Ben and Molly are married and will file jointly. Ben generates $300,000 of qualified business income from his single-member LLC (a law firm). He reports his business as a sole proprietorship. Wages paid by the law firm amount to $40,000; the law firm has no significant property. Molly is employed as a tax manager by a local CPA firm. Their modified taxable income is $381,400 (this is also their taxable income before the deduction for qualified business income). Determine their QBI deduction for 2019.

$14,400

Explanation:

QBI deduction can be as much as 20% of QBI but it cannot exceed 20% of taxable income before QBI deduction and/or capital gains.

QBI deduction also starts to phase out if the couple's income is higher than $321,400 (for 2019).

phase out = 1 - [($381,400 - $321,400) / $100,000] = 1 - 0.6 = 40%

we must choose the higher between:

tentative QBI deduction based on W-2 wages = 50% x $40,000 x 40% = $8,000

                     or

QBI deduction based on capital investment limit = (25% x $40,000 x 40%) + $0 (no qualified property) = $4,000

allowable QBI deduction:

($300,000 x 20% x 40%) - {[($300,000 x 20% x 40%) - $8,000] x (1 - 40%)} = $24,000 - [($24,000 - $8,000) x 0.60] = $24,000 - $9,600 = $14,400

g

explanation:

g

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