Chapter 2 – Problem 28 – LO.3,4 Scott and Laura are married and will file a joint tax return.

Laura has a sole proprietorship (not a

“specified services” business) that generates qualified business income of $300,000. The proprietorship pays W–2 wages of
$40,000 and holds property with an unadjusted basis of $10,000. Scott is employed by a local school district. Their taxable
income before the QBI deduction is $386,600 (this is also their modified taxable income).
- Determine Scott and Laura’s QBI deduction, taxable income, and tax liability for 2020.
- After providing you the original information in the problem, Scott finds out that he will be receiving a $6,000 bonus in
December 2020 (increasing their taxable income before the QBI deduction by this amount). Redetermine Scott and
Laura’s QBI deduction, taxable income, and tax liability for 2020.
- What is the marginal tax rate on Scott’s bonus?

Taxable Income before QBI deduction 386600

Initial QBI Amount
Wage/Capital Investment Limitation
- W2 Wages
Wage/Capital Investment Limitation
- Unadjusted basis for property
Is the QTB ‘specified service’ business? No
MFJ Threshold
Phase In: 326600
Phase Out: 426600
- Determine Scott and Laura’s QBI deduction, taxable income,
and tax liability for 2020.
Modified Taxable Income: 386600 x 20% = 77320  no great
than this amount
Determine Initial QBI amount (20% x QBI): General 20% of QBI
deduction amount: 300000 x 20% = 60000
Wage/Capital Investment Limitation amount (*greater of the
two*) –
50% of W2 Wages: 40000 x 50% = 20000
or
25% of W2 Wages: 40000 x 25% = 10000
+ +
2.5% of Unadjusted basis for property: 10000 x 2.5% = 250
= 10250
Taxable Income before QBI deduction (386600) exceeds MFJ
Threshold Phase In (326600) but less than Phase Out (426600)
and Wage/Capital Investment Limitation portion of the
computation is capping the deduction, the general 20% QBI
deduction amount is used but reduced (see next line)
Determine the difference between the general 20% QBI
deduction amount and the (greater of) Wage/Capital
Investment Limitation amount to get the Excess Amount:
60000 – 20000 = 40000
Determine the Reduction Ratio (Taxable Income Amount
before QBI – Threshold Phase In = Reduction Ratio):
386600 – 326600 = 60000 / 100000 = 60%
Determine the Reduction Ratio in Wage/Capital Investment
Limitation (Excess x Reduction Ratio = Reduction Amount):
40000 x 60% = 24000
Determine Final QBID Amount (general 20% QBI deduction
amount – reduction in Wage/Capital Investment Limitation =
Final QBID Amount): 60000 – 24000 = 36000
300000
40000
10000
- After providing you the original information in the problem,
Scott finds out that he will be receiving a $6,000 bonus in
December 2020 (increasing their taxable income before the
QBI deduction by this amount). Redetermine Scott and Laura’s
QBI deduction, taxable income, and tax liability for 2020.
Modified Taxable Income: 386600 + 6000 = 392600 x 20% =
78520  no great than this amount
Determine Initial QBI amount (20% x QBI): General 20% of QBI
deduction amount: 300000 x 20% = 60000
Wage/Capital Investment Limitation amount (*greater of the
two*) –
50% of W2 Wages: 40000 x 50% = 20000
or
25% of W2 Wages: 40000 x 25% = 10000
2.5% of Unadjusted basis for property: 10000 x 2.5% = 250
= 10250
Taxable Income before QBI deduction (392600) exceeds MFJ
Threshold Phase In (326600) but less than Phase Out (426600)
and Wage/Capital Investment Limitation portion of the
computation is capping the deduction, the general 20% QBI
deduction amount is used but reduced (see next line)
Determine the difference between the general 20% QBI
deduction amount and the (greater of) Wage/Capital
Investment Limitation amount to get the Excess Amount:
60000 – 20000 = 40000
Determine the Reduction Ratio (Taxable Income Amount
before QBI – Threshold Phase In = Reduction Ratio):
392600 – 326600 = 66000 / 100000 = 66%
Determine the Reduction Ratio in Wage/Capital Investment
Limitation (Excess x Reduction Ratio = Reduction Amount):
40000 x 66% = 26400
Determine Final QBID Amount (general 20% QBI deduction
amount – reduction in Wage/Capital Investment Limitation =
Final QBID Amount): 60000 – 26400 = 33600
 Determine Taxable Income (Taxable Income – Final QBID = Net Determine Taxable Income (Taxable Income – Final QBID = Net
Taxable Income Amount): Taxable Income Amount):
386600 – 36000 = 350600 392600 – 33600 = 359000
MFJ Minimum Tax + [(Net Taxable Income Amount – MFJ MFJ Minimum Tax + [(Net Taxable Income Amount – MFJ
Phase In) x MFJ Tax Rate] = Tax Liability Phase In) x MFJ Tax Rate] = Tax Liability
66543 + [(350600 – 326600) x 32%] 66543 + [(359000 – 326600) x 32%]
66543 + (24000 x 32%) 66543 + (32400 x 32%)
66543 + 7680 = 74223 66543 + 10360 = 76911
QBID: $36000 QBID: $33600
Taxable Income: $350600 Taxable Income: $359000
Tax Liability: $74223 Tax Liability: $76911
- What is the marginal tax rate on Scott’s bonus?
Tax Liability before bonus: $74223
Tax Liability after bonus: $76911
= 2688 / 6000 = 44.8%

Married Filing Jointly or Qualifying Widow (Widower)

If taxable income is over— but not over— the tax is:
$0 $19,750 10% of the amount over $0
$19,750 $80,250 $1,975 plus 12% of the amount over $19,750
$80,250 $171,050 $9,235 plus 22% of the amount over $80,250
$171,050 $326,600 $29,211 plus 24% of the amount over $171,050
$326,600 $414,700 $66,543 plus 32% of the amount over $326,600
$414,700 $622,050 $94,735 plus 35% of the amount over $414,700
$622,050 no limit $167,308 plus 37 % of the amount over $622,050