Question

Dan and Katlyn are married and operate a pizza restaurant as an S corporation. In 2018, the store has qualified business income of $300,000. Their itemized deductions are $22,000 and they have other income from interest and dividends of $9,000.

What is their QBI deduction for 2018?

What is their taxable income?

a. Assume the same facts as above, except that Dan and Katlyn are lawyers and jointly operate their law firm as a partnership. The income that flows to them from the partnership is $380,000. In addition, they have capital gains of $5,000.

What is their QBI deduction for 2018?

What is taxable income?

b. Assume the facts of the original problem except that their itemized deductions are $32,000, the QBI from the business is $500,000, it has W-2 wages of $160,000, and unadjusted depreciable property of $180,000.

What is their QBI deduction for 2018?

What is taxable income?

Answer 1

First case: Dan and Katyln operate S corporation that has Qualified business income of $3,00,000.

To Calculate the QBI Deduction, we need to find out the application of the deduction.

If your taxable income is less than $315,000 as a married filing jointly taxpayer, you don’t have to calculate the limitation. You can just take the straight 20% deduction. The only limitation on the 20% deduction is that it cannot exceed taxable income excluding net capital gain.

Taxable Income = Qualified business income - Deductions = $3,00,000 - $22,000 = $278,000

QBI Deduction = 20% of QBI = 20% * $300,000 = $60,000

(Note:  Income doesn’t include investment-related items of income, gain, deduction, and loss. )

Second Case: Dan and Katlyn are lawyers and jointly operate their law firm as a partnership. Among taxpayers with 2018 taxable income over $207,500 (filing one) or $415,000 (filing together), the QBI deduction will be removed if the revenue is received in the following service businesses: education, law, accounting, actuarial science, performing arts, consulting, sports, financial services, brokerage services, including investment and investment management, banking, or stock trading.

Taxable income = Qualified business income - Deductions + Gains= $380,000 - 22,000 + 5,000 = $363,000

Third Case : Their itemized deductions are $32,000, the QBI from the business is $500,000, it has W-2 wages of $160,000, and unadjusted depreciable property of $180,000.

In this case, different application is used because there is W-2 Wages in this case so QBI is limited to whichever of these options is the least:

1. 20% of your QBI

or

2. 50% of the company’s W-2 wages or the sum of 25% of the W-2 wages plus 2.5% of the unadjusted basis of all qualified property. Whichever gives you the greater deduction will be the deduction.

Taxable income = Qualified business income - Deductions + Gains= $500,000 - $32,000 = $468,000

QBI Deduction =

50% of the company’s W-2 wages

50% x $160,000 = $80,000

or

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

(25% x $160,000) + (2.5% x $180,000) = $44,500

So the greater deduction is $80,000