Sole Proprietorships

Question 1

Sole Proprietorships:

Are sole proprietorships a taxable entity?

Answer 1

No! They are not a separate taxable entity.

Question 2

Sole Proprietorships:

What form is used to report income and expenses?

Answer 2

Income and expenses reported on owner’s Schedule C (Form 1040).

Question 3

Sole Proprietorships:

What percentage of net profit is reported to the IRS?

Answer 3

100%

Proprietor reports all of the net profit from the business, regardless of any amounts actually withdrawn during the year.

Question 4

Sole Proprietorships:

What is the “character” of the income and expenses reported by the proprietor?

Answer 4

Income and expenses of the proprietorship retain their character when reported by the proprietor.

Question 5

Sole Proprietorships:

Is a deduction for qualified basic income available for sole proprietorships?

Answer 5

Yes!

A deduction for qualified business income is available for sole proprietors under IRC §199A.

Question 6

Sole Proprietorships:

What is the deduction for qualified basic income available to sole proprietorships?

Answer 6

In general, the deduction is 20% of proprietorship net income and is claimed on the proprietor’s 1040.

Question 7

Sole Proprietorships:

Ted, a married sole proprietor, has $210,000 of qualified business income and a modified taxable income of $250,000. What is his QBI deduction and final taxable income?

Answer 7

• QBI deduction is the lesser of:
• 20% of qualified business income = $210,000 x 20% = $42,000
• 20% of modified taxable income = $250,000 x 20% = $50,000
• Final taxable income is:
• $250,000 modified taxable income - $42,000 QBI deduction = $208,000

Question 8

Sole Proprietorships:

Higgins, a married sole proprietor, has one employee, who he paid $160,000 this year, and the business has no significant qualified property. Higgins has qualified business income of $500,000 and modified taxable income of $600,000.

What is his QBI deduction?

Answer 8

• QBI deduction is the lesser of:
• 20% of qualified business income = $500,000 x 20% = $100,000
• 50% of W-2 wages = $80,000
• And cannot exceed:
• 20% of modified taxable income = $600,000 x 20% = $120,000

.: The QBI deduction is $80,000

Question 9

Sole Proprietorships:

How is the QBI deduction calculated?

Answer 9

QBI deduction is:

THE LESSOR OF 
• 20% of qualified business income
AND THE GREATER OF:
• 50% of W-2 wages 
• 25% of W-2 wages + 2.5% of unadjusted basis of qualified property 

AND cannot exceed:
• 20% of modified taxable income

Question 10

Sole Proprietorships:

Rupert, a married sole proprietor, has qualified business income of $400,000 and modified taxable income of $500,000.

He pays $150,000 in W-2 wages to his employees, and he bought a building for $600,000 four years ago when the land was worth $100,000.

What is his QBI deduction?

Answer 10

• QBI deduction is the lesser of:
• 20% of qualified business income = $400,000 x 20% = $80,000

• The greater of:
• 50% of W-2 wages = $150,000 x 50% = $75,000
• 25% of W-2 wages + 2.5% of unadjusted basis of qualified property = ($150,000 x 25% =
$37,500) + ($500,000 x 2.5% = $12,500) = $50,000

• And cannot exceed:
• 20% of modified taxable income = $500,000 x 20% = $100,000

.: The QBI deduction is $75k