Question 1

The QBI deduction will reduce both the income tax and self-employment taxes owed by a self-employed individual.

Accepted Answer

The QBI deduction reduces only income tax, not self-employed taxes. It is a deduction on qualified business income for income tax purposes, not for calculating self-employment taxes.

Question 2

Code § 199A permits an individual to deduct 25% of the qualified business income generated through a sole proprietorship, a partnership, or an S corporation.

Accepted Answer

Code § 199A allows an individual to deduct up to 20% of their qualified business income from a sole proprietorship, partnership, or S corporation, not 25%.

Question 3

Aaron 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 Aaron's $100,000 salary. In addition to his compensation, ABC pays Aaron dividends of $250,000. What is Aaron's qualified business income?
A) $-0-.
B) $100,000.
C) $250,000.
D) $325,000.
E) None of these.

Accepted Answer

Aaron's qualified business income (QBI) from ABC, Inc. is $325,000. This is because QBI includes the net income of the S corporation but does not include salaries paid to shareholders or dividend distributions.

Question 4

For purposes of the qualified business income QBI) deduction, qualified business income does not include certain types of investment income [e.g., capital gains or capital losses, dividends, and interest income unless properly allocable to a trade or business, such as lending].

Accepted Answer

The statement is true. Qualified business income for the QBI deduction does not include certain types of investment income, as listed in the statement.

Question 5

A partnership will need to report wages paid to its employees as a separate line item on Schedule K-1 to help partners calculate their QBI deduction.

Accepted Answer

This statement is true. Wages paid to employees are included in the calculation of the Qualified Business Income (QBI) deduction for partners, and therefore must be reported separately on Schedule K-1.

Question 6

Tammy has $200,000 of QBI from her neighborhood clothing store a sole proprietorship). Her proprietorship paid $30,000 in W-2 wages and has $20,000 of qualified property.Tammy's spouse earned $50,000 of wages as an employee, and the couple earned $20,000 of interest income during the year and will be filing jointly.What is their QBI deduction for 2019?
A) $-0-.
B) $40,000.
C) $50,000.
D) $54,000.
E) None of these.

Accepted Answer

The QBI deduction is generally the lesser of 20% of the taxpayer's qualified business income (QBI) or 20% of the taxpayer's taxable income minus net capital gains. In this case, Tammy's QBI is $200,000, so 20% of that is $40,000. Since the question does not provide enough information to calculate the taxable income or indicate that the W-2 wages and qualified property limit applies, the basic calculation of 20% of QBI is used, making $40,000 the correct deduction amount.

Question 7

Jane is a self-employed attorney and single. Her annual net earnings from her law practice always exceed $220,000.
Jane also has a business selling stained glass windows that she makes. Her earnings from this business are usually about $35,000 per year. Jane claims the standard deduction. Because Jane's 2019 taxable income exceeds the
$210,700 threshold, she may not claim a QBI deduction for either business.

Accepted Answer

Jane may still be eligible for a Qualified Business Income (QBI) deduction for her businesses. The QBI deduction allows taxpayers a deduction of up to 20% of their qualified business income from a pass-through entity (like a sole proprietorship, partnership, S corporation, or some trusts and estates). The phase-out and disallowance thresholds for the QBI deduction are based on total taxable income and are adjusted annually for inflation. For high-income earners like Jane, the deduction may be limited or phased out, especially for specified service trades or businesses (SSTBs) like law practices once their income exceeds certain thresholds. However, the deduction isn't automatically disallowed above these thresholds; it's subject to limitations and phase-outs. Additionally, her stained glass business may qualify for the QBI deduction under different rules if it's not considered an SSTB.

Question 8

Qualified business income includes the reasonable compensation paid to the taxpayer by a qualified trade or business and guaranteed payments made to a partner for services rendered.

Accepted Answer

Qualified business income (QBI) does not include reasonable compensation paid to the taxpayer by a qualified trade or business, nor does it include guaranteed payments made to a partner for services rendered. These are specifically excluded from the definition of QBI.

Question 9

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?
A) Eduardo must report $80,000 of income on his return.
B) Luis must report $80,000 of income on his return.
C) Eduardo's proprietorship is not required to pay income tax on $80,000.
D) Luis's corporation must pay income tax on $80,000.
E) None of these.

Accepted Answer

As the sole shareholder of a regular C corporation, Luis must pay income tax on the $80,000 profit his corporation has earned. However, he is not required to report the $50,000 he withdrew from his business as income on his personal tax return. Eduardo, as the owner of a proprietorship, is not a separate taxable entity from his business, so he must report the $80,000 profit and the $50,000 withdrawal on his personal tax return. Therefore, statement B is incorrect. Statements A, C, D, and E are all correct.

Question 10

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.

Accepted Answer

Qualified business income (QBI) is defined as ordinary income less ordinary deductions earned from a qualified trade or business conducted in the United States by the taxpayer. This can include income earned from a sole proprietorship, S corporation, or partnership.

Question 11

There are three limitations on the qualified business income deduction: an overall limitation based on modified taxable income), another that applies to high income taxpayers, and a third that applies to certain types of service businesses.

Accepted Answer

This statement is true. The qualified business income deduction is subject to three limitations: an overall limitation based on modified taxable income, a limitation for high-income taxpayers, and a limitation for certain types of service businesses.

Question 12

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.

Accepted Answer

The answer of In 2019, Sam and Betty, each single,...

Question 13

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.

Accepted Answer

The answer of Qualified property is used to determine one...

Question 14

Which of the following statements is incorrect about LLCs and the check-the-box Regulations?
A) If an LLC with more than one owner does not make an election, the entity is taxed as a corporation.
B) All 50 states have passed laws that allow LLCs.
C) An entity with more than one owner and formed as a corporation cannot elect to be taxed as a partnership.
D) If an LLC with one owner does not make an election, the entity is taxed as a sole proprietorship.
E) An LLC with one owner can elect to be taxed as a corporation.

Accepted Answer

Under the check-the-box Regulations, if an LLC with more than one owner does not make an election, it is by default taxed as a partnership, not a corporation.

Question 15

Once a taxpayer reaches certain taxable income thresholds, § 199A limits the qualified business income QBI)
deduction. These thresholds $321,400 for married taxpayers filing jointly and $160,700 for all other taxpayers in
2019) are indexed for inflation every year.

Accepted Answer

This statement is true. The thresholds for the § 199A deduction are adjusted for inflation each year. In 2019, the thresholds were $321,400 for married taxpayers filing jointly and $160,700 for all other taxpayers.

Question 16

Danielle is a partner in and sales manager for DG Partners, a domestic business that is not a specified service trade or business. During the tax year, she receives guaranteed payments of $250,000 from DG Partners for her services to the partnership as its sales manager. In addition, her distributive share of DG Partners' ordinary income its only item of income or loss) was $175,000. What is Danielle's qualified business income?
A) $-0-.
B) $175,000.
C) $250,000.
D) $425,000.
E) None of these.

Accepted Answer

Danielle's qualified business income is equal to her distributive share of the partnership's ordinary income, which is $175,000. Her guaranteed payments do not count as qualified business income.

Question 17

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.

Accepted Answer

By incorporating her business and making an S election, Carla can pay herself a reasonable salary and take advantage of the QBI deduction for any remaining profits. This can potentially increase her QBI deduction and reduce her taxable income.

Question 18

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.

Accepted Answer

Ginger's QBI deduction would be calculated as 20% of her qualified business income (QBI), which would be 20% of $67,000 = $13,400. However, since she claims the standard deduction and has no other income, her taxable income would be $67,000 - $12,000 = $55,000. The QBI deduction cannot exceed 20% of her taxable income, which would be $11,000 (20% of $55,000), not $13,400.

Question 19

An individual in a specified service business, such as accounting, with taxable income over the threshold amounts $210,700, or $421,400 if married filing jointly in 2019), will not lose the QBI deduction on such income if:
A) Taxable income exceeds the thresholds due to income of a spouse.
B) Taxable income did not exceed the thresholds in the prior three years.
C) Taxable income exceeds the thresholds because of net capital gain income.
D) None of these.

Accepted Answer

The Qualified Business Income (QBI) deduction phases out for specified service businesses (like accounting) when taxable income exceeds certain thresholds. The conditions listed (A, B, C) do not provide exceptions to this rule, meaning none of the options allow an individual to not lose the QBI deduction if their income is over the threshold.

Question 20

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?
A) $-0-.
B) $200,000.
C) $225,000.
D) $325,000.
E) None of these.

Accepted Answer

Alicia's qualified business income is calculated by taking ABC's net income ($325,000) and subtracting her reasonable compensation ($200,000). Therefore, her qualified business income is $125,000 ($325,000 - $200,000). Dividends paid to the shareholder are not considered QBI.

Quiz 2: The Deduction for Qualified Business Income for Pass-Through Entities

The QBI deduction will reduce both the income tax and self-employment taxes owed by a self-employed individual.

Code § 199A permits an individual to deduct 25% of the qualified business income generated through a sole proprietorship, a partnership, or an S corporation.

For purposes of the qualified business income QBI) deduction, qualified business income does not include certain types of investment income [e.g., capital gains or capital losses, dividends, and interest income unless properly allocable to a trade or business, such as lending].

A partnership will need to report wages paid to its employees as a separate line item on Schedule K-1 to help partners calculate their QBI deduction.

Qualified business income includes the reasonable compensation paid to the taxpayer by a qualified trade or business and guaranteed payments made to a partner for services rendered.

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?

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.

There are three limitations on the qualified business income deduction: an overall limitation based on modified taxable income), another that applies to high income taxpayers, and a third that applies to certain types of service businesses.

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.

Which of the following statements is incorrect about LLCs and the check-the-box Regulations?

Once a taxpayer reaches certain taxable income thresholds, § 199A limits the qualified business income QBI) deduction. These thresholds $321,400 for married taxpayers filing jointly and $160,700 for all other taxpayers in 2019) are indexed for inflation every year.

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.

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.

An individual in a specified service business, such as accounting, with taxable income over the threshold amounts $210,700, or $421,400 if married filing jointly in 2019) , will not lose the QBI deduction on such income if: