The year is 2023: Qualified business income. Ermina is a pediatrician who is building a practice in the Los Angeles area. This is a “specified service trade or business.” This year, she earned a net profit of $240,000 from the business (i.e., profit after paying employee wages and other expenses). She is married and files jointly with her husband, who earned a $57,700 salary. They had no other income. They take the standard deduction ($27,700). She had one employee who she paid $80,000 in wages. She owned depreciable equipment she had bought 2 years earlier for $100,000 and no other property. How much is her qualified business income (QBI) deduction? Qualified business income. Ermina is a pediatrician who is building a practice in the Los Angeles area. This is a “specified service trade or business.” This year, she earned a net profit of $240,000 from the business (i.e., profit after paying employee wages and other expenses). She is married and files jointly with her husband, who earned a $57,700 salary. They had no other income. They take the standard deduction ($27,700). She had one employee who she paid $80,000 in wages. She owned depreciable equipment she had bought 2 years earlier for $100,000 and no other property. How much is her qualified business income (QBI) deduction? $40,000 [$80,000 wages x 50%] $54,000 [$270,000 joint taxable income x 20%] $22,500 [$80,000 wages x 25% + $100,000 property x 2.5%] $48,000 [$240,000 QBI x 20%] zero
The Qualified Business Income (QBI) deduction, also known as Section 199A deduction, allows eligible taxpayers to deduct up to 20% of their qualified business income from a qualified trade or business, plus 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. However, there are limitations based on the type of trade or business, the taxpayer's taxable income, and whether the business pays W-2 wages or has a certain amount of qualified property. Ermina's business is a specified service trade or business (SSTB), which means the QBI deduction may be subject to limitations based on her taxable income. For 2023, the phase-out range for a married couple filing jointly starts at $364,200 and ends at $514,200. Since Ermina and her husband's combined income is below the phase-out range, she can potentially take the QBI deduction. To calculate their taxable income, we subtract the standard deduction from their combined income: $240,000 (business income) + $57,700 (husband's salary) - $27,700 (standard deduction) = $270,000 (taxable income). Since their taxable income is below the phase-out threshold for SSTBs, Ermina can take the QBI deduction. The deduction is generally 20% of the QBI, which in this case is: 20% of $240,000 = $48,000.
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