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 and reports qualified business income of $200,000. Susan also has a part-time job earning wages of $11,000 and receives $3,200 of interest income. 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

Susan's taxable income before the QBI deduction is

Net Income	200000
Add:- Wages	11000
Add:- Interest Income	3200
Less:- Standard Deduction for 2019	12200
	202000

As Susan taxable income before the QBI deduction exceeds $ 157500, the W-2 wages/ Capital investment limit must be considered.   

(1) 20% of qualified business income (200000 x 20%) = $40,000

(2) But no more than the greater of

* 50 % of W-2 wages (60000 x 50 % ) or $ 30,000

* 25 % of W-2 wages (60000 x 25 % ) plus $15,000

* 25 % of unadjusted basis of (+)   0   $ 15,000

qualified property ($ 0 x 2.5 %)

And no more than

(3) 20% of modified taxable income ($202000 x 20 %) $ 40400

So, initially, Susan QBI deduction is limited to $ 30,000. How ever, as susan's taxable income before the QBI deduction exceeds $ 157,500 but is less than $ 207500 and the W-2 wages / capital investment portion of the computation is the limiting factor, the general 20% QBI Amount, is used but reduced as follows.