Rachel is an engineer who practices as a sole proprietor. This year, Rachel had net business income of $500,000 from her business. Assume that Rachel pays $20,000 wages to her employees, she has $500,000 of property (unadjusted basis of equipment she purchased last year), she has no capital gains, and her taxable income before the deduction for qualified business income is $380,000. Calculate Rachel's deduction for qualified business income.
What will be an ideal response?
$17,500.
Engineering is a qualified trade or business. So, Rachel is eligible for the deduction for qualified business income. Rachel is limited by the wage-based limitation because her taxable income is above $160,700. Her deduction of 20 percent of her qualified business income ($500,000 × 20% = $100,000) is limited to the greater of (a) 50 percent of her wages paid ($20,000 × 50% = $10,000) or (b) 25 percent of her allocable wages ($20,000 × 25% = $5,000) plus 2.5 percent of the unadjusted basis of qualified property ($500,000 × 2.5% = $12,500). Thus, the wage limit reduces her potential deduction for qualified business income to $17,500. Rachel is not limited by the taxable income limitation because 20 percent of her qualified business income ($500,000 × 20% = $100,000, limited to $17,500 by the wage limit) is less than 20 percent of her taxable income before the deduction ($380,000 × 20% = $76,000). Thus, she may deduct $17,500 as a deduction for qualified business income.
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