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Roquan, a single taxpayer, is an attorney and practices as a sole proprietor. This year, Roquan...

Roquan, a single taxpayer, is an attorney and practices as a sole proprietor. This year, Roquan had net business income of $90,000 from his law practice. Assume that Roquan pays $40,000 wages to his employees, he has $10,000 of property (unadjusted basis of equipment he purchased last year), and has no capital gains or qualified dividends. His taxable income before the deduction for qualified business income is $100,000. (Leave no answer blank. Enter zero if applicable.)

Required:

  1. Calculate Roquan’s deduction for qualified business income.
  2. Assume the same facts provided above, except Roquan’s taxable income before the deduction for qualified business income is $300,000. Calculate Roquan’s deduction for qualified business income.

Please use 2019 tax laws and explain your answer!

Solutions

Expert Solution

Part A

Legal services are classified as specific service or trade businesses, and thus are not considered to be "qualified trade or businesses" for qualified business income deduction. However, it can be observed that Roquan's taxable income (before the 20% deduction for qualified business income) is less than $157,500. Therefore, the condition regarding exclusion for specified service trades or business will not apply. Thus, Roquan is eligible to get deduction for qualified business income.

Roquan's deduction for qualified business income = 90000*20% = $18000

Qualified business income deduction cannot exceed:

50% of wages paid related to the qualified trade or businesses

Or

Total of 25% of wages paid related to the qualified trade or businesses and 2.5% of the unadjusted basis of all qualified property related to the qualified trade or businesses

This limits applies if taxable income exceeds $157,500 in case of single file and $315000 in case of joint filers.

Roquan taxable income being $100000, which is less than $157500, the wage-based limits does not apply to him. He is eligible to get full QBI deduction of $18000

Part B

Roquan's deduction for qualified business income = $0

Roquan taxable income being $300000, which is higher than $157500, the condition regarding exclusion for specified service trades or business will apply as legal service and thus would be considered a specified service or trade business, which is not considered to be "qualified trade or businesses" for qualified business income deduction. In short, Roquan will be considered to be engaged in specified service trades or business and thus not eligible for QBI deduction.

ekkarill92 answered 2 years ago
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