Determine whether the following taxpayers are eligible for the QBI deduction and

Question

Determine whether the following taxpayers are eligible for the QBI deduction and the deduction amount (if any). Barbara is a single taxpayer and sole proprietor that operates a small chain of hair salons that specialize in obscure hair colors. Her business has no employees since all the stylists operate as independent contractors.

Barbara’s business generated business income of $120,000 in 2018. Her taxable income before any QBI deduction is $132,500. Is Barbara eligible for QBI deduction? Answer yes or no

If eligible, how much is the QBI deduction amount?

Explanation / Answer

QBI deduction stands for qualified business income deduction.As per section 199 of the interenal revenue code provides many taxpayers a deduction for qualified business income from a qualified business trade or business operated directly or through a pass-through entity.Any eligible taxpayer may be entitled to deduction of up to 20% of qualified income.

If taxable income is below $ 157,500 for individual taxpayers, the deduction is lesser of:

(a) 20% of taxpayer qualified business income plus 20% of the taxpayer's qualified real estate investment trust dividends and qualified publicly traded partnership income.

(b) 20% of taxpayer's taxable income minus net capital gain.

Barbara’s taxable income before any QBI deduction is $132,500 and it is below $ 157,500. So, Barbara's is eligible for QBI deduction.(We assume that Barbara's is individual taxpayer.)

The QBI deduction amount are:

Lesser of:

(a) 20% of taxpayer qualified business income = 20% x 120,000 = $ 24,000

(b) 20% of taxpayer's taxable income = 20% x 132,500 = $ 26,500

(Note: There is no any capital gain and qualified real estate investment trust dividends and qualified publicly traded partnership income)

The amount of QBI deduction = $ 24,000

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