Chapter 9 Examples:

Qualified business income does not include certain types of investment income, such as:

-Capital gains or capital losses (including any net § 1231 gain included in capital gain and loss computations); -Dividends; -Interest income (unless "properly allocable" to a trade or business, such as lending); or -Certain other investment items. Nor does qualified business income include: -The "reasonable compensation" paid to the taxpayer with respect to any qualified trade or business; or -Guaranteed payments made to a partner for services rendered.

A rental real estate activity (or multiple rentals if the taxpayer chooses to combine them) will be treated as a trade or business for purposes of § 199A if the following conditions are met:

-Separate books and records are maintained for each rental activity (or the combined enterprise if grouped together). -At least 250 hours of "rental services" are performed per year for the activity (or combined enterprise). Rental services include time spent on maintenance, repairs, collecting rent, paying bills, providing services to tenants, supervising contractors and employees, and efforts to rent the property (including advertising and negotiating and executing a lease). The work does not have to be performed by the taxpayer (owner). It also can be performed by employees, agents, or contractors of the property owner. -The taxpayer maintains contemporaneous records, including time reports or similar documents, supporting the services performed (including hours, dates, description of services, and who performed the services). -A statement is attached to the timely filed return indicating the taxpayer is using the safe harbor, describing the properties, and acknowledging that the requirements for the safe harbor are met.

Dr. Stephanie Davis, DDS, is a full-time employee at the Robin University Health Center. In the evenings and on weekends, she shares a practice with another dentist who works the Monday through Friday day-time shifts. Is she an employee or self-employed or both?

. Dr. Davis is both employed and self-employed.

Josh Butler is a self-employed anesthesiologist. During the year, he spends 30 to 35 hours per week administering anesthesia and postoperative care to patients in three hospitals, none of which provides him with an office. He also spends two or three hours per day in a room in his home that he uses exclusively as an office. He does not meet patients there, but he performs a variety of tasks related to his medical practice (e.g., contacting surgeons, doing bookkeeping, and reading medical journals). Will this be a deductible home office expense?

A deduction will be allowed because Dr. Butler uses the office in the home to conduct administrative or management activities of his trade or business and there is no other fixed location where these activities can be carried out.

Abby, a singer, records a song. Abby is paid a mechanical royalty when the song is licensed or streamed. She is also paid a performance royalty when the recorded song is played publicly. Is this a specified service?

Abby is engaged in a "specified services" business (performing arts).

ssume that Abby is a single taxpayer who does not itemize deductions and operates a sole proprietorship. During 2022, her business generates $140,000 of business income, $40,000 of deductible business expenses (including her self-employment tax deduction) , but $2,950 of qualified dividend income. Abby's AGI remains $102,950, and her taxable income before the QBI deduction remains $90,000 ($102,950 AGI − $12,950 standard deduction). However, Abby's modified taxable income is now $87,050 [$90,000 taxable income before the QBI deduction less $2,950 of "net capital gain" (the qualified dividend income)]. What is her QBI and Taxable income?

Abby's QBI deduction is $17,410, the lesser of: 20% of qualified business income ($20,000; $100,000 × 20%), or 20% of modified taxable income ($17,410; $87,050 × 20%). Abby's taxable income is $72,590 ($90,000 of taxable income before the QBI deduction less her $17,410 QBI deduction).

Assume that Abby is a single taxpayer who does not itemize deductions and operates a sole proprietorship. During 2022, her business generates $140,000 of business income, $40,000 of deductible business expenses (including her self-employment tax deduction), and $2,950 of interest income from her business deposits. She has no other sources of income. Abby's AGI is $102,950. Abby has $100,000 of qualified business income ($140,000 − $40,000). The interest income does not qualify for the QBI deduction. Her modified taxable income is $90,000 ($102,950 AGI − $12,950 standard deduction). What is her QBI deduction and taxable income?

Abby's QBI deduction is $18,000, the lesser of: 20% of qualified business income ($20,000; $100,000 × 20%), or 20% of modified taxable income ($18,000; $90,000 × 20%). Abby's taxable income is $72,000 ($90,000 of taxable income before the QBI deduction less her $18,000 QBI deduction).

A nonaccountable plan is a plan where an adequate accounting or return of excess amounts, or both, is not required.

All expense reimbursements are included as wages on the employee's Form W-2. Any allowable expenses are deductible in the same manner as unreimbursed expenses.

Arnold is a lawyer whose major client accounts for 60% of his billings. He does the routine legal work and income tax returns at the client's request. He is paid a monthly retainer in addition to amounts charged for extra work. Is he an employee or self-employed?

Arnold is a self-employed individual. Even though most of his income comes from one client, he still has the right to determine how the end result of his work is attained.

Art, a physical therapist, lives with his family in Lancaster, Pennsylvania. For seven months each year, he is employed by the New Orleans Saints football team at a salary of $150,000. During this period, he rents an apartment in New Orleans. In the off-season, he works for the Lancaster YMCA at a salary of $15,000. Where is his tax home and what is deductible?

Art's tax home is clearly New Orleans and not Lancaster. Consequently, his living expenses while in New Orleans (i.e., food and lodging) are not deductible.

Jasmine owns a majority interest in a sailboat racing team; she also owns an interest in JB Marina (a partnership that operates a marina). JB Marina is a trade or business under § 162, but the operations of the sailboat racing team are not sufficient to establish a trade or business under § 162. Can she aggregate?

As a result, Jasmine has only one trade or business for purposes of § 199A and cannot aggregate her interest in the sailboat racing team with her interest in JB Marina.

Simone, a married taxpayer, operates a business as a sole proprietor. The business has one employee, who is paid $80,000 during 2022. Assume that the business has no significant assets.Assume the same facts as in Example 47, except that Simone's qualified business income is $500,000 and her modified taxable income is $600,000 (this is also her taxable income before the QBI deduction). Because Simone's taxable income before the QBI deduction exceeds $440,100, the W-2/Capital Investment Limitation fully applies. What is her QBI?

As a result, Simone's QBI deduction is $40,000, the lesser of: 20% of qualified business income ($100,000; $500,000 × 20%), or 50% of W-2 wages ($40,000; $80,000 × 50%). And no more than: 20% of modified taxable income ($120,000; $600,000 × 20%).

Wanda owns a 75% interest in Sunshine, Inc. (a clothing manufacturer operating as an S corporation) and a 75% interest in PetFriendly (a retail pet food store operating as a partnership). Wanda manages both businesses, but they operate in separate facilities, with no overlap of business operations, and do not coordinate or rely on each other. Can they be aggregated?

As a result, Wanda must treat the two businesses separately for purposes of determining the QBI deduction. Here is a key point: The owner does not have to own more than 50 percent of each business directly; rather, the owner must simply establish that a group of persons owns 50 percent or more of all of the entities the owner wants to aggregate.

Return to the facts of The Big Picture. Because Morgan will have an office in her home for her two freelancing businesses, the apartment will be her principal place of business. Will travel from her home office be a deductible transportation expense?

As a result, any transportation from her home to freelancing sites (e.g., driving to a child's home for tutoring) is not a commuting expense. However, Morgan will have commuting expenses for the mileage between her apartment and her job at Enrichment Child Care Center.

Return to the facts of The Big Picture. After starting her new job, Morgan enrolls in the evening master's degree program in child development at a local university and begins attending classes. Although Morgan believes that the master's degree would be useful, it is not a requirement of ECCC and it is not needed to maintain or improve existing skills in her current job. Is this a deductible expense?

As a result, none of her education expenses are deductible. However, the tuition and fees (but not any expenses for books and supplies) will qualify for the lifetime learning credit (see text Section 13-4e).

Ron is a full-time teacher at Hoover Elementary. During 2022, he spends $1,200 for school supplies for his fourth-grade class. Under an accountable plan (see text Section 9-9a), Hoover reimburses him for $400 of these supplies. What is his educator expense?

As to the $800 balance, Ron may claim $300 as a deduction for AGI. The remaining expenses ($500) are miscellaneous itemized deductions (and not allowed from 2018 through 2025).

Assume the same facts as in the previous example. However, the catering and restaurant businesses are operated in separate partnerships with Anita, Ben, Carole, and David each owning a 25% interest in the capital and profits of each partnership. The partners are unrelated. How should they aggregate thier businesses?

Because Anita, Ben, Carole, and David together own more than 50% of the capital and profits in each of the partnerships, each may choose to treat the catering business and the restaurant as a single trade or business in determining their QBI deduction. Further, if Anita chooses to aggregate the businesses, her decision has no effect on what Ben, Carole, and David may (independently) choose to do.

Corbin is an attorney employed as an associate with LegalEagles LLP (LE). Corbin and the other associates in LE have taxable income below the threshold amount. LE terminates its employment relationship with Corbin and its other associates, allowing Corbin and the other former associates to form a new partnership, LegalBeagles LLP (LB). LB then contracts to perform services to LE. Corbin continues to provide substantially the same services to LE and its clients through LB. The goal, obviously, is for Corbin (and the other associates) to convert wage income into pass-through income from LB that is eligible for the QBI deduction (even though LB is a "specified services" business, Corbin is below the taxable income threshold). What will qualify as qualified business income?

Because Corbin was formerly an employee of LE and continues to provide substantially the same services to LE, Corbin is presumed to be an employee of LE. Unless the presumption is rebutted, Corbin's distributive share of income from LB will be treated like wages for purposes of § 199A for a period of three years and will not be treated as qualified business income. What if LB, instead, provides contractual services to a different law firm? Now the QBI deduction is available (again assuming that Corbin is below the taxable income threshold).

Jim is single and works full-time as a long-haul truck driver. He lists his mother's home as his address and stays there during holidays. However, he contributes nothing toward its maintenance. His tax home is on the road. Are his travel expenses deductible?

Because Jim has no regular place of duty or place where he regularly lives, his tax home is where he works (i.e., on the road). As an itinerant (transient), he is never away from home, and all of his meals and lodging while on the road are personal and not deductible.

Computer Company has annual revenue of $20,000,000 ($18,500,000 of the revenue is related to the sales of computers and peripheral equipment; the remaining $1,500,000 relates to consulting, installation, and training services). Is this a specified service?

Because its consulting services revenues are less than 10% of Computer Company's total revenues, those services are ignored for purposes of determining whether Computer Company is a "specified services" business. As a result, Computer Company is not a "specified services" business.

Ben has travel expenses substantiated only by canceled checks. The checks establish the date, place, and amount of the expenditure. Is this substantiated?

Because neither the business relationship nor the business purpose is established, the deduction is disallowed

Anita wholly owns and operates a catering business and a restaurant through separate entities. The catering business and the restaurant share centralized purchasing to obtain volume discounts and a centralized accounting office that performs all of the bookkeeping, tracks and issues statements on all of the receivables, and prepares the payroll for each business. Anita maintains a website and print advertising materials that reference both the catering business and the restaurant. She uses the restaurant kitchen to prepare food for the catering business. The catering business employs its own staff and owns equipment and trucks that are not used by the restaurant. Should she aggregate them?

Because the restaurant and catering business are held in separate entities, Anita will be treated as operating each of these businesses directly. Both businesses offer prepared food to customers. The two businesses share the same kitchen facilities in addition to centralized purchasing, marketing, and accounting. As a result, Anita may choose to treat the catering business and restaurant as a single trade or business in determining her QBI deduction.

Danielle is in the business of licensing software to customers. As part of her business, she evaluates a customer's software needs and discusses alternatives with her customers. She advises the customer on the particular software products her business licenses. Danielle is paid a flat price for the software license. After a customer licenses the software, Danielle helps to implement it. Is she a specified service?

Danielle is engaged in the trade or business of licensing software and is not engaged in a "specified services" business.

Luis is a certified public accountant employed by a regional CPA firm as a tax manager. He operates a separate furniture refinishing business that he operates out of his home. For this business, he uses two rooms in the basement exclusively and regularly. The floor space of the two rooms is 240 square feet, which is 10% of the total floor space of his 2,400-square-foot residence. Gross income from the business totals $8,000. Expenses of the business (other than home office expenses) are $6,500. Luis incurs the following home office expenses: Real property taxes on residence$ 4,000 Interest expense on residence 7,500 Operating expenses of residence (including homeowners insurance) 2,000 MACRS cost recovery on residence (based on 10% business use) 350 What are his deductions? except that Luis chooses the Simplified Method. This choice results in the following deduction:

Deduction is as follows:

Luis is a certified public accountant employed by a regional CPA firm as a tax manager. He operates a separate furniture refinishing business that he operates out of his home. For this business, he uses two rooms in the basement exclusively and regularly. The floor space of the two rooms is 240 square feet, which is 10% of the total floor space of his 2,400-square-foot residence. Gross income from the business totals $8,000. Expenses of the business (other than home office expenses) are $6,500. Luis incurs the following home office expenses: Real property taxes on residence$ 4,000 Interest expense on residence 7,500 Operating expenses of residence (including homeowners insurance) 2,000 MACRS cost recovery on residence (based on 10% business use) 350 What are his deductions?

Deductions as follows: Luis has a carryover of $200 (the unused excess MACRS cost recovery). Because he is self-employed, the allocable taxes and interest ($1,150), the other deductible office expenses ($200 + $150), and $6,500 of other business expenses are deductible for AGI

Tim purchased his automobile in 2019 for $36,000. It is used 90% for business purposes. Tim drove the automobile for 10,000 business miles in 2021, 8,500 business miles in 2020, and 6,000 business miles in 2019. At the beginning of 2022, the basis of the business portion of his car is $25,945.

Depreciable basis: 36,000*0.90= 32400 less Depreciation: 2021 (10,000 miles*0.26)= (2600) 2020 (8500 miles* 0.27)= (2295) 2019 (6000 miles*0.26)= (1560) Adjusted business basis 1/1/2022 25,945

Ellen is a lawyer hired by Arnold to assist him in the performance of services for the client mentioned in Example 1. Is she an employee or independent contractor?

Ellen is under Arnold's supervision; he reviews her work and pays her an hourly fee. Ellen is an employee of Arnold.

Muriel operates a licensed day-care center in her home. The children use the living room as a play area during the day, and Muriel and her family use it for personal purposes in the evening and on weekends. Can she claim a deduction?

Even though the living room is used for both business and personal purposes, Muriel can claim an office in the home deduction, because of the daycare exception.

What is the automatic mileage method rate for 2022?

For 2022, the deduction is based on 58.5 cents per mile for business miles.

Many itemized deductions (from AGI deductions) are subject to limitations based on a taxpayer's AGI.

For example, only those medical expenses in excess of 7.5 percent of AGI are deductible (this is often called a "floor") and charitable contributions made in cash are normally limited to a maximum of 60 percent of a taxpayer's AGI (this is often called a "ceiling").

Frank owns a 75% interest and Geoff owns a 5% interest in each of five partnerships. Helen owns a 10% interest in only two of the partnerships. Each partnership operates a restaurant, each restaurant is a trade or business, and there is centralized management across the restaurants (Geoff is the executive chef of all of the restaurants, and he creates the menus and orders all of the food and related supplies). How does aggregrating work?

Frank may choose to aggregate all five partnerships. Geoff may do the same even though he only owns a 5% interest in each partnership (Geoff can show that Frank owns 50% or more of each of the partnerships; as a result, they are "commonly controlled"). Helen may only aggregate the two partnerships in which she has an interest.

Assume that Hana goes to New York for a two-week vacation. While there, she spends several hours renewing acquaintances with people in her company's New York office. Is her transportation expenses deductible?

Her transportation expenses are not deductible.

The deduction for moving expenses has been suspended from 2018 through 2025.

However, during this period, the moving expense deduction is retained for members of the Armed Forces (or their spouse or dependents) on active duty who move because of a military order that relates to a permanent change of station,

Treatment of Losses with QBI

If a taxpayer has a qualified business loss in one year, no QBI deduction is allowed, and the loss is carried over to the next year to reduce QBI (but not below zero)

The classification of employee expenses depends on whether the expenses are reimbursed by the employer under an accountable plan

If so, neither the reimbursement nor the expense is reported by the employee. In effect, this result is equivalent to treating the expenses as deductions for AGI.. If the expenses are reimbursed under a nonaccountable plan or are not reimbursed at all, then they are classified as deductions from AGI and are classified as miscellaneous itemized deductions

Certain miscellaneous itemized deductions, including the following, are not subject to the 2%-of-AGI floor and remain deductible from AGI:

Impairment-related work expenses of individuals with a disability. Amortizable premium on taxable bonds. Losses from Ponzi-type investment schemes. Gambling losses to the extent of gambling winnings. Unrecovered investment in an annuity.

In 2022, a single taxpayer has modified taxable income of $200,050, of which $150,000 is attributable to an accounting sole proprietorship that pays wages of $100,000 to employees. The taxpayer has an applicable percentage of 40%, computed as follows:

In determining includible qualified business income, the taxpayer takes into account 40% of $150,000, or $60,000. In determining the includible W-2 wages, the taxpayer takes into account 40% of $100,000, or $40,000. (30, 000= (200050-170050)/(50,000)= 40%

During 2022, Lance submits a proposed consulting contract to a local business. He invites the two business owners to dinner at a local restaurant and pays for the meal. During the meal, Lance discusses and answers questions about the proposed contract. Can lance deduct the expense?

Lance can deduct 100% of this qualified business meal.

Assume that Malcolm in Example 11 decided that he was the best person to manage the new office in San Diego and so decided to move there permanently. His wife and children continued to live in Los Angeles until the end of the school year. Is his travel expenses still deductible?

Malcolm is no longer "away from home" because the assignment is not temporary. His travel expenses are not deductible.

Malcolm maintains a consulting practice in Los Angeles. Due to new client responsibilities, Malcolm decided to open a new office in San Diego. Malcolm worked out of the new office for three months to train a new manager and to assist in setting up the new office. He tried commuting from his home in Los Angeles for a week and decided that he could not continue driving several hours a day. He rented an apartment in San Diego, where he lived during the week. He spent weekends with his wife and children at their home in Los Angeles. Are these travel expenses deductible?

Malcolm's rent, meals, laundry, incidentals, and automobile expenses in San Diego are deductible. To the extent that Malcolm's transportation expense related to his weekend trips home exceeds what his cost of meals and lodging would have been, the excess is personal and nondeductible.

Return to the facts of The Big Picture. During Morgan's senior year in college, her parents gave her one of the family cars—a 2018 Toyota Camry. Morgan has no idea as to the car's original cost or the odometer reading at the time the car was registered in her name. She has, however, kept track of the miles driven for business since she accepted her new job. What method should she use?

Morgan should use the automatic mileage method in claiming business use of the car.

Dr. Hill, a pathologist who works for a hospital in Ohio, travels to Las Vegas to attend a two-day session on recent developments in estate planning. Is a travel deduction allowed?

No deduction is allowed for Dr. Hill's travel expenses.

An alternative to the traditional IRA is the Roth IRA, which takes a radically different tax approach.

No tax benefit (i.e., exclusion or deduction) results from the initial contribution to a Roth IRA. Instead, later distributions (including postcontribution earnings) are recovered tax-free.

In December, Prism Associates purchases framed prints from a local artist and mails one to each of its clients. Each print costs $70; packaging and shipping costs are $10 per print. What can Prism deduct?

Prism may deduct $35 for each print sent ($25 gift maximum plus $10 for packaging and shipping).

Surgery Centers LLC (SC) operates specialty surgical centers that provide outpatient medical procedures (none of which require the patient to stay overnight). The company owns a number of facilities throughout the country. For each facility, SC ensures compliance with Federal and state laws and manages each facility's operations and performs all administrative functions. SC does not employ physicians, nurses, and medical assistants. Rather, it enters into agreements with medical professionals and other medical organizations to perform the procedures and provide all needed medical care. Patients are billed by SC for the facility costs related to their procedure; they are billed separately by the health care professional (or the medical organization) for the costs of the procedure performed by the physician and medical support team. Is this a specified Services Business?

SC is not engaged in a "specified services" business (health) because it is not providing the medical services (the medical professionals using the centers are operating businesses in the field of health).

In Example 44, Sanjay operated a sole proprietorship that generated QBI of $210,000 and he was able to claim a QBI deduction of $42,000. But if his spouse had a salary of $300,000 (instead of $64,000), Sanjay would not be able to claim a QBI deduction. This is because:

Sanjay would not be able to claim a QBI deduction since their taxable income before the QBI deduction exceeds ‍‍‍‍‍‍$440,100‍ [$210,000‍(QBI)+$300,000‍(spouse's‍wages)-$25,900‍(standard‍ deduction)=$484,100] . Sanjay did not attempt to "convert wages to ... income eligible for the (QBI) deduction." The income of his spouse triggered the limitation.

Sanjay, a married taxpayer, operates a candy store as a sole proprietor. The business has no employees (Sanjay provides all services to customers). During 2022, Sanjay's qualified business income is $210,000 [this is his Schedule C (Form 1040) net income reduced by his self-employment tax deduction]. Sanjay's AGI is $275,900, which includes wages earned by his spouse, but no other income. He and his spouse claim the standard deduction ($25,900). Sanjay's modified taxable income is $250,000 ($275,900 − $25,900). What is his QBI and taxable income?

Sanjay's QBI deduction is $42,000, the lesser of: 20% of qualified business income ($42,000; $210,000 × 20%), or 20% of modified taxable income ($50,000; $250,000 × 20%). Sanjay's taxable income is $208,000 ($250,000 of taxable income before the QBI deduction less his $42,000 QBI deduction).

Self-Employed Retirement Plans

Self-employed taxpayers also can participate in retirement plans with tax-favored benefits. Known as Keogh (or H.R. 10) plans, these arrangements follow the deduction approach of traditional IRAs.The amount contributed under a plan is a deduction for AGI and is reported on Form 1040.

In 2022, Hana travels from Seattle to New York primarily for business. She spends five days conducting business and three days sightseeing and attending shows. Her plane and taxi fare amounts to $1,160. Her meals (all at local restaurants) amount to $200 per day, and lodging and incidental expenses are $350 per day. What can she deduct?

She can deduct the transportation charges of $1,160, because the trip is primarily for business (five days of business versus three days of sightseeing). Meals are limited to five days and are not subject to a 50% reduction since they were consumed at local restaurants (see text Section 9-6c). Her meals deduction will be $1,000 (5 days × $200), and other expenses are limited to $1,750 (5 days × $350).

Assume the same facts as Example 37, except that Lance buys dinner for the two business owners but does not attend the dinner. Can he still deduct the expense?

Since Lance was not present at the meal, no deduction is allowed.

Simone, a married taxpayer, operates a business as a sole proprietor. The business has one employee, who is paid $80,000 during 2022. Assume that the business has no significant assets. During 2022, Simone's qualified business income is $230,000, and her modified taxable income is $250,000 (this is also her taxable income before the QBI deduction). What is her QBI?

Since Simone's taxable income before the QBI deduction is below the income threshold for married taxpayers filing a joint return ($340,100), the W-2/Capital Investment Limitation does not apply. As a result, Simone's QBI deduction is $46,000, the lesser of: 20% of qualified business income ($46,000; $230,000 × 20%), or 20% of modified taxable income ($50,000; $250,000 × 20%).

Jiaxiu, a single taxpayer, owns a five-unit apartment building that he purchased five years ago. His unadjusted basis in the building (purchase price minus the value of the land) is $500,000. He has taxable income before the QBI deduction of $250,000 during 2022 (this is also his modified taxable income). He has no employees in his business, and his QBI is $220,000. What is his QBI deduction?

Since his taxable income before the QBI deduction exceeds the $220,050 threshold, the W-2 Wages/Capital Investment Limit comes into play. His QBI deduction is $12,500, computed as follows:

Tom and Eileen are married and file a joint return for 2022. Their taxable income before the QBI deduction is $500,000 (this is also their modified taxable income). Tom has $400,000 in QBI from a restaurant he owns (a sole proprietorship). Tom employed four individuals (cook, bartender, and wait staff) during the year and paid them $150,000 in W-2 wages. Tom owns the building in which the restaurant is located. He bought the building (and its furniture and fixtures) four years ago for $600,000, and the land was worth $100,000, so the unadjusted acquisition basis of the building (and its furniture and fixtures) is $500,000. What is their QBI Deduction?

Since their taxable income before the QBI deduction exceeds the $440,100 threshold, the W-2 Wages/Capital Investment Limit comes into play. Their QBI deduction is $75,000, computed as follows:

Chad drove his car 20,000 miles for business during 2022. To determine his standard mileage deduction, he simply multiplies his business miles by the appropriate standard mileage rate. What is his deduction?

So his total standard mileage deduction for the year is $11,700 (20,000 miles × 58.5 cents per mile).

An accountable plan requires the employee to satisfy these two requirements

Substantiate the Expenses. An employee provides an adequate accounting by submitting a record (e.g., completing an employer-provided travel expense reimbursement form), with receipts and other substantiation, to the employer. Return Any Excess Reimbursement or Allowance. An "excess reimbursement or allowance" is any amount the employee does not adequately account for as an ordinary and necessary business expense.

Geraldo is employed by Sparrow Corporation. He drives 22 miles each way to work. Is this a deductible travel expense?

The 44 miles he drives each workday are nondeductible commuting expenses.

Myrtle wins an all-expense-paid trip to Europe for selling the most insurance for her company during the year. Her employer treats this trip as additional compensation to Myrtle. No deduction is made

The 50% rule does not apply to the employer because only 50% of food and beverages can be dudcted and this is additional compensation.

The other income tax approach is followed by the traditional IRA. Here, the contributing employee is allowed a deduction for AGI.

The amount, a maximum of $6,000 in 2022 and 2021 ($7,000 in 2022 and 2021 for those age 50 and older), is reported as a deduction on Form 1040

Jean-Claude, a scholar of French literature, travels to Paris to do specific library research that cannot be done elsewhere and to take courses that are offered only at the Sorbonne. What is deductible?

The travel costs are deductible, assuming that the other requirements for deducting education expenses (discussed later in the chapter) are met.

To satisfy the State Board of Public Accountancy rules for maintaining her CPA license, Nancy takes an auditing course sponsored by a local college. Is this expense deductible?

The cost of the education is deductible.

The deduction for QBI is the lesser of: 1. 20% of QBI, or 2. 20% of modified taxable income

The deduction is available for partnerships, S Corps, and sole proprietors. This is a FROM AGI Deduction.

Trisha is self-employed and maintains an office in her home for business purposes. The office also is used by her spouse to pay the family bills and by their children to do homework assignments. Is this deductible?

The exclusive use requirement is not met, and no office in the home deduction is allowed.

A business meal is deductible only if all of the following conditions are met

The expense is reasonable (i.e., not lavish or extravagant). The taxpayer (or an employee) is present at the meal. The food and beverages are provided to a current or potential business customer or client. If combined with entertainment, the meal and beverages cost is separately itemized on the bill or receipt.

A specified service trade or business includes those involving:

The performance of services in certain fields, including health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services; Services consisting of investing and investment management, trading or dealing in securities, partnership interests, or commodities; and Any trade or business where the business's principal asset is the reputation of one or more of its employees or owners.

QBI taxable income limitation

These taxable income thresholds—determined without regard to the QBI deduction—are $340,100 for married taxpayers filing jointly and $170,050 for single and head-of-household taxpayers in 2022.In 2021, these amounts were $329,800 and $164,900.

Miscellaneous Employee Expenses

They include union dues; membership dues to professional organizations; subscriptions to trade publications and professional journals; special clothing (e.g., uniforms, protective shoes, and safety glasses); and various license fees paid to government agencies and other regulatory bodies, but they are suspended from 2018-2025.

A taxpayer has QBI of $20,000 from qualified business A and a qualified business loss of $50,000 from qualified business B in 2021. The taxpayer is not permitted a deduction for 2021 and has a carryover qualified business loss of $30,000 to 2022. In 2022, the taxpayer has QBI of $20,000 from qualified business A and QBI of $50,000 from qualified business B. What is the deduction in 2022?

To determine the deduction for 2022, the taxpayer reduces the 20% deductible amount determined for the QBI of $70,000 from qualified businesses A and B by 20% of the $30,000 carryover qualified business loss. The result is that the taxpayer has a QBI deduction in 2022 of ‍8,000. [(20,000+50,000)-30,000=40,000x20%=8000

Greta, a German teacher, travels to Germany to maintain general familiarity with the language and culture. Is this deductible?

Travel as a form of education is not deductible.

Vicki's sole proprietorship reports $54,000 of net income [on Schedule C (Form 1040)]. As a result, Vicki's self-employment tax liability is $7,630 ($54,000 × 0.9235 × 15.3%). She is allowed a for AGI deduction for one-half of her self-employment tax liability ($3,815; $7,630 × ½). What is her QBI?

Vicki's QBI is $50,185 ($54,000 − $3,815).