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

Ginger is a self-employed driver finding rides via a few different platform companies such as Lyft. She is single and claims the $12,000 standard deduction. For 2019, her income from driving is $67,000 and she has no other income. Ginger's QBI deduction for 2019 is $13,400.

Which of the following taxpayers is eligible for a qualified business income deduction regarding the activity noted? circle all that apply)

Jake, the sole shareholder of Peach Corporation a C corporation) has the corporation pay him $100,000. For income tax purposes, Jake would prefer to have the payment treated as a dividend instead of salary.

Where is the § 199A deduction taken on Form 1040?

Jane is a self-employed attorney and single. Her annual net earnings from her law practice always exceed $220,000. Jane also has a business selling stained glass windows that she makes. Her earnings from this business are usually about $35,000 per year. Jane claims the standard deduction. Because Jane's 2019 taxable income exceeds the $210,700 threshold, she may not claim a QBI deduction for either business.

The QBI deduction will reduce both the income tax and self-employment taxes owed by a self-employed individual.

Qualified business income QBI) is defined as the ordinary income less ordinary deductions that a taxpayer earns from a qualified trade or business e.g., from a sole proprietorship, S corporation, or partnership) conducted in the United States by the taxpayer.

Qualified property is used to determine one of the limitations to the qualified business income QBI) deduction. Specifically, 2.5% of the unadjusted basis immediately after acquisition) of qualified property is added to 50% of W-2 wages to determine this limitation.

For purposes of the qualified business income QBI) deduction, qualified business income does not include certain types of investment income [e.g., capital gains or capital losses, dividends, and interest income unless properly allocable to a trade or business, such as lending].

An individual in a specified service business, such as accounting, with taxable income over the threshold amounts $210,700, or $421,400 if married filing jointly in 2019), will not lose the QBI deduction on such income if:

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 in W-2 wages, has $150,000 of qualified property, and $200,000 in net income all of which is qualified business income). Susan also has a part-time job earning wages of $11,000, receives $3,200 of interest income, and will take the standard deduction. What is Susan's qualified business income deduction?

A C corporation with taxable income of $100,000 in the current year will have a tax liability of $22,250.

Once a taxpayer reaches certain taxable income thresholds, § 199A limits the qualified business income QBI) deduction. These thresholds $321,400 for married taxpayers filing jointly and $160,700 for all other taxpayers in 2019) are indexed for inflation every year.

In 2019, Kendra has taxable income before the QBI deduction of $274,000. Kendra is single and has income from her law firm a sole proprietorship operating as an LLC) of $200,000. Her law firm paid wages of $82,000 and has qualified property of $20,000. What is Kendra's QBI deduction?

Donald owns a 45% interest in a partnership that earned $130,000 in the current year. He also owns 45% of the stock in a C corporation that earned $130,000 during the year. Donald received $20,000 in distributions from each of the two entities during the year. With respect to this information, Donald must report $78,500 of income on his individual income tax return for the year.

Sergio Fernandez owns and manages his single-member LLC which provides a wide variety of accounting services to his clients. He is married and will file a joint tax return with his spouse, Goretty. His LLC reports $250,000 of net income, W-2 wages of $120,000, and assets with an unadjusted basis of $75,000. Their taxable income before the QBI deduction is $215,000 this is also their modified taxable income). Determine their QBI deduction for 2019.

Carla is a self-employed online retailer and single. She has no employees. Her annual taxable income is usually around $200,000. Carla could increase her QBI deduction if she incorporated her business, made an S election, and paid herself wages.

Ben owns and operates a machine repair shop as a sole proprietorship. It generates a profit of about $150,000 annually. The business pays wages of about $50,000 annually. The building and most of the equipment are leased so there is no qualified property. Ben files as single and claims the standard deduction. He has a large unrealized gain in bitcoin that he acquired in 2014 and is wondering when he should sell it and whether he should sell it all in one year or over a few years. Advise Ben as to how the sale of the bitcoin and its resulting capital gain can affect his QBI deduction in 2019.

Double taxation of corporate income results because dividend distributions are included in a shareholder's gross income and are not deductible by the corporation.

One of the purposes of the qualified business income deduction is to reduce the taxes on businesses that are operating in noncorporate business formse.g., sole proprietors, partnerships, and S corporations).