Question

Elliot operates his clothing store as a single member LLC (which he reports as a sole proprietorship). In 2018, his proprietorship generates net income of $280,000, he pays W-2 wages of $170,000 and he has qualified business property of $140,000. Elliot's wife, Julie, is an attorney who works for a local law firm and receives wages of $90,000. They will file a joint tax return and use the standard deduction. What is Elliot's qualified business income deduction.

Assume the same facts as problem 25, except that the business is a "specified services" business (e.g, a consulting firm) owned equally by Elliot and Conrad (an unrelated individual) in a two-member LL. Assume that each member's share of net income, W-2 wages, a qualified business property is one-half of the information provided in Problem 35. Conrad's wife, Jessica, earned wages during the year of $350,000, and Conrad and Jessica have itemized deductions of $62,000.

A. What is Elliot's qualified business income deduction?

B. What is Conrad's qualified business income deduction?

Answer 1

Effective for tax years beginning after December 31, 2017 and before January 1, 2026, a taxpayer other than a corporation is entitled to a deduction equal to 20% of the taxpayer’s “qualified business income” earned in a “qualified trade or business.” The deduction is limited, however, to the greater of:

• 50% of the W-2 wages with respect to the qualified trade or business, or
• The sum of 25% of the W-2 wages with respect to the qualified trade or business, plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property.

Elliott’s tentative deduction is $56,000 ($280,000 * 20%). Elliott's deduction is limited to the greater of:

• 50% of W-2 wages, which is $85,000, or
• 25% of W-2 wages ($42,500) plus 2.5% of unadjusted basis of qualified property ($3,500), which is $46,000.

Thus, Elliott is entitled to a $56,000 deduction in 2018.

Second Question:

Because Elliott’s taxable income for 2018 is less than $315,000(140000+90000), the W-2 limitations do not apply, and Elliott is entitled to claim the full $56,000 deduction.

Conrad has taxable income of $428,000 (140000+350000-62000). Because taxable income exceeds $415,000, Conrad is not entitled to any deduction under Section 199A.