1.4 - Items From Other Entities

Question 1

Business entities are either _____ entities or _____ entities for tax purposes.

Answer 1

Separate taxpaying entities
Flow through entities

Question 2

This business entity pays tax on the income earned by the business.
This business entity reports income on a tax return filed for informational purposes only. The income flows through to the owners and is taxed at the individual owner level.

Answer 2

Separate taxpayingentity
Flow through entity

Question 3

The tax system in the U.S. recognizes four categories of business entities:

Answer 3

Partnership or limited liability company (LLC)
S corporation
Sole proprietorship
C corporation

Question 4

What type of entity are the following business entities and where are their income’s reported?

1. Partnership or limited liability company (LLC)
2. S corporation
3. Sole proprietorship
4. C corporation

Answer 4

1. Flow through entity - income on form 1065
2. Flow through entity- income on form 1120S
3. Flow through entity - income on form 1040, Schedule C
4. Separate taxpaying entity - income on Form 1120

Question 5

What is a K-1?

Answer 5

Each partner gets a K-1 and reports their share of net income/loss on their 1040 schedule E

Question 6

When is partnership and S corporation income taxed?

Answer 6

When business earns and reports the income NOT when distributed

Question 7

Guaranteed payments to partners or LLC members for services provided to the partnership are subject to what two taxes?

Answer 7

Self-employment (social security and Medicare) tax and income tax

Question 8

Shareholders in an S corporation receive a salary, so how are their salaries taxed?

Answer 8

Half of the social security and Medicare taxes are paid by the corporation and half are withheld from the shareholder’s salary.

Question 9

If a partner or LLC member is actively involved in the operations of the business, the partner or member’s allocable share of ordinary business income is considered self-employment income which is subject to what tax?

Answer 9

Self-employment tax

Question 10

What is on reason a business may choose to organize as an S corporation rather than a partnership or LLC?

Answer 10

The shareholder’s allocable share of S corporation ordinary business income is not self employment income and therefore no self-employment tax is applied

Question 11

What did the Tax Cuts and Jobs Act of 2017 provide?

Answer 11

A deduction of up to 20 of qualified business income for eligible flow-through entities

Question 12

What is ordinary business income minus ordinary business deductions earned from a sole proprietorship, S corp, limited liability company, or partnership connected to business conducted within the US?

Answer 12

Qualified business income (QBI)

Question 13

What is excluded from QBI?

Answer 13

Wages earned as an employee
Guaranteed payments to partners
Dividends
Interest
Long-term and short-term capital gains and losses

Question 14

What is any tangible, depreciable property that is held by the business called?

Answer 14

Qualified property

Question 15

What is any business other than a specified services trade or business (SSTB) called?

Answer 15

Qualified trade or business (QTB)

Question 16

What is a business that involves direct services in the field of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage, investment management, trading or dealing in securities, partnership interest or commodities?

Answer 16

Specified service trade or business (SSTB)

Question 17

What two jobs are specifically excluded from the SSTB?

Answer 17

Engineering and architectural services

Question 18

What is the basic QBI deduction calculation?

Answer 18

20% X QBI

Question 19

What is the specific income level for those MFJ and all other filers must obtain to be able to qualify for the QBI deduction?

Answer 19

MFJ = between $340,100 - $440,100
All others = between $170,050 - $220,050

Question 20

In regard to the W-2 wage and property limitation, the QBI deduction is limited to the greater of:

Answer 20

50% of W-2 wages for the business
OR
25% of W-2 wages for the business plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property

Question 21

There is an overall taxable income limitation to the QBI deduction. It is the lesser of:

Answer 21

The combined QBI deductions for all qualifying businesses
OR
20% of the taxpayers taxable income (before QBI deduction) in excess of net capital gain

Question 22

What are the three categories taxpayers are divided into to best apply the limitations of the QBI deduction based on the taxable income and the W-2 wages and property limitations?

Answer 22

Category 1 - taxable income below $170,050 (S) or $340,100 (MFJ)
Category 2 - taxable income above $220,050 (S) or $440,100 (MFJ)
Category 3 - taxable income between $170,050 and $220,050 (S) or $340,100 - $440,100 (MFJ)

Question 23

For a category 1 taxpayer, what QBI deduction do they receive if they are a Qualified Trade or Business (QTB) or a Specified Service Trade or Business (SSTB)?

Answer 23

Both would receive a full 20% QBI deduction

Question 24

For a category 2 taxpayer, what QBI deduction do they receive if they are a Qualified Trade or Business (QTB) or a Specified Service Trade or Business (SSTB)?

Answer 24

If QTB - the W-2 wage limitation applies
If SSTB - no QBI deduction is allowed

Question 25

For a category 3 taxpayer, what QBI deduction do they receive if they are a Qualified Trade or Business (QTB) or a Specified Service Trade or Business (SSTB)?

Answer 25

If QTB - phase in of W-2 wage limitation
If SSTB - QBI, W-2 wages, and qualified property amounts are reduced and then phase in of W-2 wage and property limitation using reduced amounts

Question 26

A single QTB taxpayer has the following:

Income before QBI deduction = $50,000
Net capital gains = $5,000
QBI = $40,000

Calculate the QBI Deduction.

Answer 26

40,000 X 20% = 8,000

(Not limited by wages since 50k < 170k)
(Not limited by overall limit because (50K-5K capital gains)X20% = 9,000 which is more than the 8,000 deduction)

Question 27

A single SSTB taxpayer has the following:

Income before QBI deduction = $50,000
Net capital gains = $15,000
QBI = $40,000

Calculate the QBI deduction.

Answer 27

40,000 X 20% = 8,000
50,000 - 15,000 =35,000 X 20% = 7,000

7,0000 < 8,000 therefore, QBI deduction = 7,000

Question 28

A QTB taxpayer has the following:

Income before QBI deduction = $240,000
Net capital gains = 0
QBI = 100,000
Share of W-2 wages = 30,000
Share of QTB’s UIBA of qualified property = $80,000

Calculate the QBI deduction.

Answer 28

100,000 X 20% = 20,000

30,000 * 50% = 15,000
(30,000 X 25%) + (80,000 * 2.5%) = 7,500 + 2,000 = 9,500
9,500 < 15,000, therefore we compare the 15,000 to the 20,000 QBI deduction.

20,000 > 15,000, therefore the QBI deduction is 15,000.

Question 29

A SSTB taxpayer has the following:

Income before QBI deduction = $240,000
Net capital gains = 0
QBI = 100,000
Share of W-2 wages = 30,000
Share of UBIA of qualified property = 80,000

Calculate the QBI deduction.

Answer 29

0

Because the business is an SSTB and the taxpayer’s income is above 220,050 the taxpayer is not eligible for a QBI deduction.

Question 30

A QTB taxpayer has the following:

Income before QBI deduction = $212,550
Net capital gains = 0
QBI = 100,000
Share of W-2 wages = 30,000
Qualifies property = 0

Calculate the QBI deduction.

Answer 30

100,000 X 20% = 20,000
30,000 X 50% = 15,000
20,000 - 15,000 = 5,000

212,550 - 170,050 (lower wage limit) = 42,500
42,500 / 50,000 (Amount between the wage limit) = 85%

85% X 5,000 = 4,250

20,000 - 4,250 = 15,750 QBI deduction

Question 31

A SSTB taxpayer has the following:

Income before QBI deduction = 212,550
Net capital gains = 0
QBI = 100,000
Share of W-2 wages = 30,000
Qualified property = 0

Calculate the QBI deduction.

Answer 31

212,550 - 170,050 (lower wage limit) = 42,500 / 50,000 (Amount between wage limit) = 85%
100% - 85% = 15% X 100,000 = 15,000 X 20% = 3,000

30,000 X 15% = 4,500 X 50% = 2,250

3,000 - 2,250 = 750 X 85% = 637.5

3,000 - 637.5 = 2,362.5 QBI deduction

Question 32

A taxpayer may have multiple sources of business income that are eligible for the QBI deduction. If one or more of these sources has a loss for the tax year, what does the taxpayer do?

Answer 32

Th losses are allocated pro-rate among the qualifying businesses with positive QBI to calculate the QBI deduction. The W-2 wages and UBIA of qualified property of the business with a negative QBI are ignored and do not get allocated or carried forward.

Question 33

Calculate the QBI deduction fr the following businesses:

Business A QBI = 100,000
Business B QBI = 200,000
Business C QBI = -75,000.

Answer 33

100,000 + 200,000 = 300,000
100,000/300,000 = 1/3
200,000/300,000 = 2/3

(75,000) X 1/3 = (25,000)
Adjusted business A QBI = 100,000 - 25,000 = 75,000
(75,000) X 2/3 = (50,000)
Adjusted business B QBI = 200,000 - 50,000 = 150,000

Question 34

If QBI for the tax year (either one source or multiple sources) is negative, what happens to the QBI deduction and QBI loss?

Answer 34

The QBI deduction is 0 and the QBI loss is carried forward as a separate business.