Question

In: Accounting

Determine whether the following taxpayers are eligible for the QBI deduction and the deduction amount (if...

Determine whether the following taxpayers are eligible for the QBI deduction and the deduction amount (if any). Cathy is married and files a joint return with her spouse. Cathy operates a small family restaurant as a sole proprietor. She pays wages of $70,000 and the QBI from the restaurant is $100,000. Cathy’s spouse has wages of $250,000 and their joint taxable income is $364,000. Is Cathy eligible for QBI deduction? Answer yes or no If eligible, how much is the QBI deduction amount?

Solutions

Expert Solution

As per IRS, Sec. 199A allows a deduction for up to 20% of QBI from partnerships, limited liability companies (LLCs), S corporations, trusts, estates, and soleproprietorships. Sec. 199A creates a deduction based on an "artificial" calculation of business income instead of actual economic outlays required for most other business deductions.

taxpayers with taxable income of more than $415,000 (the "higher threshold") are denied the Sec. 199A deduction for the income from any business that is a specified service trade or business. A specified service trade or business is defined in Sec. 199A(d)(2) as "any trade or business — (A) which is described in section 1202(e)(3)(A) (applied without regard to the words 'engineering, architecture,') ... or which involves the performance of services that consist of investing and investment management, trading, or dealing in securities (as defined in section 475(c)(2)), partnership interests, or commodities (as defined in section 475(e)(2))." Sec. 1202(e)(3)(A) describes:

any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees [or owners].

So, Cathy is eligible for QBI deduction.

Now, Cathy's aggregated QBI = 350000 (100000+250000)

And her W2 wages are = 70000 (employess who are paid wages)

So, his aggregated QBI deduction is equal to the lesser of:

20% of QBI

or

50% of Wages

= 350000 * 20% = 70000

or

70000 * 0.50 = 35000

So, it is 35000.

However,

For single taxpayers with taxable income above $157,500 ($315,000 is the threshold for joint filers), an exclusion from QBI begins to be phased in for income of “specified service” trades or businesses.

Specified service trades or businesses are those:

  • involving the performance of services in the fields of health, law, consulting, athletics, financial or brokerage services; or
  • where the principal asset is the reputation or skill of one or more employees or owners.

Here, the restaurant business is not covered in the list. So, it will not be phased out.

So, Cathy's QBI deduction is $35000.


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