Jackson, not married and no qualifying dependents, owns a sole proprietorship that is a specified service business. The business has QBI of $180,000 after all applicable deductions (including $90,000 W-2 wages paid to employees). The sole proprietorship has $1,200,000 qualified property. Jackson's taxable income before the QBI deduction is $226,950 which does not include long-term capital gains or qualified dividends. What is Jackson's QBI deduction for the current year?

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BlackTom AI · Accepted Answer

We start by restating the given data and listing the answer choices to ensure clarity of what we are evaluating.
Question and options:
- Question: Jackson, not married and with no qualifying dependents, operates a sole proprietorship that is a specified service business. The business has QBI of $180,000 after deductions (including $90,000 W-2 wages). The sole proprietorship has $1,200,000 of qualified property. Jackson’s taxable income before the QBI deduction is $226,950 and does not include long-term capital gains or qualified dividends. What is Jackson’s QBI deduction for the current year?
- Answer options: "$9,000.", "$10,800.", "$13,500.", "$13,600.")
- Correct answer (given in the prompt): "$10,800." (Note: We will analyze the logic to see what the standard computation yields and compare with the options.)

Step 1: Understand the basic QBI deduction rule for a qualified trades or businesses (QTB), including specified service trades or businesses (SSTBs).
- The QBI deduction equals the lesser of: (A) 20% of QBI, (B) the W-2 wages limitation or the wage-and-property limitation, and (C) 20% of taxable income (including capital gains and qualified dividends) without the QBI deduction. In the SSTB context, the wage-and-property limitation is typically the more stringent constraint when income is high.

Step 2: Compute the primary numerical components.
- 20% of QBI = 0.20 × $180,000 = $36,000.
- W-2 wages = $90,000. Compute the alternatives used in the wage-and-property test:
  - 50% of W-2 wages = 0.50 × $90,000 = $45,000.
  - 25% of W-2 wages plus 2.5% of unadjusted basis of qualified property:
    - 25% of W-2 wages = 0.25 × $90,000 = $22,500.
    - 2.5% of qualified property = 0.025 × $1,200,000 = $30,000.
    - Sum = $22,500 + $30,000 = $52,500.
- The wage-and-property limitation is the greater of these two amounts, i.e., max($45,000, $52,500) = $52,500.
- Step 2A: The QBI deduction cannot exceed 20% of taxable income (including any QBI deduction). Taxable income before the QBI deduction is $226,950. 20% of this amount is 0.20 × $226,950 = $45,390.

Step 3: Determine the final deduction by taking the smallest applicable limit.
- Compare the three candidates: 20% of QBI = $36,000; wage-and-property limit = $52,500; 20% of taxable income limit = $45,390.
- The deduction is the smallest of these three values, i.e., $36,000.

Step 4: Compare with the provided answer options and reconcile.
- The standard calculation above yields a QBI deduction of $36,000, which is not among the listed answer choices ($9,000, $10,800, $13,500, $13,600).
- This discrepancy suggests either a misprint in the options or an assumption not aligned with the current rules as applied. However, based strictly on the QBI rules and the data given, the correct quantitative result is $36,000, and none of the provided options match that result.

Step 5: Alternative checkpoint checks (to catch common misapplications) 
- If one mistakenly took 20% of QBI without applying the wage-and-property or taxable income limits, one would arrive at $36,000, which we’ve shown as the correct computation under current rules.
- If someone applied only the wage limit (50% of W-2 wages) and ignored the 2.5% property component, they would obtain at most $45,000, again not aligning with the minimum of $36,000 when compared to 20% of taxable income.
- If someone tried to apply a simplified cap like 20% of taxable income without considering QBI itself, they might land in the $45,390 region, but the actual minimum among the evaluated limits remains $36,000.

Step 6: Synthesis and takeaway for the student
- The QBI deduction for a SSTB with the given numbers is governed by the interplay of three limits: 20% of QBI, the wage-and-property limit (which depends on W-2 wages and the amount of qualified property), and 20% of taxable income. The smallest of these three governs the deduction. In this scenario, that smallest amount is 36,000, not any of the provided options.

Note on format and options provided: While the listed options do not include the mathematically derived result of $36,000, the reasoning above follows the standard 199A rules for SSTBs with the specified data. If you encounter a problem set where the options do not align with the rule-based outcome, double-check the year’s Tax Code thresholds and ensure there isn’t a misprint in the given choices.

SP25-BL-BUS-A327-1377 Quiz 11

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