ACCT 3326 Tax II Cengage Ch 2 199A

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1. 1. Check- 1. By using the check-the-box rules prudently, an entity can select the most attractive tax results offered by the Code,
the-box without being bound by legal forms. By default, an unincorporated entity with more than one owner is taxed as a
Regulations partnership; an unincorporated entity with one owner is a disregarded entity, taxed as a sole proprietorship or
2. Limited corporate division. No action is necessary by the taxpayer if the legal form or default status is desired. Form 8832 is
liability used to "check a box" and change the tax status. Not available if the entity is incorporated under state law.
company 2. A legal entity in which all owners are protected from the entity's debts but which may lack other characteristics of a
(LLC) corporation (i.e., centralized management, unlimited life, free transferability of interests). LLCs are treated as
3. Deduction partnerships (or disregarded entities if they have only one owner) for tax purposes.
for qualified 3. A deduction allowed for noncorporate taxpayers based on the qualified business income of a qualified trade or
business business. In general, the deduction is limited to the lesser of 20 percent of qualified business income, or 20 percent of
income taxable income before the qualified business income deduction less any net capital gain. There are three limitations on
4. the deduction—an overall limitation (based on modified taxable income), another that applies to high-income
Disregarded taxpayers, and a third that applies to certain types of services businesses. § 199A.
entity 4. The Federal income tax treatment of business income usually follows the legal form of the taxpayer (i.e., an
5. C individual's sole proprietorship is reported on the Form 1040); a C corporation's taxable income is computed on Form
corporations 1120. The check-the-box Regulations are used if the unincorporated taxpayer wants to use a different tax regime. Under
these rules, a disregarded entity is taxed as an individual or a corporate division; other tax regimes are not available.
For instance, a one-member limited liability company is a disregarded entity.
5. A separate taxable entity subject to the rules of Subchapter C of the Code. This business form may create a double
taxation effect relative to its shareholders. The entity is subject to the regular corporate tax and a number of penalty
taxes at the Federal level.
2. 1. S 1. The designation for a corporation that elects to be taxed similarly to a partnership. Sections 1361-1379 of the Internal
corporations Revenue Code. An elective provision permitting certain small business corporations (§ 1361) and their shareholders (§
2. Limited 1362) to elect to be treated for income tax purposes in accordance with the operating rules of §§ 1363-1379. However,
partnerships some S corporations usually avoid the corporate income tax, and corporate losses can be claimed by the
3. Qualified shareholders.
business 2. A partnership in which some of the partners are limited partners. At least one of the partners in a limited partnership
income must be a general partner.
4. Qualified 3. For purposes of the qualified business income deduction, it is the ordinary income less ordinary deductions a
trade or taxpayer earns from a qualified trade or business conducted in the United States by the taxpayer. It also includes the
business distributive share of these amounts from each partnership or S corporation interest held by the taxpayer. It does not
5. Regular include certain types of investment income (e.g., capital gains or losses and dividends), "reasonable compensation"
corporations paid to a taxpayer with respect to any qualified trade or business, or guaranteed payments made to a partner for
services rendered. § 199A(c).
4. Used in determining the deduction for qualified business income (§ 199A). In general, it includes any trade or
business other than providing services as an employee. In addition, a "specified services trade or business" is not a
qualified trade or business. § 199A(d)(1)(B).
5. A separate taxable entity subject to the rules of Subchapter C of the Code. This business form may create a double
taxation effect relative to its shareholders. The entity is subject to the regular corporate tax and a number of penalty
taxes at the Federal level.
3. 1. W-2 Wages/Capital Investment 1.
Limit 2. For purposes of the qualified business income deduction, it is the ordinary income less
2. QBI deduction ordinary deductions a taxpayer earns from a qualified trade or business conducted in the
3. Specified service trade or United States by the taxpayer. It also includes the distributive share of these amounts from
business each partnership or S corporation interest held by the taxpayer. It does not include certain
types of investment income (e.g., capital gains or losses and dividends), "reasonable
compensation" paid to a taxpayer with respect to any qualified trade or business, or
guaranteed payments made to a partner for services rendered. § 199A(c).
3. For purposes of the deduction for qualified business income, a specified service trade or
business includes those involving the performance of services in certain fields, including
health, law, accounting, actuarial science, performing arts, consulting, athletics, financial
services, and brokerage services; services consisting of investing and investment management,
trading or dealing in securities, partnership interests, or commodities; and any trade or
business where the business's principal asset is the reputation of one or more of its employees
or owners. § 199A(d)(2).A limitation on the deduction for qualified business income that caps
the deduction at the greater of (1) 50 percent of the wages paid by a qualified trade or
business or (2) 25 percent of the wages paid by the qualified trade or business plus 2.5
percent of the taxpayer's share of the unadjusted basis of property used in the business that
has not been fully depreciated prior to the close of the taxable year. § 199A(b)(2)(B).
4. Charlotte is a partner in, and sales Answer: $175,000.
manager for, CD Partners, a Qualified business income does not include certain types of investment income, such as:
domestic business that is not a Capital gains or capital losses;
"specified services" business. During Dividends;
the tax year, she receives Interest income (unless "properly allocable" to a trade or business, such as lending); or
guaranteed payments of $250,000 Certain other investment items.
from CD Partners for her services Nor does qualified business income include:
to the partnership as its sales The "reasonable compensation" paid to the taxpayer with respect to any qualified trade or
manager. In addition, her business; or
distributive share of CD Partners' Guaranteed payments made to a partner for services rendered.
ordinary income (its only item of Accordingly, Charlotte's qualified business income from CD Partners is $175,000. Her
income or loss) was $175,000. guaranteed payments do not qualify as QBI.
What is Charlotte's qualified
business income?$ [175,000]
5. Complete the following statements below regarding how each can be Answers: before; reduced by any net capital gain; a
used in determining the QBI deduction. qualified trade or business; excluding; is not; Yes; Yes;
Yes; Yes; No; Yes;
a. Modified taxable income is taxable income [before] the deduction for
qualified business income, [reduced by any net capital gain] .

b. Qualified Business income (QBI) is defined as the ordinary income less

ordinary deductions a taxpayer earns from [a qualified trade or business]
conducted in the United States by the taxpayer.

c. A qualified trade or business is any trade or business [excluding]

providing services as an employee. In addition, a "specified services" trade
or business [is not] a qualified trade or business.

d. Indicate whether the following are considered a "specified service trade

or business:
Services consisting of investing and investment management: [Yes]
Performance of services in law: [Yes]
Performance of services in accounting: [Yes]
Performance of services in the performing arts: [Yes]
Operating a retail furniture store: [No]
Performance of services in athletics: [Yes]
6. Complete the following statements regarding the general rules for the Answers: noncorporate; a sole proprietorship, a
QBI deduction and how is it computed. partnership, or an S corporation; lesser; 20%; 20%;
The QBI deduction is available to [noncorporate] taxpayers. It applies to from; whether a taxpayer uses the standard deduction
the qualified business income generated through a [sole proprietorship, a or itemizes deductions.
partnership, or an S corporation] .
In general, the deduction for qualified business income is the [lesser] of:
[20]% of qualified business income, or
[20]% of modified taxable income.
The QBI deduction is a deduction [from] AGI. Further, the deduction is
available [whether a taxpayer uses the standard deduction or itemizes
deductions.] .
7. Complete the statement below in response to the question, "Can a sole Answers: Yes; allow; sole proprietorship; corporation.
proprietorship form as a single member limited liability company (LLC)?"
[Yes] . Most states [allow] for single member LLCs. Under the default rules
of the check-the-box Regulations, a single member LLC is taxed as a [sole
proprietorship] and by filing Form 8832 a single member LLC is taxed as a
[corporation] .
8. Henry, a freelance driver, finds customers Answers: $9,800; $4,510.
using various platforms such as Uber and Henry's initial QBI Amount is $12,400 (20% × QBI of $61,200). However, he must
Grubhub. He is single and has no other apply the modified taxable income limitation. Assuming that Henry claims the
sources of income. In 2019, Henry's qualified standard deduction of $12,200, his modified taxable income is $49,000 ($61,200 -
business income from driving is $61,200. $12,200). Because Henry's modified taxable income this is lower than his QBI, his
Assume Henry takes the standard deduction deduction is limited to $9,800 (20% × $49,000). Henry's taxable income is $39,200
of $12,200. ($49,000 - $9,800), and his tax liability is $4,510 [$970 + ($29,500 × 12%)].
Click here to access the 2019 individual tax Effectively, the QBI deduction—a from AGI deduction—is the last deduction taken in
rate schedule to use for this problem. determining taxable income. Further, the deduction is available whether a taxpayer
Assume the QBI amount is net of the self- uses the standard deduction or itemizes deductions. Therefore, Henry's taxable
employment tax deduction. income after the QBI deduction is $39,200 ($49,000 - $9,800).Using the tax rate
Compute Henry's QBI deduction and his tax schedule for single taxpayers, Henry's tax liability is $4,510 computed as
liability .QBI deduction: $[9,800] follows:$39,200 - $9,700 = $29,500$29,500 x 12% = $3,540$3,540 + $970 =
Tax liability (round to the nearest dollar): $4,563.50, rounded to $4,510.
$[4,510]
9. In 2019, Meghann Carlson, a single taxpayer, Answer: $15,600
has QBI of $110,000 and modified taxable The lesser of:
income of $78,000 (this is also her taxable 1. 20% of qualified business income ($110,000 × 20%), or $22,000
income before the QBI deduction). Given this 2. 20% of modified taxable income ($78,000 × 20%) $15,600
information, what is Meghann's QBI
deduction?
Meghann's QBI deduction is $[15,600].
10. Maria and Javier are the equal partners in Answer: $175,000; 275,000
MarJa, a partnership that is a qualfied trade or a. Maria and Javier each have $175,000 of QBI ($350,000 of ordinary income split
business. In the current year, MarJa had equally between the equal partners). The guaranteed payments Maria and Javier
$350,000 of ordinary income after reporting receive are not QBI.
$500,000 in guaranteed payments to Maria b. Now Maria and Javier each have $275,000 of QBI ($550,000 of ordinary income
and Javier for their services to MarJa split equally between the equal partners). By taking smaller guaranteed payments,
($250,000 each). Maria and Javier have a larger QBI (and a larger QBI deduction). This aspect of §
a. What is Maria's and Javier's qualified 199A will result in planning to determine the appropriate mix of guaranteed
business income? $[175,000] payments and ordinary income for flow-through entities. Lower guaranteed
b. What is Maria's and Javier's qualified payments means less cash in the partner's hands (but a larger QBI deduction).
business income if MarJa had $550,000 of
ordinary income after reporting $300,000 in
guaranteed payments to Maria and Javier
($150,000 each)? $[275,000]
11. Paul wholly owns and operates an office supplies business and a printing/ shipping business through separate entities. Answer:
The office supplies business and printing/shipping business share centralized purchasing to obtain volume discounts are held
and also share a centralized accounting office that performs all necessary accounting for both businesses (including in
preparing financial statements, paying bills, collecting receivables, and preparing payrolls for both businesses). Paul separate
maintains a website that promotes both businesses. The businesses operate in separate spaces in the same building entities;
(next to each other) but share an office and a shipping/receiving space at the rear of the building and an opening in will;
the shared inside wall that allows customers to move between the businesses without going outside. Each business directly;
owns its own equipment and employs its own staff. may
choose.
Because the office supplies business and the printing/shipping business [are held in separate entities], Paul [will] be
treated as operating each of these businesses [directly]. Paul [may choose] to treat the two businesses as a single
trade or business in determining his QBI deduction.
12. Robert is the sole shareholder and CEO of ABC, Inc., an S Answer: $325,000.
corporation that is a qualified trade or business. During the Qualified business income does not include certain types of
current year, ABC has net income of $325,000 after investment income, such as:
deducting Robert's $100,000 salary. In addition to his Capital gains or capital losses;
compensation, ABC pays Robert dividends of $250,000. Dividends;
a. What is Robert's qualified business income? $[325,000] Interest income (unless "properly allocable" to a trade or business,
b. What is Robert's qualified business income if you such as lending); or
determined that reasonable compensation for someone Certain other investment items.
with Robert's experience and responsibilities is $200,000? Nor does qualified business income include:
$[225,000] The "reasonable compensation" paid to the taxpayer with respect to
any qualified trade or business; or
Guaranteed payments made to a partner for services rendered.
Robert's qualified business income from ABC, Inc., is $325,000 (the net
income reported to Robert as ordinary income). Note that he may not
include the $250,000 received as dividends as additional qualified
business income.
b. Taxpayers may try to avoid higher income tax rates by disguising
salary as dividends (which are taxed a preferential rates). In addition,
reclassifying salary as dividends also would impact the amount of
qualified business income passed thru from a S corporation.
Accordingly, qualified business income excludes "reasonable
compensation" paid to the taxpayer with respect to any qualified trade
or business.
If reasonable compensation for Robert was $200,000, then $100,000
of the $250,000 "dividends" would be reclassified as compensation
under § 199A. This would reduce ABC's net income from $325,000 to
$225,000 and Robert's qualified business income would be $225,000.
Reasonable compensation is not considered qualified business
income.
13. Thad, a single taxpayer, has taxable income before the Answer: $12,000.
QBI deduction of $190,700. Thad, a CPA, operates an (1) Determine Applicable Percentage: Applicable percentage=
accounting practice as a single member LLC (which he 100% - [($190,700 - $160,700) / 50,000] = 40%
reports as a sole proprietorship). During 2019, his (2) Determine QBI deduction: 20% of qualified business income x
proprietorship generates qualified business income of applicable percentage
$150,000, W-2 wages of $125,000, and $10,000 of qualified ($150,000 × 20%) = $30,000 × 40% = $12,000
property.
Assume the QBI amount is net of the self-employment tax
deduction.
What is Thad's qualified business income deduction?
$[12,000]
14. Why did the TCJA of 2018 include a deduction for Answer: To provide a tax cut for owners of pass-through entities.
qualified business income? [To provide a tax cut for
owners of pass-through entities.]