Question

Ella, a single taxpayer, operates a gardening shop as a sole proprietor. The business has 3 employees who are paid a total of $110,000 during 2020. Assume that the business has no significant assets. During 2020, the business generates $156,000 of income and Ella’s taxable income before the QBI deduction is $162,000

1. What is Ella’s qualified business income deduction?
2. What is Ella’s qualified business income deduction if the facts are the same except that the business income is $320,000 and Ella’s taxable income before the QBI deduction is $350,000?

Answer 1

The Qualified business income deduction (QBI) allows eligible self employed and small business owners to deduct upto 20% of their qualified business income on their taxes. Sole proprietorship is an eligible entity for claiming Qualified business income deduction. QBI deduction is available on the net profit of the business. It excludes capital gains or losses, dividends, interest income, income earned outside U.S., etc A. If the total taxable income is at or below $163,300 for single filers or $326,600 for joint filers, then in 2020 he may qualify for the 20% deduction on his taxable business income. Single Ella is a single taxpayer and Ella's taxable income before the QBI deduction is $162,000 which is below the limit, Ella is eligible for 20% deduction on taxable business income of $156,000 Ella's qualified business income deduction = $156,000 * 20% = $31,200 B. The gardening shop does not come under "specified service trade or business". If a taxpayer has taxable income over the higher taxable income threshold i.e. $213,300 if you are a single, and owns a business that is not a specified service trade or business, then the QBI deduction is subject to limitation based on W-2 wages and the business's unadjusted basis in all qualified property. The QBI deduction is the lesser of (1) 20% of the business's QBI or (2) the greater of - (i) 50% of the W-2 wages for the business or (ii) 25% of the W-2 wages plus 2.5% of the business's unadjusted basis in all qualified property. Since there are no significant assets, we consider only 50% of the wages = $110,000 * 50% = $55,000 20% of the business's QBI = $320,000 * 20% = $64,000 Since the lesser of the above two is $55,000, Ella's qualified business income deduction for 2020 = $55,000