Exam 2: The Deduction for Qualified Business Income for Pass-Through Entities

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a. Under Prop. Reg. § 1.199A-1d), Felicia must allocate Business B's negative QBI t Business A and Business C in proportion to their positive QBI amounts $240,000 for Business A; $120,000 for Business C). As a result, the negative QBI from Business C apportioned 66.66% to Business A and 33.33% to Business C. So $72,000) is apportioned to Business A and $36,000) to Business C. $$\begin{array} { | c | c | c | c } \hline \text { Business } & \text { Adjusted QBI } & \text { W-2 Wages } & \text { Capital Investm } \\\hline \text { A } & \begin{array} { c } \$ 168,000 ( \$ 240,000 - \\\$ 72,000 )\end{array} & \$ 72,000 & \$ - 0 - \\\hline \text { B } & \$ - 0 - [ \$ ( 108,000 ) + \$ 108,000 ] & \$ 48,000 & \$ - 0 - \\\hline \text { C } & \$ 84,000 ( \$ 120,000 - \$ 36,000 ) & \$ - 0 - & \$ - 0 - \\\hline\end{array}$$
$$\begin{array} { c c c c } \text { A } & \$ 168,000 \$ 240,000 - & \$ 72,000 & \$ - 0 - \\& \$ 72,000 ) & & \\\text { B } & \$ - 0 - [ \$ 108,000 ) + \$ 108,000 ] & \$ 48,000 & \$ - 0 - \\\text { C } & \$ 84,000 \$ 120,000 - \$ 36,000 ) & \$ - 0 - & \$ - 0 -\end{array}$$

Felicia now applies the "W-2 Wages" limitation by determining the lesser of 20% of QBI
50% of W-2 wages for each business. $$\begin{array} { | c | c | c | r } \hline \text { Business } & \text { QBI x 20\% } & \text { W-2 Wages } \times \text { 50\% } & \text { Lesser } \\\hline \text { A } & \$ 33,600 ( \$ 168,000 \times 20 \% ) & \$ 36,000 & \$ 33,600 \\\hline \text { B } & \$ - 0 - & \$ 24,000 & \$ - 0 - \\\hline \text { C } & \$ 16,800 ( \$ 84,000 \times 20 \% ) & \$ - 0 - & \$ - 0 - \\\hline\end{array}$$ Felicia's "combined qualified business income amount" is $33,600 $33,600 + $-0- + $
). Because this amount is less than 20% of Felicia's modified taxable income $60,800;
$304,000 x 20%), Felicia's QBI deduction is $33,600 and her taxable income is $270,400. There is no carryover of any loss into the following taxable year for purposes of § 199A Business B negative QBI was completely used).
b. Because Felicia's taxable income is above the threshold amount, her QBI deduction subject to the W-2 wages and capital investment limitations. Because the businesses a aggregated, these limitations are applied on an aggregated basis. $$\begin{array} { | c | c | c | c } \hline \text { Business } & \text { QBI } & \text { W-2 Wages } & \text { Capital Investm } \\\hline \text { A } & \$ 240,000 & \$ 72,000 & \$ - 0 - \\\hline \text { B } & \$ ( 108,000 ) & \$ 48,000 & \$ - 0 - \\\hline \text { C } & \$ 120,000 & \$ - 0 - & \$ - 0 - \\\hline \text { Total } & \$ 252,000 & \$ 120,000 & \$ - 0 - \\\hline\end{array}$$ None of the businesses own "qualified property." As a result, only the "W-2 Wages"
limitation applies. Felicia's "combined qualified income amount" is $50,400, the lesser
20% of the QBI from the aggregated businesses $50,400; $252,000 x 20%), or 50% W-2 wages from the aggregated businesses $60,000; $120,000 x 50%).
Felicia's QBI deduction is equal to the lesser of $50,400 or 20% of her modified taxa income $60,800; $304,000 x 20%). As a result, Felicia's QBI deduction is $50,400, her taxable income is $253,600. By aggregating her businesses, Felicia has increased size of her QBI deduction.