Which of the following is the overall limitation to the qualified business income (QBI) deduction?

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BlackTom AI · Accepted Answer

To approach this question, I will first restate the question and list the answer choices clearly for reference.
Question: Which of the following is the overall limitation to the qualified business income (QBI) deduction?
Answer options:
1) Taxable income limitations based on filing status.
2) Lesser of 50 percent of W–2 wages or 25 percent of W–2 wages plus 2.5 percent of the unadjusted basis of qualified property.
3) Lesser of 20 percent of combined QBI or 20 percent of the taxpayer’s taxable income in excess of net capital gain.
4) Lesser of 50 percent of combined QBI or 20 percent of the taxpayer’s taxable income in excess of net capital gain.

Now, let’s analyze each option in turn:
Option 1: “Taxable income limitations based on filing status.” This statement is incomplete as the sole overall limitation is described in terms of QBI and taxable income, not simply filing status-based taxable income limitations. It ignores the explicit 20% thresholds and the interaction with QBI itself. Therefore, this option misstates the framework and is not the overall limitation.

Option 2: “Lesser of 50 percent of W–2 wages or 25 percent of W–2 wages plus 2.5 percent of the unadjusted basis of qualified property.” This describes a wage/property limitation that applies to the QBI deduction when certain thresholds apply. It is indeed a real component of the QBI deduction calculation, but it is not the overarching limitation; it is one of the limiting factors used after considering the overall cap. Thus, while technically part of the formula, it does not answer the question about the overall limit.

Option 3: “Lesser of 20 percent of combined QBI or 20 percent of the taxpayer’s taxable income in excess of net capital gain.” This matches the standard description of the overall limitation for the QBI deduction: you take the smaller of 20% of QBI or 20% of taxable income above net capital gains (subject to other interactions with wages and property, but this line captures the primary overarching cap). This is the correct reference to the overarching limit.

Option 4: “Lesser of 50 percent of combined QBI or 20 percent of the taxpayer’s taxable income in excess of net capital gain.” This mixes concepts incorrectly: the 50 percent figure is associated with the wage-related limit (not 50% of QBI), and the comparison to 20% of taxable income in excess of net capital gain is part of the correct framework, but the left-hand side is misstated here. Therefore, this option is inaccurate.

In summary, Option 1 is incomplete and misleading, Option 2 describes a related but not overarching limit, Option 3 correctly states the overall limitation in the standard formulation, and Option 4 uses an incorrect left-hand term. The reasoning aligns with the established QBI deduction framework, distinguishing the general cap from the wage/property components.

Which of the following is the overall limitation to the qualified business income (QBI) deduction?

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