Outdoors Meeting

Section 199A 20% QBI Deduction Examples

  • Catherine makes $100,000 in net business income from her sole proprietorship, and deducts $5,000 for self-employed health insurance, $7,065 for self-employment taxes and $10,000 for a SEP IRA. These adjustments can be found of Catherine's Form 1040 to calculate adjusted gross income. Catherine's deduction will be the lessor of 20% of $77,935 (net business income after deductions above) or 20% of her taxable income, which could be less.

  • Mark owns three rentals with net incomes of $20,000 and $5,000, with one losing $8,000 annually. These are aggregated to be $17,000. He would deduct 20% of $17,000.

  • Greg has passive losses that carried forward and are “released” because he now has net rental income, those passive losses are taken first. With using the same example above with $10,000 in passive loss carried forward, Barney’s deduction would equal $17,000 less $10,000 or 20% of $7,000.

  • Christine earns $100,000 from her pass-through business but reports $80,000 of taxable income on her tax return due to other deductions such as her itemized deductions. Her Section 199A deduction would be $16,000 since it limited by the lessor of 20% of $100,000 or $80,000.

  • Bob operates an online retailer S corporation which pays $100,000 in W-2 wages and earns $400,000 in net qualified business income. Because he is considered a “high earner” by exceeding the income limits, his deduction is limited to 50% of the W-2 or $50,000 which is less than 20% of $400,000. $ 50,000

  • Sam operates as a sole proprietor and earns $500,000 but does not pay any W-2 wages, his deduction is the lessor of 50% of the W-2 wages (or $0 in this example) or 20% of the $500,000. If Sam paid out $200,000 in wages and had $300,000 in net business income, his Section 199A deduction would be the lessor of 50% of $200,000 or 20% of $300,000. Bob would deduct $60,000. If Sam operates as a specified service trade business, Sam would completely phase out of the Section 199A deduction by exceeding the income limit of $207,500 and $415,000. Ouch.

  • Michael is single and operates an S Corp as an architect. Michael earns $100,000 in net qualified business income after paying $50,000 to himself in W-2 wages. Michael takes the full Section 199A deduction of 20% of $100,000

  • Christine is a landlord and earning $500,000 in rental income. Christine does not pay herself a W-2 salary as she is operating the properties (passive income) as an individual. Christine purchased the properties for a $1,000,000 (the unadjusted basis). Christine's deduction is $100,000.

50% of $0 is $0 (W-2 limit calculation), 2.5% of $1,000,000 is $25,000 (depreciable asset    limit calculation). Section 199A is limited to the lessor of $100,000 as compared to the greater of $0 (W-2)  and  $25,000 (depreciable assets).

199A QBI Deduction
Examples