Scott and Laura are married and will file a joint tax return. Laura has a sole...

Scott and Laura are married and will file a joint tax return. Laura has a sole proprietorship (not a “specified services” business) that generates qualified business income of $300,000. The proprietorship pays W–2 wages of $40,000 and holds property with an unadjusted basis of $10,000. Scott is employed by a local school district. Their taxable income before the QBI deduction is $386,600 (this is also their modified taxable income).

Determine Scott and Laura’s QBI deduction, taxable income, and tax liability for 2020.
After providing you the original information in the problem, Scott finds out that he will be receiving a $6,000 bonus in December 2020 (increasing their taxable income before the QBI deduction by this amount). Redetermine Scott and Laura’s QBI deduction, taxable income, and tax liability for 2020.
What is the marginal tax rate on Scott’s bonus?

Solutions

Expert Solution

Qualified Business Income (QBI)

QBI is a deduction available to eligible tax payers. Section 199 A offers 20% deduction on Qualified Business Income and 20% of qualified real estate investment trust and qualified publicity traded partnership Income.

QBI deduction is the lessor of: 20% of QBI or 20% of modified taxable income

initial QBI amount = 20% QBI = 20% 300k = 60k
W/CI limit = 50% of wages = 20k

reduction ratio: (381,400 - 321,400) / 100,000 = 0.6

(initial QBI amount - W/CI limit ) reduction ratio = (60k - 20k) 0.6 = 24k

QBI amount = initial QBI amount - reduction in W/CI limit = 60k - 24k = 36k

lesser of 20% of QBI (36k) or 20% of modified taxable income (76,280)

deduction = 36k

ekkarill92 answered 1 year ago

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