7. Qualified Business Income Deductions

Question 1

What are the two categories of pass-through entities relevant to the qualified business income deduction (QBID)?

Answer 1

1.Specified service trades or businesses (SSTBs)
2.Qualified trades or businesses

Question 2

What is a specified service trade or business (SSTB)?

Answer 2

An SSTB is any trade or business in which the principle asset is the reputation or skill of one or more of its employees. Examples include health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services.

Question 3

What kinds of trades and businesses are not considered SSTBs?

Answer 3

1.Architects
2.Engineers
3.Real estate agents and brokers
4.Insurance agents and brokers

Question 4

What is a qualified trade or business?

Answer 4

In general, a qualified trade or business is any pass-through entity not considered a specified service trade or business (SSTB). Specifically, a pass-through entity can be identified as a qualified trade or business if it has qualified business income (QBI).

Question 5

What is a qualified trade or business?

Answer 5

In general, a qualified trade or business is any pass-through entity not considered a specified service trade or business (SSTB). Specifically, a pass-through entity can be identified as a qualified trade or business if it has qualified business income (QBI).

Question 6

What is the overall limitation for the qualified business income deduction (QBID)?

Answer 6

The overall limitation is the lesser of
1.20% × Qualified business income or
2.20% × (Taxable income – Net capital gains)

Question 7

What qualifies business income for the qualified business income deduction (QBID)?

Answer 7

1.The entity is a relevant pass-through entity.
2.The entity is directly owned by the taxpayer.
3.The income is effectively connected with the conduct of a trade or business within the U.S. or Puerto Rico.
4.The income is included in taxable income for the tax year.

Question 8

What types of income are not included in qualified business income (QBI)?

Answer 8

1.Capital gains and losses
2.Dividends
3.Nonoperating interest income
4.Interest income attributable to working capital
5.Gains or losses relating to transactions in commodities
6.Foreign currency gains
7.Less-than-reasonable salary payments to owners
8.Any deduction or loss properly allocated to items above

Question 9

What types of income are not included in qualified business income (QBI)?

Answer 9

1.Capital gains and losses
2.Dividends
3.Nonoperating interest income
4.Interest income attributable to working capital
5.Gains or losses relating to transactions in commodities
6.Foreign currency gains
7.Less-than-reasonable salary payments to owners
8.Any deduction or loss properly allocated to items above

Question 10

When must the Alternative Minimum Tax (AMT) be reported and paid?

Answer 10

The AMT must be reported and paid at the same time as regular tax liability.

Question 11

Are estimated payments of the Alternative Minimum Tax (AMT) required?

Answer 11

Yes, they are required.

Question 12

Regarding the Alternative Minimum Tax (AMT), what are tax preference items?

Answer 12

Tax preference items generate tax savings by reducing the taxpayer’s taxable income. Therefore, they must be added back to taxable income when computing AMT income.

Question 13

What are examples of tax preference items for Alternative Minimum Tax (AMT)?

Answer 13

1.Section 1202 stock
2.Private activity bonds
3.Percentage depletion
4.Intangible drilling costs

Question 14

Regarding the Alternative Minimum Tax (AMT), what are adjustments?

Answer 14

Usually, adjustments eliminate “time value” tax savings from accelerated deductions or deferral of income. An adjustment is an increase or a decrease to taxable income in computing AMT income.

Question 15

What are examples of adjustments in computing Alternative Minimum Tax (AMT) income?

Answer 15

1.Installment sales
2.Long-term contracts
3.Pollution control facilities (certified)
4.Mining exploration and development
5.Net operating loss (NOL) adjustments
6.Distributions from a trust or estate
7.Research and experimental expenditures
8.Standard deduction
9.Certain itemized deductions
10.Circulation expenditures
11.Incentive stock options (ISOs)

Question 16

What amount of Social Security (FICA) tax must an employer pay for 2022?

Answer 16

An employer must pay
a. 6.20% of the first $147,000 of wages paid for old-age, survivors, and disability insurance, plus
b. 1.45% of all wages for the hospital insurance (Medicare) portion.

Question 17

What amount of Social Security (FICA) tax must an employer pay for 2022?

Answer 17

An employer must pay
a. 6.20% of the first $147,000 of wages paid for old-age, survivors, and disability insurance, plus
b. 1.45% of all wages for the hospital insurance (Medicare) portion.

Question 18

An additional Medicare tax of 0.9% applies to

Answer 18

Wages, compensation, and self-employment income above the specified threshold amount.

Question 19

Who pays the additional Medicare tax?

Answer 19

The additional Medicare tax is paid by the employee.

Question 20

Are FICA tax contributions made by the employee tax deductible?

Answer 20

No, FICA tax contributions made by the employee are not deductible by the employee.

Question 21

Are FICA tax contributions made by the employer tax deductible?

Answer 21

Yes, FICA tax contributions made by the employer are deductible by the employer.

Question 22

What is the net investment income tax?

Answer 22

The net investment income tax is a tax imposed on all investment income in excess of deductions allowable for such income and income from passive activities. The threshold amounts are $250,000 (MFJ), $200,000 (S), and $125,000 (MFS). The tax rate is 3.8%.

Question 23

At what rate is the FICA tax liability imposed on net earnings from self-employment?

Answer 23

The FICA tax liability is imposed on net earnings from self-employment at twice the rate that applies to an employer, that is, at the rate of 15.3% [2 × (6.20% + 1.45%)].

Question 24

Net income from self-employment does not include

Answer 24

1.Rents
2.Gain or loss from disposition of business property
3.Capital gain or loss
4.Nonbusiness interest
5.Dividends

Question 25

Net income from self-employment does not include

Answer 25

1.Rents
2.Gain or loss from disposition of business property
3.Capital gain or loss
4.Nonbusiness interest
5.Dividends

Question 26

A self-employed person is allowed to deduct what portion of the FICA tax paid?

Answer 26

For 2022, a self-employed person is allowed a deduction for the employer portion of the FICA tax paid to arrive at his or her AGI. The deduction is 50% of the FICA tax paid.

Question 27

A minister may exclude the rental value of his or her home or parsonage if it is

Answer 27

Connected with the performance of religious duties.

Question 28

The unemployment (FUTA) tax is imposed on whom?

Answer 28

The FUTA tax is imposed on employers; the employee does not pay any portion of FUTA tax.

Question 29

What is the amount of FUTA tax imposed on employers?

Answer 29

The tax is 6.0% of the first $7,000 of wages paid to each employee.

Question 30

Employers must pay FICA taxes for all household employees who are paid more than what amount during the year?

Answer 30

An employer must pay FICA taxes for all household employees, e.g., baby-sitters and maids, who are paid more than $2,400 during the year.

Question 31

Are estimated payments of the Alternative Minimum Tax (AMT) required?

Answer 31

Yes, they are required.

Question 31

What penalty will be imposed if a taxpayer fails to file Form 8938, Statement of Specified Foreign Financial Assets?

Answer 31

There is a $10,000 penalty for failure to file Form 8938 on time. After 90 days of being notified of the failure, an additional $10,000 penalty will be assessed every 30 days, but the total amount of the penalty will not exceed $50,000.

Question 31

What is the overall limitation for the qualified business income deduction (QBID)?

Answer 31

The overall limitation is the lesser of
1.20% × Qualified business income or
2.20% × (Taxable income – Net capital gains)

Question 31

When must the Alternative Minimum Tax (AMT) be reported and paid?

Answer 31

The AMT must be reported and paid at the same time as regular tax liability.

Question 31

What qualifies business income for the qualified business income deduction (QBID)?

Answer 31

1.The entity is a relevant pass-through entity.
2.The entity is directly owned by the taxpayer.
3.The income is effectively connected with the conduct of a trade or business within the U.S. or Puerto Rico.
4.The income is included in taxable income for the tax year.

Question 32

A self-employed person is allowed to deduct what portion of the FICA tax paid?

Answer 32

For 2022, a self-employed person is allowed a deduction for the employer portion of the FICA tax paid to arrive at his or her AGI. The deduction is 50% of the FICA tax paid.