Question

Joan, a single taxpayer filing as head of household, operates a local candy store as a sole proprietorship. The business has two (2) employees, one who earned $40,000 and another who earned $60,000 in 2020. The business had no significant assets during the year. Joan’s “modified taxable income” for 2020 was $155,000 and she reported $195,000 of net business income on Schedule C of her IRS Form 1040.

a. Calculate Joan’s qualified business income tax deduction for 2020? (3 points)

b. Calculate Joan’s qualified business income tax deduction for 2020, assuming the same facts as in Q27, except that Joan’s taxable income before any potential qualified business income tax deduction is $183,300. (3 points)

Answer 1

Answer :

Taxable income is below the $163,300, a wage limit will be not applicable :

QBI deduction is lesser of

20% of QBI	(195000*20%)	$39,000
Not greater than 20% taxable income	(155000*20%)	$31,000
Hence, QBI deduction is	-	$31,000

Taxable income is within the phaseout limit of $213,300, but greater than $163,300, a wage limit will be applicable as below

50% of W -2 wages	(100000*50%)	50000
QBI deduction is lesser of	-	-
20% of QBI	(195000*20%)	$39,000
After wage limit or	(100000*50%)	$50,000
Not greater than 20% taxable income	(183300*20%)	$36,660
Hecen,QBI deduction is	-	$36,660