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

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