Question

Susan, a single taxpayer, owns and operates a bakery (as a sole proprietorship). The business is not a "specified services" business. In 2019, the business pays $60,000 of W–2 wages and generates $200,000 of qualified business income. 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 as a single tax payer, her income from all sources should be limited to $1,57,500 to qualify for direct QBI deduction(that is, QBI * 20%).

Total income of Susan= Business income+ job income+ Interest income

= 2,00,000+ 11,000+ 3,200= 2,14,200

As Susan's total income is above the limit she can't automatically calculate 20% deduction. She has to calculate her limitation.

Susan's tentative QBI =$ 2,00,000

W-2 wages= $ 60,000

Susan's allowable QBI deduction is limited higher of:

50% of Susan's W-2 wages

Or

The sum of 25% of W-2 wages plus 2.5% of the unadjusted basis of all qualified property.

and

QBI deduction will be limited to 20% of QBI.

Calculation of QBI deduction:

20% of QBI= 2,00,000 * 20%= 40,000

50% of Susan's W-2 wages= 60,000 * 50%= 30,000

QBI deduction = $30,000 as it is the least.

Note: Susan do not have any qualified property as the same is not considered for the calculation of QBI deduction.