Question

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 reports qualified business income of $200,000. Susan also has a part-time job earning wages of $11,000 and receives $3,200 of interest income. Assume the QBI amount is net of the self-employment tax deduction.

What is Susan's tentative QBI based on the W–2 Wages/Capital Investment Limit? $ ______

Determine Susan's allowable QBI deduction. $______

Answer 1

Susan's taxable income before the QBI deduction is

Net income        = $ 200,000

(+) wages                    = $11,000

(+)Interest income        = $ 3,200

(-)Standard deduction   = $(12,000)

Taxable income           = $202,200

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($202,200 x 20%)                                          $40440

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 = $44700(202200 - 157500) / $50,000

                         = 89.4%

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

Excess($10,000 x 89.4%) = $8940

(4)Determine find QBI amount

General 20% QBI amount     $40,000

less: reduction in the W-2 wages/ capital limit        (8940)

       Find QBI amount $31060