Question

6. Your client Rachel Robert is an engineer who practices as a sole proprietor. This year, Rachel had net business income of $500,000 from her business. Assume that Rachel pays $20,000 wages to her employees, she has $500,000 of property (unadjusted basis of equipment she purchased last year), she has no capital gains, and her taxable income before the deduction for qualified business income is $380,000. Calculate your client, Rachel’s deduction for qualified business income. Please show all workings.

Answer 1

ANSWER

As per the given question,

QBI deduction:-
	An Individual tax payer's deduction for a particular year is equal to
	Lesser of the following:
1	20% of QBI
2	The greater of
	a. 50% of W-2 wages with respect to businesses
	b. 25% of W-2 wages with respect to businesses + 2.5% of the unadjusted basis of all "qualified property"
3	20% of taxable income of the business owner
Computation of Rachel's QBI deduction:-
	Lesser of the following:
1	20% of QBI = 20% of $500,000			$      100,000
2	The greater of
	a. 50% of W-2 wages with respect to businesses   = 50% of $20000		$ 10,000
	b. 25% of W-2 wages with respect to businesses + 2.5% of the unadjusted basis of all "qualified property" = 25% of $20,000 +   2.5% of $500,000 = $5000 + $12500		$ 17,500
	The greater is			$        17,500
3	20% of taxable income of the business owner = 20% of $380,000			$        76,000
	Lesser of the above is			$        17,500
So, Rachel's QBI deduction is $17,500

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