owns and operates a bakery (as a sole proprietorship). The business is not a "specified services" business. In 2019, the business pays $60,000 of W-2 wages and generates $200,000 of qualified business income. Susan also has a part-time job earning wages of $11,000 and receives $3,200 of interest income.

a. What is Susan's tentative Q8I based on the W-2 Wages/Capital Investment Limit?

b. Determine Susan's allowable QBI deduction

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  1. 7 April, 13:56
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    Susan's taxable income before the QBI deduction is

    Net income = $ 200,000

    (+) wages = $11,000

    (+) Interest income = $ 3,000

    (-) Standard deduction = $ (12,000)

    Taxable income = $202,000

    As susan's taxable income before the QBI deduction exceeds $ 157,500, the W-2 wages / capital investment limit must be considered

    (1) 20% of qualified business income $ 40,000

    ($200,000 x 20%)

    (2) But no more than the greater of 50% of W-2 wages ($60,000 x 50%) $30,000

    25% of W-2 wages ($60,000 x 25%) plus 15,000

    2.5% of unadjusted basis o qualified property (0 x 2.5%) 0 $15,000

    And no more than

    (3) 20% of modified taxable income ($202,000 x 20%) $40400

    So, initially, susan's QBI deduction is limited to $30,000. However as susan's taxable income before the QBI deduction exceeds $157,500, but is less than $207,500 and the W-w wages / capital investment portion of the computation is the limiting factor, the general 20% QBI amount is used but reduced as follows

    (1) Determine difference between general 20% QBI deduction amount and the W-2 wages / capital amount

    General 20% QBI deduction amount 40,000

    less: The W-2 wages / capital amount (30,000)

    Excess $10,000

    (2) Determine reduction ratio:

    Reduction ration = $44500 (202000 - 157500) / $50,000

    = 89%

    (3) Determine the reduction in the W-w wages/capital limit

    Excess ($10,000 x 89%) = $8900

    (4) Determine find QBI amount

    General 20% QBI amount $40,000

    less: reduction in the W-2 wages / capital limit (8900)

    Find QBI amount $31100
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