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True / False |
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1. Tomas owns a sole proprietorship, and Lucy is the sole shareholder of a C corporation. In the current year, both businesses make a net profit of $60,000. Neither business distributes any funds to the owners in the year. For the current year, Tomas must report $60,000 of income on his individual tax return, but Lucy is not required to report any income from the corporation on her individual tax return.
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2. Carol and Candace are equal partners in Peach Partnership. In the current year, Peach had a net profit of $75,000 ($250,000 gross income – $175,000 operating expenses) and distributed $25,000 to each partner. Peach must pay tax on $75,000 of income.
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3. Rajib is the sole shareholder of Cardinal Corporation, a calendar year S corporation. In the current year, Cardinal generated a net profit of $350,000 ($520,000 gross income – $170,000 operating expenses) and distributed $80,000 to Rajib. Rajib must report the Cardinal Corporation profit of $350,000 on his Federal income tax return.
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4. Donald owns a 45% interest in a partnership that earned $130,000 in the current year. He also owns 45% of the stock in a C corporation that earned $130,000 during the year. Donald received $20,000 in distributions from each of the two entities during the year. With respect to this information, Donald must report $78,500 of income on his individual income tax return for the year.
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5. Quail Corporation is a C corporation that generates net income of $125,000 during the current year. If Quail paid dividends of $25,000 to its shareholders, the corporation must pay tax on $100,000 of net income. Shareholders must report the $25,000 of dividends as income.
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6. Eagle Company, a partnership, had a short-term capital loss of $10,000 during the current year. Aaron, who owns 25% of Eagle, will report $2,500 of Eagle’s short-term capital loss on his individual tax return.
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7. Matt, the sole shareholder of Pastel Corporation (a C corporation), has the corporation pay him a salary of $600,000 in the current year. The Tax Court has held that $200,000 represents unreasonable compensation. Matt must report a salary of $400,000 and a dividend of $200,000 on his individual tax return.
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8. Double taxation of corporate income results because dividend distributions are included in a shareholder’s gross income and are not deductible by the corporation.
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9. Jake, the sole shareholder of Peach Corporation (a C corporation) has the corporation pay him $100,000. For income tax purposes, Jake would prefer to have the payment treated as a dividend instead of salary.
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10. Thrush Corporation files its Form 1120, which reports taxable income of $200,000 in the current year. The corporation’s tax is $42,000.
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11. The corporate marginal income tax rate is lower than the top individual tax rate.
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12. Employment taxes apply to all entity forms of operating a business. As a result, employment taxes are a neutral factor in selecting the most tax effective form of operating a business.
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13. Under the check-the-box Regulations, a two-owner LLC that fails to elect to be to treated as a corporation will be taxed as a sole proprietorship.
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14. A C corporation with taxable income of $100,000 in the current year will have a tax liability of $22,250.
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15. Katherine, the sole shareholder of Penguin Corporation, has the corporation pay her a salary of $300,000 in the current year. The Tax Court has held that $90,000 represents unreasonable compensation. Katherine has avoided double taxation only to the extent of $210,000 (the portion of the salary that is considered reasonable compensation).
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16. One of the purposes of the qualified business income deduction is to reduce the taxes on businesses that are operating in noncorporate business forms (e.g., sole proprietors, partnerships, and S corporations).
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17. Instead of providing the qualified business income deduction to owners of noncorporate businesses, Congress could have applied a special tax rate to the business income to achieve a similar result.
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18. A qualified trade or business includes any trade or business including providing services as an employee.
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19. Unless Congress makes a change, the QBI deduction will expire after 2025.
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20. The QBI deduction percentage matches the 21% tax rate applicable to C corporations.
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21. Code § 199A permits an individual to deduct 25% of the qualified business income generated through a sole proprietorship, a partnership, or an S corporation.
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22. There are three limitations on the qualified business income deduction: an overall limitation (based on modified taxable income), another that applies to high income taxpayers, and a third that applies to certain types of service businesses.
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23. The QBI deduction will reduce both the income tax and self-employment taxes owed by a self-employed individual.
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24. Qualified business income (QBI) is defined as the ordinary income less ordinary deductions that a taxpayer earns from a qualified trade or business (e.g., from a sole proprietorship, S corporation, or partnership) conducted in the United States by the taxpayer.
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25. Jane is a self-employed attorney and single. Her annual net earnings from her law practice always exceed $220,000. Jane also has a business selling stained glass windows that she makes. Her earnings from this business are usually about $35,000 per year. Jane claims the standard deduction. Because Jane’s 2020 taxable income exceeds the $213,300 threshold, she may not claim a QBI deduction for either business.
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26. Qualified business income includes the reasonable compensation paid to the taxpayer by a qualified trade or business and guaranteed payments made to a partner for services rendered.
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27. Ginger is a self-employed driver finding rides via a few different platform companies such as Lyft. She is single and claims the $12,400 standard deduction. For 2020, her income from driving is $67,000 and she has no other income. Ginger’s QBI deduction for 2020 is $13,400 ($67,000 x 20%).
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28. A partnership will need to report wages paid to its employees as a separate line item on Schedule K-1 to help partners calculate their QBI deduction.
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29. Qualified property is used to determine one of the limitations to the qualified business income (QBI) deduction. Specifically, 2.5% of the unadjusted basis (immediately after acquisition) of qualified property is added to 50% of W-2 wages to determine this limitation.
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30. Once a taxpayer reaches certain taxable income thresholds, § 199A limits the qualified business income (QBI) deduction. These thresholds are indexed for inflation every year.
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31. For purposes of the qualified business income (QBI) deduction, qualified business income does not include certain types of investment income [e.g., capital gains or capital losses, dividends, and interest income (unless properly allocable to a trade or business, such as lending].
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32. Carla is a self-employed online retailer and single. She has no employees. Her annual taxable income is usually around $200,000. Carla could increase her QBI deduction if she incorporated her business, made an S election, and paid herself wages.
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Multiple Choice |
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33. Luis is the sole shareholder of a regular C corporation, and Eduardo owns a proprietorship. In the current year, both businesses make a profit of $80,000, and each owner withdraws $50,000 from his business. With respect to this information, which of the following statements is incorrect?
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34. Which of the following statements is incorrect about LLCs and the check-the-box Regulations?
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35. An individual in a specified service business, such as accounting, with taxable income over the threshold amounts ($213,300 for single or head-of-household taxpayers, or $426,600 if married filing jointly in 2020), will not lose the QBI deduction on such income if:
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36. In 2020, Sam and Betty, each single, both generate sole proprietor income of $240,000. Sam’s income is generated from a wholesale business whereas Betty’s is earned from her law practice. Neither has any employees or qualified assets. Both claim the standard deduction and have other income equal to the standard deduction amount.
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37. Tammy has $200,000 of QBI from her neighborhood clothing store (a sole proprietorship). Her proprietorship paid $30,000 in W-2 wages and has $20,000 of qualified property.Tammy’s spouse earned $50,000 of wages as an employee, and the couple earned $20,000 of interest income during the year. They will be filing jointly and take the standard deduction of $24,800.What is their QBI deduction for 2020?
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38. Jenna Parker owns and manages her single-member LLC, which provides a wide variety of financial services to her clients. She is married and will file a joint tax return with her spouse, Paul. Her LLC reports $300,000 of net income, W-2 wages of $120,000, and assets with an unadjusted basis of $75,000. Their taxable income before the QBI deduction is $285.000 (this is also their modified taxable income). What is their QBI deduction for 2020?
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39. Ellie (a single taxpayer) is the owner of ABC, LLC. The LLC (a sole proprietorship) reports QBI of $900,000 and is not a specified services business. ABC paid total W-2 wages of $300,000, and the total unadjusted basis of property held by ABC is $30,000. Ellie’s taxable income before the QBI deduction is $740,000 (this is also her modified taxable income). What is Ellie’s QBI deduction for 2020?
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40. Danielle is a partner in and sales manager for DG Partners, a domestic business that is not a specified service trade or business. During the tax year, she receives guaranteed payments of $250,000 from DG Partners for her services to the partnership as its sales manager. In addition, her distributive share of DG Partners’ ordinary income (its only item of income or loss) was $175,000. What is Danielle’s qualified business income?
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41. Aaron is the sole shareholder and CEO of ABC, Inc., an S corporation that is a qualified trade or business. During the current year, ABC has net income of $325,000 after deducting Aaron’s $100,000 salary. In addition to his compensation, ABC pays Aaron dividends of $250,000. What is Aaron’s qualified business income?
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42. Alicia is the sole shareholder and CEO of ABC, Inc., an S corporation that is a qualified trade or business. During the current year, ABC has net income of $325,000 after deducting Alicia’s $100,000 salary. In addition to her compensation, ABC pays Alicia dividends of $250,000. After reviewing comparable companies, you determine that reasonable compensation for someone with her experience and responsibilities is $200,000. What is Alicia’s qualified business income?
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43. Taylor, a single taxpayer, has taxable income before the QBI deduction of $193,300 in 2020. Taylor, a CPA, operates an accounting practice as a single-member LLC (which he reports as a sole proprietorship). During 2020, his proprietorship reports net income of $150,000, W-2 wages of $125,000, and $10,000 of qualified property. What is Taylor’s qualified business income deduction?
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44. Jason and Paula are married. They file a joint return for 2020 on which they report taxable income before the QBI deduction of $200,000. Jason operates a sole proprietorship, and Paula is a partner in the PQRS Partnership. Both are a qualified trade or business and neither is a specified services business. Jason’s sole proprietorship reports $150,000 of net income, W-2 wages of $45,000, and has qualified property of $50,000. Paula’s partnership reports a loss for the year, and her allocable share of the loss is $40,000. The partnership reports no W-2 wages and Paula’s share of the partnership’s qualified property is $20,000. What is their qualified business income deduction for the year?
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45. Tanuja Singh is a CPA and operates her own accounting firm (Singh CPA, LLC). As a single-member LLC, she reports her accounting firm operations as a sole proprietor. Tanuja has QBI from her accounting firm of $540,000, reports W-2 wages of $156,000, and the unadjusted basis of property used in the LLC is $425,000. Tanuja is married and will file a joint tax return with her spouse. Their taxable income before the QBI deduction is $475,000, and their modified taxable income is $448,000. What is Tanuja’s QBI deduction for 2020.
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46. Which of the following types of income are included in qualified business income (QBI)?
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47. What happens to the § 199A deduction if a qualified trade or business generates a loss?
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48. Where is the § 199A deduction taken on Form 1040?
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49. Which of the following is considered qualified property in the calculation of the deduction for qualified business income (§ 199A)?
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50. In 2020, Kendra has taxable income before the QBI deduction of $274,000. Kendra is single and has income from her law firm (a sole proprietorship operating as an LLC) of $200,000. Her law firm paid wages of $82,000 and has qualified property of $20,000. What is Kendra’s QBI deduction?
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Multiple Response |
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51. Which of the following taxpayers is eligible for a qualified business income deduction regarding the activity noted? (circle all that apply)
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52. Which of the following taxpayers is potentially eligible for a qualified business income deduction based on the noted activity? (circle all that apply)
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53. Which of the following self-employed individuals are in a specified service trade or business? (circle all that apply)
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Subjective Short Answer |
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54. Rebecca and Brad are married and will file jointly. Rebecca earns $300,000 from her single-member LLC (a law firm). She reports her business as a sole proprietorship. Wages paid by the law firm amount to $40,000; the law firm has no significant property. Brad is employed as a tax manager by a local CPA firm. Their modified taxable income is $386,600 (this is also their taxable income before the deduction for qualified business income). Determine their QBI deduction for 2020.
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55. Ashley (a single taxpayer) is the owner of ABC, LLC. The LLC (a sole proprietorship) reports QBI of $900,000 and is not a specified services business. ABC paid total W-2 wages of $300,000, and the total unadjusted basis of property held by ABC is $30,000. Ashley’s taxable income before the QBI deduction is $740,000 (this is also her modified taxable income). What is Ashley’s QBI deduction for 2020?
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56. Susan, a single taxpayer, owns and operates a bakery (as a sole proprietorship). The business is not a specified services business. In 2020, the business pays $60,000 in W-2 wages, has $150,000 of qualified property, and $200,000 in net income (all of which is qualified business income). Susan also has a part-time job earning wages of $13,600, receives $3,400 of interest income, and will take the standard deduction. What is Susan’s qualified business income deduction?
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57. Ben owns and operates a machine repair shop as a sole proprietorship. It generates a profit of about $150,000 annually. The business pays wages of about $50,000 annually. The building and most of the equipment are leased so there is no qualified property. Ben files as single and claims the standard deduction. He has a large unrealized gain in bitcoin that he acquired in 2015 and is wondering when he should sell it and whether he should sell it all in one year or over a few years. Advise Ben as to how the sale of the bitcoin and its resulting capital gain can affect his QBI deduction in 2020.
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58. Sergio Fernandez owns and manages his single-member LLC which provides a wide variety of accounting services to his clients. He is married and will file a joint tax return with his spouse, Goretty. His LLC reports $250,000 of net income, W-2 wages of $120,000, and assets with an unadjusted basis of $75,000. Their taxable income before the QBI deduction is $215,000 (this is also their modified taxable income). Determine their QBI deduction for 2020.
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59. Taylor owns a wide variety of commercial rental properties held in a single-member LLC. Her LLC reports rental income of $750,000. The LLC pays no W-2 wages; rather, it pays a management fee to an S corporation that Taylor controls. The management company pays W-2 wages, but reports no income (or loss). Taylor’s total unadjusted basis of the commercial rental property is $5,000,000 and her taxable income before the QBI deduction (and her modified taxable income) is $1,000,000. What is Taylor’s QBI deduction for 2020?
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60. Jansen, a single taxpayer, owns and operates a restaurant (as a sole proprietorship). The business is not a specified services business. In 2020, the business pays $125,000 in W-2 wages, has $187,500 of qualified property, and $437,700 in net income (all of which is qualified business income). Jansen has no other items of income or loss and will take the standard deduction. What is Jansen’s qualified business income deduction?
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61. Felicia, who is single, operates three sole proprietorships that generate the following information in 2020 (none is a “specified services” businesses):
Felcia chooses not to aggregate the businesses. She also earns $150,000 of wages from an unrelated business and her modified taxable income (before any QBI deduction) is $304,000.
a. What is Felicia’s QBI deduction? b. Assume that Felicia can aggregate these businesses. Determine her QBI deduction if she decides to aggregate the businesses.
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Essay |
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62. Compare the basic tax and nontax factors of doing business as a partnership, an S corporation, and a C corporation. Circle the correct answers.
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63. Dawn is the sole shareholder of Thrush Corporation, a C corporation. In the current year, Thrush earned $350,000 and distributed $75,000 to Dawn. Kirk is the sole shareholder of Swallow Corporation, an S corporation. In the current year, Swallow earned $350,000 and distributed $75,000 to Kirk. Contrast the tax treatment of Thrush Corporation and Dawn with the tax treatment of Swallow Corporation and Kirk.
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64. What is a limited liability company? What favorable nontax and tax attributes does the LLC entity form offer taxpayers?
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65. The qualified business income deduction is severely limited for specified services businesses. What is a specified services trade or business?
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66. Describe the limitations on the qualified business income deduction that apply to high income taxpayers.
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67. How does property used in a qualified trade or business factor into the QBI deduction calculation? What types of property are considered for the QBI deduction?
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