Chapter 2: Homework

Question 1

Jennifer and Jamie are starting a business and have asked you for advice about whether they should form a partnership, a corporation, or some other type of entity.

To help Jennifer and Jamie decide which type of entity to establish, label the following as “Yes” a question to ask or “No” no need to ask.

Question
What type of business are you going to operate?

Answer 1

Yes

Business operations can be conducted in a number of different forms.

Among the various possibilities are the following:
* Sole proprietorships;
* Partnerships;
* Trusts and estates;
* S corporations;
* Regular corporations
* Limited liability companies.

For Federal income tax purposes, the distinctions among these forms of business organization are very important.

Question 2

Jennifer and Jamie are starting a business and have asked you for advice about whether they should form a partnership, a corporation, or some other type of entity.

To help Jennifer and Jamie decide which type of entity to establish, label the following as “Yes” a question to ask or “No” no need to ask.

Question
What amount and type of income (loss) do you expect from the business?

Answer 2

Yes

Question 3

Jennifer and Jamie are starting a business and have asked you for advice about whether they should form a partnership, a corporation, or some other type of entity.

To help Jennifer and Jamie decide which type of entity to establish, label the following as “Yes” a question to ask or “No” no need to ask.

Question
Do you expect to have losses in the early years of the business?

Answer 3

Yes

Question 4

Jennifer and Jamie are starting a business and have asked you for advice about whether they should form a partnership, a corporation, or some other type of entity.

To help Jennifer and Jamie decide which type of entity to establish, label the following as “Yes” a question to ask or “No” no need to ask.

Question
Will you lease or purchase your office building?

Answer 4

No

Question 5

Jennifer and Jamie are starting a business and have asked you for advice about whether they should form a partnership, a corporation, or some other type of entity.

To help Jennifer and Jamie decide which type of entity to establish, label the following as “Yes” a question to ask or “No” no need to ask.

Question
Will you withdraw profits from the business or leave them in the business so it can grow?

Answer 5

Yes

Question 6

Jennifer and Jamie are starting a business and have asked you for advice about whether they should form a partnership, a corporation, or some other type of entity.

To help Jennifer and Jamie decide which type of entity to establish, label the following as “Yes” a question to ask or “No” no need to ask.

Question
What is the amount and type of income (loss) you expect from other sources?

Answer 6

Yes

Question 7

Jennifer and Jamie are starting a business and have asked you for advice about whether they should form a partnership, a corporation, or some other type of entity.

To help Jennifer and Jamie decide which type of entity to establish, label the following as “Yes” a question to ask or “No” no need to ask.

Question
In what state(s) will the business be formed?

Answer 7

Yes

Question 8

Complete the statement below in response to the question, “Can a sole proprietorship form as a single member limited liability company (LLC)?”

Answer 8

Yes. All 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.

When the limited liability company was developed, the IRS was deluged with inquiries regarding its tax status. An unincorporated entity with only one owner is, by default, classified as a disregarded entity (or DRE).

Question 9

In the current year, Juanita and Joseph form a two-member LLC and do not file Form 8832 (Entity Classification Election).

State whether the following statement is “True” or “False”.

As a result, the LLC will be treated as a partnership for Federal tax purposes.

Answer 9

True

Regulations (check-the-box Regulations) enable taxpayers to choose the tax status of a business entity without regard to its corporate (or noncorporate) characteristics.

Question 10

Why did Congress decide to provide a deduction for qualified business income?

Answer 10

To provide a tax cut for owners of pass-through entities.

A primary goal for tax reform in 2017 was to lower the Federal income tax rate for C corporations. However, an obstacle to lowering the Federal corporate income tax rate is that most businesses in the United States operate as sole proprietorships, partnerships, or S corporations, rather than as C corporations.

Question 11

Who can claim the qualified business income (QBI) deduction?

The QBI deduction is available to any ____ taxpayer.

Answer 11

noncorporate

Under the TCJA of 2017, § 199A (Qualified Business Income) was added to the Internal Revenue Code, allowing up to a 20 percent deduction on the qualified business income of certain taxpayers.

Question 12

Complete the following statements regarding the general rules for the QBI deduction and how is it computed.

The QBI deduction is available to ____ taxpayers. It applies to the qualified business income generated through ____.

In general, the deduction for qualified business income is the
____ of:

____% of qualified business income, or
____% of modified taxable income.

The QBI deduction is a deduction ____ AGI. Further, the deduction is available ____..

Answer 12

Complete the following statements regarding the general rules for the QBI deduction and how is it computed.

The QBI deduction is available to noncorporate taxpayers. It applies to the qualified business income generated through a sole proprietorship, a 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..

With the reduction in the corporate income tax rate to 21 percent in 2018, Congress needed to provide a means of reducing the taxes on businesses that operate in different business forms. Congress accomplished this with the creation of the deduction for qualified business income (§ 199A). 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.

Question 13

Which of the following taxpayers may claim a deduction for qualified business income? Select “Yes” or “No”, whichever is applicable.

Question
A driver for Uber or Lyft.

Answer 13

Yes

With the reduction in the corporate income tax rate to 21 percent in 2018, Congress needed to provide a means of reducing the taxes on businesses that operate in different business forms. Congress accomplished this with the creation of the deduction for qualified business income (§ 199A), which applies to certain noncorporate taxpayers.

Question 14

Which of the following taxpayers may claim a deduction for qualified business income? Select “Yes” or “No”, whichever is applicable.

Question
A veterinarian operating as an S corporation. In addition to veterinary services, revenues also are derived from the sale of pet food and supplies and from the boarding of animals.

Answer 14

Yes

Question 15

Which of the following taxpayers may claim a deduction for qualified business income? Select “Yes” or “No”, whichever is applicable.

Question
A CPA operating as an LLC taxed as a sole proprietorship. The CPA is single and has taxable income of $150,000.

Answer 15

Yes

Question 16

Which of the following taxpayers may claim a deduction for qualified business income? Select “Yes” or “No”, whichever is applicable.

Question
A CPA operating as an LLC taxed as a sole proprietorship. The CPA is single and has taxable income of $200,000.

Answer 16

Yes

Question 17

Which of the following taxpayers may claim a deduction for qualified business income? Select “Yes” or “No”, whichever is applicable.

Question
A real estate salesperson.

Answer 17

Yes

Question 18

Which of the following taxpayers may claim a deduction for qualified business income? Select “Yes” or “No”, whichever is applicable.

Question
A self-employed pet sitter/dog walker.

Answer 18

Yes

Question 19

Which of the following taxpayers may claim a deduction for qualified business income? Select “Yes” or “No”, whichever is applicable.

Question
A sole proprietor software developer.

Answer 19

Yes

Question 20

Which of the following taxpayers may claim a deduction for qualified business income? Select “Yes” or “No”, whichever is applicable.

Question
A taxpayer who is a wage earner.

Answer 20

No

Question 21

Which of the following taxpayers may claim a deduction for qualified business income? Select “Yes” or “No”, whichever is applicable.

Question
The taxpayer also derives $60,000 of rental income from a duplex she owns.

Answer 21

Yes

Question 22

Why do you think the QBI deduction is limited to earnings from a business conducted in the United States and doesn’t also include business income from a foreign business activity?

A possible reason may be that most businesses ___ operate as sole proprietorships, partnerships, or S corporations, rather than as C corporations and Congress needed a means of reducing the taxes on businesses that operate in different business forms. Also, a primary goal for tax reform in 2018 was to ____ the Federal income tax rate for C corporations, improving the ____ of U.S. corporations and attracting investment ____ from non-U.S. multinational corporations.

Answer 22

A possible reason may be that most businesses in the United States operate as sole proprietorships, partnerships, or S corporations, rather than as C corporations and Congress needed a means of reducing the taxes on businesses that operate in different business forms. Also, a primary goal for tax reform in 2018 was to lower the Federal income tax rate for C corporations, improving the international competitiveness of U.S. corporations and attracting investment in the United States from non-U.S. multinational corporations.

Section 199A permits an individual to deduct 20 percent of the qualified business income generated through a sole proprietorship, a partnership, or an S corporation. 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.

Question 23

In 2024, Meghann, a single taxpayer, has QBI of $110,000 and modified taxable income of $78,000 (this is also her taxable income before the QBI deduction). Given this information, what is Meghann’s QBI deduction?

Meghann’s QBI deduction is $____

Answer 23

15,600

78,000 * 0.20 = 15,600

Modified Taxable Income * 20% = QBI Deduction

Question 24

Peter owns and manages his single member LLC that provides a wide variety of financial services to his clients. He is married and will file a joint tax return with his spouse, Marta. His LLC reports $300,000 of qualified business 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).

Determine their QBI deduction for 2024. $____

Answer 24

57,000

Given Information:
Filing Status: Married Filing Jointly
Qualified Business Income (QBI): $300,000
W-2 Wages: $120,000
Assets (Unadjusted Basis): $75,000
Taxable Income before QBI deduction: $285,000
Phase-out threshold for married filing jointly (2024):
Threshold begins: $383,900
Phase-out ends: $483,900
Step 1: Preliminary QBI Deduction
The preliminary QBI deduction is 20% of the lesser of:

QBI: $300,000 \times 0.20 = 60,000 \

Taxable Income (before the QBI deduction): 285,000 × 0.20 = 57,000
285,000×0.20=57,000

The preliminary QBI deduction is $57,000, as it is the lesser of the above amounts.

Question 25

Stella Watters is a CPA and operates her own accounting firm (Watters CPA LLC). As a single member LLC, Stella reports her accounting firm operations as a sole proprietorship. Stella has QBI from her accounting firm of $540,000, she reports W–2 wages of $156,000, and the unadjusted basis of property used in the LLC is $425,000. Stella is married and will file a joint tax return with her spouse. Their taxable income before the QBI deduction is $488,000, and their modified taxable income is $448,000. Determine Stella's QBI deduction for 2024.$ ____

Answer 25

$0 ## Footnote There are three limitations on the QBI 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 services businesses. The second and third limitations only apply when taxable income before the QBI deduction exceeds $364,200 (married taxpayers filing a joint return) or $191,950 (single and head-of-household taxpayers).

Question 26

Thad, a single taxpayer, has taxable income before the QBI deduction of $221,950. Thad, a CPA, operates an accounting practice as a single member LLC (which he reports as a sole proprietorship). During 2024, his proprietorship generates qualified business income of $150,000, W–2 wages of $125,000, and $10,000 of qualified property. Assume the QBI amount is net of the self-employment tax deduction. What is Thad's qualified business income deduction? ____

Answer 26

12,000 ## Footnote There are three limitations on the QBI 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 services businesses. The second and third limitations only apply when taxable income before the QBI deduction exceeds $383,900 (married taxpayers filing a joint return) or $191,950 (single and head-of-household taxpayers).