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Exam 15: Taxing Business Income

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Question 21

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In 2019, Sam and Betty, each single, both generate sole proprietor income of $240,000. Sam's income is generated from a wholesale business whereas Betty's is earned from her law practice. Neither has any employees or qualified assets. Both claim the standard deduction and have other income equal to the standard deduction amount.

A) Both Sam and Betty will have a QBI deduction of $48,000.
B) Sam can obtain a QBI deduction, but Betty cannot because of the taxable income level and law practice is a specified service business.
C) Neither Sam nor Betty will generate a QBI deduction due to their taxable income levels.
D) None of these.

E) A) and B)
F) All of the above

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Question 22

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Which of the following taxpayers is eligible for a qualified business income deduction regarding the activity noted? (circle all that apply) a. Tom's Burger Place, a sole proprietorship. b. A driver for Uber or Lyft. c. An employee working for Apple, Inc. d. Apple, Inc. e. A partner of a Big 4 firm.

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Question 23

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Luis is the sole shareholder of a regular C corporation, and Eduardo owns a proprietorship. In the current year, both businesses make a profit of $80,000, and each owner withdraws $50,000 from his business. With respect to this information, which of the following statements is incorrect?

Ginger is a self-employed driver finding rides via a few different platform companies such as Lyft. She is single and claims the $12,000 standard deduction. For 2019, her income from driving is $67,000 and she has no other income. Ginger's QBI deduction for 2019 is $13,400.

Qualified business income (QBI) is defined as the ordinary income less ordinary deductions that a taxpayer earns from a qualified trade or business (e.g., from a sole proprietorship, S corporation, or partnership) conducted in the United States by the taxpayer.

What is a limited liability company? What favorable nontax and tax attributes does the LLC entity form offer taxpayers?

Taylor, a single taxpayer, has taxable income before the QBI deduction of $190,700. A CPA, he operates an accounting practice as a single-member LLC (which he reports as a sole proprietorship) . During 2019, his proprietorship reports net income of $150,000, W-2 wages of $125,000, and $10,000 of qualified property. What is Taylor's qualified business income deduction?

Qualified property is used to determine one of the limitations to the qualified business income (QBI) deduction. Specifically, 2.5% of the unadjusted basis (immediately after acquisition) of qualified property is added to 50% of W-2 wages to determine this limitation.

Felicia, who is single, operates three sole proprietorships that generate the following information in 2019 (none is a "specified services" businesses): $\begin{array} { | c | c | c | c | } \hline \text { Business } & \text { QBI } & \text { W-2 Wages } & \text { Capital Investment } \\\hline \text { A } & \$ 240,000 & \$ 72,000 & \$ - 0 - \\\hline \text { B } & \$ ( 108,000 ) & \$ 48,000 & \$ - 0 - \\\hline \text { C } & \$ 120,000 & \$ - 0 - & \$ - 0 - \\\hline\end{array}$ Felcia chooses not to aggregate the businesses. She also earns $150,000 of wages from an unrelated business and modified taxable income (before any QBI deduction) is $304,000. a. What is Felicia's QBI deduction? b. Assume that Felicia can aggregate these businesses. Determine her QBI deduction if she decides to aggreg the businesses.

How does property used in a qualified trade or business factor into the QBI deduction calculation? What types of property are considered for the QBI deduction?

Which of the following types of income are included in qualified business income (QBI) ?

Quail Corporation is a C corporation that generates net income of $125,000 during the current year. If Quail paid dividends of $25,000 to its shareholders, the corporation must pay tax on $100,000 of net income. Shareholders must report the $25,000 of dividends as income.

Sergio Fernandez owns and manages his single-member LLC which provides a wide variety of accounting services to his clients. He is married and will file a joint tax return with his spouse, Goretty. His LLC reports $250,000 of net income, W-2 wages of $120,000, and assets with an unadjusted basis of $75,000. Their taxable income before the QBI deduction is $215,000 (this is also their modified taxable income). Determine their QBI deduction for 2019.

Susan, a single taxpayer, owns and operates a bakery (as a sole proprietorship). The business is not a specified services business. In 2019, the business pays $60,000 in W-2 wages, has $150,000 of qualified property, and $200,000 in net income (all of which is qualified business income). Susan also has a part-time job earning wages of $11,000, receives $3,200 of interest income, and will take the standard deduction. What is Susan's qualified business income deduction?

Alicia is the sole shareholder and CEO of ABC, Inc., an S corporation that is a qualified trade or business. During the current year, ABC has net income of $325,000 after deducting Alicia's $100,000 salary. In addition to her compensation, ABC pays Alicia dividends of $250,000. After reviewing comparable companies, you determine that reasonable compensation for someone with her experience and responsibilities is $200,000. What is Alicia's qualified business income?

Unless Congress makes a change, the QBI deduction is set to expire after 2025.

One of the purposes of the qualified business income deduction is to reduce the taxes on businesses that are operating in noncorporate business forms (e.g., sole proprietors, partnerships, and S corporations).

Where is the § 199A deduction taken on Form 1040?

Katherine, the sole shareholder of Penguin Corporation, has the corporation pay her a salary of $300,000 in the current year. The Tax Court has held that $90,000 represents unreasonable compensation. Katherine has avoided double taxation only to the extent of $210,000 (the portion of the salary that is considered reasonable compensation).

Carla is a self-employed online retailer and single. She has no employees. Her annual taxable income is usually around $200,000. Carla could increase her QBI deduction if she incorporated her business, made an S election, and paid herself wages.