Question

Susan, a single taxpayer, owns and operates a bakery (as a sole proprietorship). The business is not a "specified services" business. In 2020, the business pays $60,000 of W–2 wages, has $150,000 of qualified property, and generates $200,000 of qualified business income. Susan also has a part-time job earning wages of $11,100 and receives $3,300 of interest income. Her standard deduction is $12,400. 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

Solution:

1.Susan's tentative QBI based on the W-2 wages/ Capital investment limit is $30,000

Applying two limitatios , greater of the two

50% of the W-2 wages = 50% of $60,000 = $30,000

25% of W-2 wages + [2.5% of qualified property] = [$60,000*25%]+ [$150,000*2.5%] = $18,750

2.Susan's allowable QBI deduction is $31,740

a.QBI deduction without any limit [20% of net income] = 20% * $200,000 = $40,000

b.Applying two limitatios , greater of the two

50% of the W-2 wages = 50% of $60,000 = $30,000

25% of W-2 wages + [2.5% of qualified property] = [$60,000*25%]+ [$150,000*2.5%] = $18,750

c.Not more than 20% of taxable income 20%[(200,000+11,100+3,300)-12,400] = $40,400

d.Excess of 20% of QBI deduction over wage limit [40,000 - 30,000] = $10,000

e.Reduction ratio = [202,000-160725]/50,000 = 82.6%

f. Rduction in W-2 wage / capital limit = [10,000 *82.6%] = $8,260

Qualified QBI Deduction= General 20% QBI deduction limit $40,000  

Reduction in W-2 wage /capital limit ($8,260)

Final QBI deduction = $31,740