Question

Jacquise, a single taxpayer, operates a sole proprietorship that manufactures dog and cat toys. For 2020, the sole proprietorship has QBI of $245,000. Included in the QBI amount are W2 wages paid of $87,500 and the sole proprietorship has $1,150,000 of qualified property (i.e., for UB purposes). Lastly, Jacquise's taxable income before the Section 199A deduction is $256,000.

What is Jacquise's 2020 Section 199A deduction?

Answer 1

Calculation of Jacquise's 2020 Section 199A deduction

QBI Deduction = Lesser of:

(a) 20% of Qualified  business income: $245,000 x 20% = $49000

(b) 20% of taxable income: $256000 x 20% = $51200

(c) greater of: (i) 50% of W-2 wages ($87500 x 50% = $43750) or (ii) 25% of W-2 wages plus 2.5% of unadjusted cost basis of assets: [$87500 x 25%] + [$11,50,000 x 2.5%] = $50625. so higher is $50625

Jacquise's 2020 Section 199A deduction = Lower of the above i.e. $49000