Question

Ben and Molly are married and will file jointly. Ben generates $300,000 of qualified business income from his single member LLC (a law firm). He reports his business as a sole proprietorship. Wages paid by the law firm amount to $40,000; the law firm has no significant property. Molly is employed as a tax manager by a local CPA firm. Their modified taxable income is $386,600 (this is also their taxable income before the deduction for qualified business income).
Required:
a. What is their tentative QBI based on the W–2 Wages/Capital Investment Limit?
b. Determine their allowable QBI deduction?

Answer 1

Answer:

a) $5,680

b) $8,906

Explanation:

QBI deduction can be as much as 20% of QBI but it cannot exceed 20% of taxable income before QBI deduction and/or capital gains.

QBI deduction also starts to phase out if the couple's income is higher than $315,000.

phase out = 1 - [($386,600 - $315,000) / $100,000] = 0.284 = 28.4%

we must choose the higher between:

tentative QBI deduction based on W-2 wages = 50% x $40,000 x 28.4% = $5,680

                     or

QBI deduction based on capital investment limit = (25% x $40,000 x 28.4%) + $0 (no qualified property) = $2,840

allowable QBI deduction:

($300,000 x 20% x 28.4%) - {[($300,000 x 20% x 28.4%) - $5,680] x (1 - 28.4%)} = $17,040 - [($17,040 - $5,680) x 0.716] = $17,040 - $8,134 = $8,906