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Exam 15: Taxing Business Income

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Question 1

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There are three limitations on the qualified business income 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 service businesses.

A) True
B) False

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Question 2

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For purposes of the qualified business income (QBI) deduction, qualified business income does not include certain types of investment income [e.g., capital gains or capital losses, dividends, and interest income (unless properly allocable to a trade or business, such as lending].

A) True
B) False

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Question 3

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Rajib is the sole shareholder of Cardinal Corporation, a calendar year S corporation. In the current year, Cardinal generated a net profit of $350,000 ($520,000 gross income - $170,000 operating expenses) and distributed $80,000 to Rajib. Rajib must report the Cardinal Corporation profit of $350,000 on his Federal income tax return.

Which of the following self-employed individuals are in a specified service trade or business? (circle all that apply) a. Dentist. b. Consultant. c. Architect. d. CPA. e. None of these.

Which of the following is considered qualified property in the calculation of the deduction for qualified business income (§ 199A) ?

The corporate marginal income tax rate is lower than the top individual tax rate.

Tanuja Singh is a CPA and operates her own accounting firm (Singh CPA, LLC) . As a single-member LLC, she reports her accounting firm operations as a sole proprietor. Tanuja has QBI from her accounting firm of $540,000, reports W-2 wages of $156,000, and the unadjusted basis of property used in the LLC is $425,000. Tanuja is married and will file a joint tax return with her spouse. Their taxable income before the QBI deduction is $475,000, and their modified taxable income is $448,000. What is Tanuja's QBI deduction for 2019.

Which of the following taxpayers is potentially eligible for a qualified business income deduction based on the noted activity? (circle all that apply) a. A shareholder of General Electric. b. A sole proprietor operating a restaurant. c. A self-employed doctor. d. Jennifer, owner of a winery operated as an S corporation. e. The Red Cross (a charitable organization).

Under the check-the-box Regulations, a two-owner LLC that fails to elect to be to treated as a corporation will be taxed as a sole proprietorship.

The QBI deduction will reduce both the income tax and self-employment taxes owed by a self-employed individual.

Rebecca and Brad are married and will file jointly. Rebecca earns $300,000 from her single-member LLC (a law firm) She reports her business as a sole proprietorship. Wages paid by the law firm amount to $40,000? the law firm has no significant property. Brad is employed as a tax manager by a local CPA firm. Their modified taxable income is $381,40 (this is also their taxable income before the deduction for qualified business income). Determine their QBI deduction f 2019.

Jake, the sole shareholder of Peach Corporation (a C corporation) has the corporation pay him $100,000. For income tax purposes, Jake would prefer to have the payment treated as a dividend instead of salary.

Ellie (a single taxpayer) is the owner of ABC, LLC. The LLC (a sole proprietorship) reports QBI of $900,000 and is n a specified services business. ABC paid total W-2 wages of $300,000, and the total unadjusted basis of property held b ABC is $30,000. Ellie's taxable income before the QBI deduction is $740,000 (this is also her modified taxable income What is Ellie's QBI deduction for 2019?

A C corporation with taxable income of $100,000 in the current year will have a tax liability of $22,250.

Describe the limitations on the qualified business income deduction that apply to high income taxpayers.

Ben owns and operates a machine repair shop as a sole proprietorship. It generates a profit of about $150,000 annually. The business pays wages of about $50,000 annually. The building and most of the equipment are leased so there is no qualified property. Ben files as single and claims the standard deduction. He has a large unrealized gain in bitcoin that he acquired in 2014 and is wondering when he should sell it and whether he should sell it all in one year or over a few years. Advise Ben as to how the sale of the bitcoin and its resulting capital gain can affect his QBI deduction in 2019.

Donald owns a 45% interest in a partnership that earned $130,000 in the current year. He also owns 45% of the stock in a C corporation that earned $130,000 during the year. Donald received $20,000 in distributions from each of the two entities during the year. With respect to this information, Donald must report $78,500 of income on his individual income tax return for the year.

Employment taxes apply to all entity forms of operating a business. As a result, employment taxes are a neutral factor in selecting the most tax effective form of operating a business.

Once a taxpayer reaches certain taxable income thresholds, § 199A limits the qualified business income (QBI) deduction. These thresholds ($321,400 for married taxpayers filing jointly and $160,700 for all other taxpayers in 2019) are indexed for inflation every year.

Thrush Corporation files its Form 1120, which reports taxable income of $200,000 in the current year. The corporation's tax is $42,000.