Question

6) Shawn owns and manages his single-member LLC which provides a wide variety of accounting services to his clients. He is married and will file a joint tax return with his spouse, Georgia. His LLC reports $250,000 of net income, W-2 wages of $120,000, and assets with an unadjusted basis of $75,000. Their taxable income before the QBI deduction is $215,000 (this is also their modified taxable income). Determine their QBI deduction under Section 199A for 2019.

Answer 1

The QBI deduction is the way for the individual taxpayer for reducing their tax liability for the qualified business income that they generate from S corporations, sole proprietorships, and partnerships. The deduction for QBI is limited to the lesser of the:

1)     20% of the QBI

or

2)     50% of W-2 wages paid by the company for business or trade or it can be the total of 25% of W-2 wages plus 2.5% unadjusted basis of the total qualified property. The individual taxpayer can choose any of these wage tests which can provide a greater deduction.

Since, the taxable income of Shawn is $215,000, so it will neither subject to the W-2 wage limit nor required to phase out because if the taxable income is lower than $157,000 (single) or $315,000 (jointly filing by married), then the individual taxpayer doesn’t need to calculate the limitation.

Thus, the QBI deduction of Jennifer will be 20% of the taxable QBI.

QBI deduction = $215,000*20%

                      = $43,000