Question

QTB : limitations MFJ 315k ,all others 157,500 Joe, MFJ, operates a candy store as a sole proprietor, the business has no employees (Joe provides all the services to customers). During 2018, the net income of Joe's business amount to $210,000. Joe ’s AGI $274,000 which includes wages earned by his spouse but no other income. He and Maria (spouse) claim the STD $24,000 What is Joe modified taxable income? how much is Joe’s qualified business income deduction? What is Joe’s taxable income? Now, Assumed that Joe is Single and does not itemize and operates a sole proprietorship. Joe’s business generate 140,000 business income and $40,000 deductible business expense, and 2,000 of interest income from his business deposits. Joe's AGI is 102,000 What is sam Qualified Business Income ?What is his modified taxable income? what is Joe qualified business income deduction? what is Joe taxable income?

Answer 1

Answer;

Scenario 1

Given details;

Joe, MFJ (Married Filing Jointly)

Net Income from Joe’s business = $210000

Joe’s AGI (Adjusted Gross Income) =$274000(includes wages earned by his wife)

Their claim of STD (Standard Deduction) = $24000

1.What is Joe’s Modified Taxable Income?

Joe’s Modified Taxable Income is $250,000 ($274000- $24000). Modified Taxable Income is calculating by adding back certain Deductions to AGI (Adjusted Gross Income). The Deductions are listed by IRS. Because, when we calculating AGI (Adjusted Gross Income) we are deducting certain allowable Deductions as per IRS.

In this case, we are deducting STD of $24000 from AGI of $274000 for calculation Modified Taxable Income.

2.What is Joe’s Qualified Business Income Deduction?

Joe, MFJ (Married Filing Jointly) and her Taxable Income is $250k which is below of threshold amounts ($315,000 for a married couple filing a joint return) under QBI deduction. So, the QBI deduction will be the lesser of the following;

a) 20% of Joe’s Qualified Business Income (QBI) = 20 % of $210000

                                                                                           = $42000

b)20% of Joe’s Modified taxable income    = 20 % of $250000

                                                                                  = $50,000

Therefore, Joe’s Qualified Business Income (QBI) Deduction is “42000”. Since 20% of Joe’s Modified taxable income ($42000) is less than 20% of Joe’s QBI ($50000).

Here, QBI is the Joe’s business Income of $210000 only, which doesn’t include his wife’s wages.

3.What is Joe’s Taxable Income?

Joe’s Taxable Income is $250000, which is calculating by deducting STD of $24000 from AGI of $274000. STD (Standard Deduction) is an allowable deduction for calculating Taxable Income.

Scenario 2

Given details;

Joe, Single Taxpayer

Income from Joe’s business = $140000

Joe’s AGI (Adjusted Gross Income) =$102000

Deductible Business Expense = $40000

Interest income from Business deposits = $2000

1.What is Joe’s Modified Taxable Income?

Joe’s Modified Taxable Income is $102000 only. Modified Taxable Income is calculating by adding back certain Deductions to AGI (Adjusted Gross Income). The Deductions are listed by IRS. Because, when we calculating AGI (Adjusted Gross Income) we are deducting certain allowable Deductions as per IRS.

In Joe’s case, there is no allowable Adjustments for calculation Modified Taxable Income.

2.What is Joe’s Qualified Business Income Deduction?

Joe, single Taxpayer and his Taxable Income is $102000 which is below of threshold amounts ($157,500 for all other taxpayers) under QBI deduction. So, the QBI deduction will be the lesser of the following;

a) 20% of Joe’s Qualified Business Income (QBI) = 20 % of $100000 (see note 1)

                                                                                           = $20000

b)20% of Joe’s Modified taxable income    = 20 % of $140000

                                                                                  = $28000

Therefore, Joe’s Qualified Business Income (QBI) Deduction is “20000”. Since 20% of Joe’s Modified taxable income ($20000) is less than 20% of Joe’s QBI ($28000).

Note 1;

Qualified Business Income (QBI) is calculated by the following;

                             = Income from Joe’s business - Deductible Business Expense

                             = $140000-$40000

                            =$100000

Qualified Business Income (QBI) is includes income, gain, loss and deduction from Qualified business activity. It doesn’t include any other items which are not related to the Business. So the Interest income from Business deposits of $2000 is not from the business activity but from the investment, since we are not taking into calculation of QBI.

3.What is Joe’s Taxable Income?

Joe’s Taxable Income is $102000 (AGI), because in this scenario there is no other an allowable deduction for calculating Taxable Income.