Acct15- Taxes Ch.9 Examples

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

No travel expense deduction is allowed.

Assume the same facts as in Example 42, 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 $429,800, the W-2/Capital Investment Limitation fully applies. As a result, Simone's QBI deduction is $40,000, the lesser of:

1. 20% of qualified business income ($100,000; $500,000 × 20%), or 2. 50% of W-2 wages ($40,000; $80,000 × 50%). And no more than: 3. 20% of modified taxable income ($120,000; $600,000 × 20%).

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).

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.

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

Assume the same facts as in Example 40, except that Abby has no interest income, but $2,550 of qualified dividend income. Abby's AGI remains $102,550, and her taxable income before the QBI deduction remains $90,000 ($102,550 AGI − $12,550 standard deduction). However, Abby's modified taxable income is now $87,450 [$90,000 taxable income before the QBI deduction less $2,550 of "net capital gain" (the qualified dividend income)].

Abby's QBI deduction is $17,490, the lesser of: 1. 20% of qualified business income ($20,000; $100,000 × 20%), or 2. 20% of modified taxable income ($17,490; $87,450 × 20%). Abby's taxable income is $72,510 ($90,000 of taxable income before the QBI deduction less her $17,490 QBI deduction).

Assume that Abby is a single taxpayer who does not itemize deductions and operates a sole proprietorship. During 2021, her business generates $140,000 of business income, $40,000 of deductible business expenses (including her self-employment tax deduction), and $2,550 of interest income from her business deposits. She has no other sources of income. Abby's AGI is $102,550. 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 ($102,550 AGI − $12,550 standard deduction).

Abby's QBI deduction is $18,000, the lesser of: 1. 20% of qualified business income ($20,000; $100,000 × 20%), or 2. 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).

Animal Care LLC provides veterinary services performed by licensed staff. It also develops and sells its own line of organic dog food at its veterinarian clinic and online. The veterinary services are in the field of health (a "specified service"). Animal Care LLC separately invoices for its veterinarian services and the sale of its organic dog food. Animal Care LLC maintains separate books and records for its veterinarian clinic and its development and sale of its dog food. Animal Care LLC also has separate employees who are unaffiliated with the veterinary clinic and who only work on the formulation, marketing, sales, and distribution of the organic dog food products.

Animal Care LLC treats its veterinary practice and the dog food development and sales as separate trades or businesses. Animal Care LLC has gross receipts of $3,000,000; $1,000,000 of the gross receipts relates to the veterinary services. Although the gross receipts from the veterinary services exceed 10% of Animal Care LLC's total gross receipts, the dog food development and sales business is not considered a "specified services" business. Animal Care LLC has chosen to treat each business separately, so the veterinarian services business is a "specified services" business, while the dog food business is not.

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.

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.

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.

Return to the facts of Example 5. Chad drove his car a total of 25,000 miles in 2021 (20,000 for business and 5,000 for personal use). He incurred the following automobile costs (he has receipts for all of these expenses):

As a result, Chad is better off using the automatic mileage method. Chad's true cost of operating the vehicle is 42.6 cents per mile ($10,650 ÷ 25,000 miles), yet the government is allowing him to deduct 56 cents per mile.

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.

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.

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.

As a result, Wanda must treat the two businesses separately for purposes of determining the QBI deduction.

Ron is a full-time teacher at Hoover Elementary. During the year, 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.

As to the $800 balance, Ron may claim $250 as a deduction for AGI. The remaining expenses ($550) 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.

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.

Chaz and Abby Klein (see Example 63) provide you with the following information for 2020 on their two businesses. Chaz's proprietorship (Chaz Management Consulting LLC; EIN 32-4567890) generated qualified business income of $230,000, he paid W-2 wages of $50,000 to an employee, and he has $100,000 of qualified property. The couple reported $146,400 of net income from their real estate rentals (Abby/ Chaz Real Estate Management; EIN 32-0987654). They own and manage three rental properties (meeting the rental real estate safe harbor); they pay no wages, and they have $450,000 of qualified property. They have no other income or deductions (and will use the standard deduction). Their modified taxable income is $351,600 (AGI of $376,400 less their $24,800 standard deduction); this is also taxable income before the QBI deduction. The maximum QBI deduction they can claim is $70,320 ($351,600 × 20%). Because their 2020 modified taxable income is more than $326,600 and less than $426,600, both of the QBI deduction limitations apply. Based on the various QBI deduction limitations, their 2020 QBI deduction is $55,334 ($30,562 for Chaz's consulting business and $24,772 from their rental real estate). Consult the completed Form 8995-A and Schedule A (Form 8995-A) to see how their QBI deduction was determined. Form 8995-A, Part I provides a summary of the Kleins' qualified trades or businesses. As indicated in Part I, taxpayers must complete any appropriate schedules before completing Form 8995-A.

Because Chaz has a "specified service" business, the Kleins must begin by completing Schedule A (Form 8995-A). On Schedule A, the "applicable percentage" for Chaz's business is determined on lines 5 through 10. It is then applied to the business's QBI, W-2 wages and qualified property. The resulting figures (on lines 11 through 13) are then transferred to Form 8995-A (Part II, Column A, lines 2, 4, and 7). The determination of their QBI deduction now continues on Form 8995-A. The Kleins' rental real estate information is added in Column B. The remainder of Part II computes the QBI deduction for each business (including, in Part III, the phase-in reductions required because the Kleins' taxable income before the QBI deduction is greater than $326,600 but less than $426,600 in 2020). The Kleins' "combined qualified business income amount" is reported on line 16 of Part II. Part IV completes the QBI deduction determination by applying the overall limitation (based on modified taxable income). Because the Kleins are using the rental real estate safe harbor to treat their rentals as a business for § 199A purposes, they also must attach a statement to their return indicating that they are using this safe harbor. Compare the completed forms to the computational structure of the QBI deduction contained in Example 63 to see how the forms implement these computations.

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).

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).

In Example 39, 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 since their taxable income before the QBI deduction exceeds ‍‍‍‍‍‍$429,800 [$210,000 (QBI) + $300,000 (spouse's wages) - $25,100 (standard deduction) = $484,900]. Sanjay did not attempt to "convert wages to ... income eligible for the (QBI) deduction." The income of his spouse triggered the limitation.

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.

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).

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.

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.

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.

Assume the same facts as Example 60, except that Jenna and Paul's taxable income before the QBI deduction is $450,000.

Because their modified taxable income exceeds the $429,800 threshold for married taxpayers and their only QBI is from a "specified services" business, Jenna and Paul are not allowed a QBI deduction.

Canary Corporation provides coffee and sometimes doughnuts to employees in the breakroom. This is a de minimis fringe benefit that is not taxable to the employees.

Canary may deduct only 50% of the cost of this food.

Christian is in the business of providing services that assist unrelated entities in making their personnel structures more efficient. Christian studies a variety of client organizations and structures and compares each to peers in its industry. He then makes recommendations and provides advice to clients regarding possible changes to their personnel structure, including the use of temporary workers.

Christian is engaged in a "specified services" business (consulting).

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.

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

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.

Dr. Davis is both employed and self-employed.

Ellen is a lawyer hired by Arnold to assist him in the performance of services for the client mentioned in Example 1.

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

Emeril is a well-known chef and the sole owner of multiple restaurants, each of which is an LLC. Due to his skill and reputation as a chef, Emeril receives an endorsement fee of $5,000,000 for the use of his name on a line of cooking utensils and cookware.

Emeril is in the trade or business of being a chef and owning restaurants—neither is a "specified services" business. However, he is also in the trade or business of receiving endorsement income. This business—consisting of endorsement fees for Emeril's skill and/or reputation—is a "specified services" business.

Assume the same facts as in Example 71, except that Business C generates a loss that results in $(90,000) of negative QBI.

Erica's "combined qualified business income amount" is $28,000 ($28,000 + $0 + $0). Since this amount is less than 20% of Erica's modified taxable income ($82,000; $410,000 × 20%), her QBI deduction is $28,000 and her taxable income is $382,000. There is no carryover of any loss into the following taxable year for purposes of § 199A (the Business C negative QBI was completely used).

Erica, who is single, operates three sole proprietorships that generate the following information in 2021 (none are "specified services" businesses):

Erica's "combined qualified business income amount" is $34,000 ($30,000 + $0 + $4,000). Since this amount is less than 20% of Erica's modified taxable income ($104,000; $520,000 × 20%), Erica's QBI deduction is $34,000 and her taxable income is $486,000.

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.

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

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).

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.

Her transportation expenses are not deductible.

Mohammed has travel and entertainment expenses substantiated by a digital diary showing the time, place, and amount of the expenditure. He is able to provide information about the business relationship and business purpose orally.

However, because he has no receipts, any expenditures of $75 or more are disallowed.

Assume the same facts as in Example 13 with the additional fact that Dr. Hill is accompanied by her husband, Mr. Hill. Mr. Hill is not employed, but possesses secretarial skills and takes notes during the proceedings. No deduction is allowed for Mr. Hill's travel expenses.

If, however, Mr. Hill is a medical professional trained in pathology and is employed by Dr. Hill as her assistant, his travel expenses become deductible.

In 2021, a single taxpayer has modified taxable income of $194,900, 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.

Jennifer is a well-known actor. Jennifer entered into a partnership with Shoe Company in which she contributed her likeness and the use of her name to the partnership in exchange for a 50% interest in the partnership and a guaranteed payment.

Jennifer's trade or business consisting of the receipt of the partnership interest and guaranteed payment for use of her likeness and name is a "specified services" business.

Krystal is in the business of providing services to assist clients with their finances. Krystal generally studies a particular client's financial situation, including the client's present income, savings and investments, and anticipated future economic and financial needs. Based on this study, she then assists the client in making decisions and plans regarding the client's financial activities. This planning includes the design of a personal budget to assist the client in monitoring the client's financial situation, the adoption of investment strategies tailored to the client's needs, and other similar services.

Krystal is engaged in a "specified services" business (financial services).

During 2021, 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.

Lance can deduct 100% of this qualified business meal.

Landscape LLC sells lawn care and landscaping equipment. It also provides advice and counsel on landscape design for large office parks and residential buildings. The landscape design services include advice on the selection and placement of trees, shrubs, and flowers (these are "consulting services" under § 199A).

Landscape LLC separately invoices for its landscape design services and does not sell the trees, shrubs, or flowers it recommends for use in the landscape design. Landscape LLC maintains one set of books and records and treats the equipment sales and design services as a single trade or business. Landscape LLC has gross receipts of $2,000,000; $250,000 of the gross receipts relates to the landscape design services. Because the gross receipts from the consulting services exceed 10% of Landscape LLC's total gross receipts, the entirety of Landscape LLC's business is considered a "specified services" business.

During 2021, Liang travels to San Francisco for a business convention. She pays for her meals at a local restaurant and is reimbursed by her employer.

Liang's employer can deduct 100% of the cost of her meals.

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:

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.

Assume that Malcolm in Example 8 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.

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.

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.

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.

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

Assume the same facts as in Example 72, except that Businesses A, B, and C meet the aggregation requirements of Reg. § 1.199A-4 and Erica chooses to aggregate the three businesses. Because Erica's taxable income is above the threshold amount, her QBI deduction is subject to the W-2 wages and capital investment limitations. Because the businesses are aggregated, these limitations are applied on an aggregated basis.

None of the businesses own "qualified property." As a result, only the "W-2 Wages" limitation applies. Erica's "combined qualified income amount" is $42,000, the lesser of 20% of the QBI from the aggregated businesses ($42,000; $210,000 × 20%) or 50% of W-2 wages from the aggregated businesses ($50,000; $100,000 × 50%). Erica then applies the overall limitation, comparing her "combined qualified income amount" ($42,000) to 20% of her modified taxable income ($82,000; $410,000 × 20%). Erica's QBI deduction is $42,000 (the lesser of $42,000 or $82,000). Note that by aggregating her businesses, Erica has increased the amount of her QBI deduction.

Assume the same facts as in Example 12, except that the convention deals entirely with recent developments in pathology.

Now a travel deduction is allowed.

Assume the same facts as in Example 20. Robert is gone the same period of time but spends only two days (rather than three) vacationing.

Now no allocation of transportation is required. Because the pleasure portion of the trip is less than 25% of the total, all of the airfare qualifies for the travel deduction.

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.

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

Ravi is a partner in RoundballSports (RS), which owns and operates a professional basketball team. RS employs athletes and sells tickets to the public to attend games in which its basketball team competes.

RS is engaged in a "specified services" business (athletics).

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 separately billed by the health care professional (or the medical organization) for the costs of the procedure performed by the physician and medical support team.

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).

Sanjay, a married taxpayer, operates a candy store as a sole proprietor. The business has no employees (Sanjay provides all services to customers). During 2021, 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 $275,100, which includes wages earned by his spouse, but no other income. He and his spouse claim the standard deduction ($25,100). Sanjay's modified taxable income is $250,000 ($275,100 − $25,100).

Sanjay's QBI deduction is $42,000, the lesser of: 1. 20% of qualified business income ($42,000; $210,000 × 20%), or 2. 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).

In 2021, 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.

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).

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

Assume the same facts as Example 37, except that Lance buys dinner for the two business owners but does not attend the dinner.

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 2021. Assume that the business has no significant assets. During 2021, 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).

Since Simone's taxable income before the QBI deduction is below the income threshold for married taxpayers filing a joint return ($329,800), the W-2/Capital Investment Limitation does not apply. As a result, Simone's QBI deduction is $46,000, the lesser of: 1. 20% of qualified business income ($46,000; $230,000 × 20%), or 2. 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 2021 (this is also his modified taxable income). He has no employees in his business, and his QBI is $220,000.

Since his taxable income before the QBI deduction exceeds the $214,900 threshold, the W-2 Wages/Capital Investment Limit comes into play. His QBI deduction is $12,500, computed as follows:

Now assume the same facts as Example 60, except that Jenna's business is a flower and gift shop (not a "specified services" business). As before, Jenna and Paul have modified taxable income of $369,800 and Jenna has QBI of $75,000, pays $20,000 in wages to employees, and has qualified business property of $90,000. Their QBI deduction is $13,000, computed as follows:

Since the QBI amount ($13,000) is less than 20% of their modified taxable income ($73,960; $369,800 × 20%), they will be allowed a $13,000 deduction for qualified business income.

Return to the facts of Example 49, but assume that Tom and Eileen's taxable income before the QBI deduction is $369,800 (this is also their modified taxable income), QBI is $320,000, and W-2 wages are $100,000. Their unadjusted property basis remains at $500,000. Tom and Eileen's initial calculation yields a qualified business income amount of $50,000, computed as follows:

Since the QBI amount ($58,400) is less than 20% of their modified taxable income ($73,960; $369,800 × 20%), they will be allowed a $58,400 deduction for qualified business income.

In 2021, Jenna and Paul have taxable income before the QBI deduction (and modified taxable income) of $369,800, and Jenna is a part-time financial adviser (a "specified service trade or business") with QBI of $75,000. Jenna pays $20,000 in wages to employees and has qualified business property of $90,000. Normally, Jenna and Paul would be entitled to a QBI deduction of $15,000 ($75,000 × 20%). But since their taxable income exceeds the threshold for married taxpayers ($329,800), their QBI deduction is limited to $7,800, computed as follows:

Since the QBI amount ($7,800) is less than 20% of their modified taxable income ($73,960; $369,800 × 20%), they will be allowed a $7,800 deduction for qualified business income.

Chaz and Abby Klein are involved in two activities during 2021. Chaz is a management consultant. Chaz's consulting business is an LLC (and a "specified services" business), which he reports as a sole proprietorship. The proprietorship generates qualified business income of $230,000, Chaz pays W-2 wages of $50,000 to an employee, and he has $100,000 of qualified property. Chaz and his wife, Abby, also own and operate rental properties. The couple report $149,900 of net income from their rental real estate (three rental properties that they manage; they meet the rental real estate safe harbor requirements for these rentals). They pay no wages with respect to the rental properties, and they have $450,000 of qualified property. They have no other income or deductions (and will use the standard deduction). Their modified taxable income is $354,800 (AGI of $379,900 less their $25,100 standard deduction); this is also taxable income before the QBI deduction. The maximum QBI deduction they can claim is $70,960 ($354,800 × 20%). Because their modified taxable income is more than $329,800 and less than $429,800, both of the QBI deduction limitations apply.

Since the combined QBI amount ($55,859) is less than 20% of their modified taxable income ($70,960; $354,800 × 20%), they will be allowed a $55,859 deduction for qualified business income. Their final taxable income is $298,941 ($354,800 − $55,859).

Tom and Eileen are married and file a joint return for 2021. 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.

Since their taxable income before the QBI deduction exceeds the $429,800 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 2021. To determine his standard mileage deduction, he simply multiplies his business miles by the appropriate standard mileage rate (56 cents per mile in 2021).

So his total standard mileage deduction for the year is $11,200 (20,000 miles × 56 cents per mile).

A CPA is unable to attend a convention at which current developments in taxation are discussed. She pays $300 to stream the recorded sessions and views them at home later.

The $300 is a deduction for AGI if the CPA is self-employed. If the CPA is an employee, the $300 is a miscellaneous itemized deduction (and not allowed from 2018 through 2025).

Geraldo is employed by Sparrow Corporation. He drives 22 miles each way to work.

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

General Hospital has an employee cafeteria on the premises for its doctors, nurses, and other employees. The cafeteria operates at cost.

The 50% rule applies to the employee cafeteria costs of General Hospital.

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.

The 50% rule does not apply to the employer.

Assume the same facts as Example 35. In addition to the framed prints, Prism also encloses a coffee mug imprinted with its name and logo. Each mug costs $3.

The coffee mug is considered a promotional item, and its cost is also allowed as a deduction.

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

The cost of the education is deductible.

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

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

A taxpayer has QBI of $20,000 from qualified business A and a qualified business loss of $50,000 from qualified business B in 2020. The taxpayer is not permitted a deduction for year 1 and has a carryover qualified business loss of $30,000 to 2021. In 2021, the taxpayer has QBI of $20,000 from qualified business A and QBI of $50,000 from qualified business B. To determine the deduction for 2021, 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 2021 of $8,000 [($20,000 + $50,000) - $30,000 = $40,000 x 20% = $8,000].

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.

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

Tyler, a calendar year taxpayer, prepared and filed his own tax return for 2020. Being in a hurry, he decided to use the Simplified Method of computing his home office deduction. In March 2022, Tyler seeks tax advice and learns how much he could have saved by using the Regular Method.

Tyler cannot file an amended return for 2020, but he can switch to the Regular Method for 2021.