Chapter 9, Problem 45P

To determine

Compute qualified business income (QBI).

Explanation of Solution

Qualified Business Income: Qualified Business Income is a deduction available to eligible tax payers. Sec 199 A offers 20% deduction on qualified business income and 20% of qualified real estate investment trust and qualified publicly traded partnership income.

Person B and Person M are subject to QBI deduction of $60,000. However, their taxable income exceeds the threshold for married taxpayer so; their QBI deduction is limited to $14,400.

Compute applicable percentage:

$\begin{array}{c}\text{Applicable percentage}=100\%-\frac{\left(\begin{array}{l}\text{QBI deduction}\\ \times \left(\begin{array}{l}\text{Modified taxable income}\\ \text{Maximum limit}\end{array}\right)\end{array}\right)}{\$100,000}\\ =100\%-\frac{\left(\$60,000\times \left(\begin{array}{l}\$381,400\\ -\$321,000\end{array}\right)\right)}{\$100,000}\\ =40\%\end{array}$

Compute the QBI deduction.

Particulars	Amount ($)
20% of qualified business income(a)	$60,000
Applicable percentage (b)	40%
QBI deduction (a/b)	$24,000

Table (1)

2. Not more than the greater of:

Particulars	Amount ($)	Amount ($)
50% of W-2 wages (1)  or		80,000
25% of W-2 wages  (2)	4,000
2.5% of the unadjusted basis of qualified property (3)	0	4,000

Table (2)

Working Notes (1): Calculate 50% of W-2 wages.

$\begin{array}{c}50\%\text{ of W-2 wages}=\left(\begin{array}{l}\left(\begin{array}{l}\text{Total payment of }\\ \text{W-2 wages}\end{array}\right)\\ \times 50\%\\ \times \text{Applicable percentage}\end{array}\right)\\ =\$40,000\times 50\%\times 40\%\\ =\$8,000\end{array}$

(2) Calculate 25% of W-2 wages.

$\begin{array}{c}25\%\text{ of W-2 wages}=\left(\begin{array}{l}\left(\begin{array}{l}\text{Total payment of }\\ \text{W-2 wages}\end{array}\right)\\ \times 20\%\\ \times \text{Applicable percentage}\end{array}\right)\\ =\$40,000\times 25\%\times 40\%\\ =\$4,000\end{array}$

(3) Calculate the 2.5% of the unadjusted basis of qualified property.

$\begin{array}{c}\left(\begin{array}{l}\text{2}\text{.5\% of the unadjusted}\\ \text{basis of qualified property}\end{array}\right)=\left(\begin{array}{l}\left(\begin{array}{l}\text{Total unadjusted basis of}\\ \text{property}\end{array}\right)\\ \times 2.5\%\\ \times \text{Applicable percentage}\end{array}\right)\\ =\left(\$0\times 2.5\%\times 40\%\right)\\ =\$0\end{array}$

Mr. B and Mrs. M’s modified taxable income exceeds the threshold limit of $321,400 but less than $421,000. The W-2 wages is the limiting factor where the general 20% QBI amount.

1. Determine the difference between the general 20% deduction amount and the W-2 wages/ capital investment amount.

Particulars	Amount($)
General 20% QBI deduction amount	24,000
Less: The W-2 wages/ capital investment limit	(8,000)
Excess	$16,000

Table (3)

2. Determine the reduction ratio.

$\begin{array}{c}\text{Reduction ratio}=\frac{\left(\begin{array}{l}\left(\begin{array}{l}\text{Taxable income before}\\ \text{the QBI deduction}\end{array}\right)\\ -\text{Threshold amount}\end{array}\right)}{100,000}\\ =\frac{\$375,000-\$315,000}{\$100,000}\\ =60\%\end{array}$

3. Determine reduction in the W-2 wages.

$\begin{array}{c}\text{W-2 wages}=\left(\text{Excess}\times \text{Reduction ratio}\right)\\ =\$16,000\times 60\%\\ =\$9,600\end{array}$

4. Determine final QBI amount.

Particulars	Amount($)
General 20% QBI deduction amount	24,000
Less: The W-2 wages/ capital investment limit	(9,600)
Final QBI amount	$14,400

Table (4)

Final amount is less than 20% of their modified taxable income, so they will allow $14,400 deduction for qualified business income.