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
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 $14,400.
Compute applicable percentage:
Compute the QBI deduction.
| Particulars | Amount ($) |
| 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.
(2) Calculate 25% of W-2 wages.
(3) Calculate the 2.5% of the unadjusted basis of qualified property.
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 | $16,000 |
Table (3)
2. Determine the reduction ratio.
3. Determine reduction in the W-2 wages.
4. Determine final QBI amount.
| Particulars | Amount($) |
| 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.
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