Margarita operates a sole proprietorship that earns $100,000 of qualified business income after deducting salaries of $300,000. The sole proprietorship is not a specified service business. She files a single tax return for 2019. Assume her taxable income before the QBI deduction is $175,000. Margarita's QBI deduction for 2019 is:

Margarita's QBI deduction for 2019 is

$20,000

Explanation:

What is the qualified business income deduction?

The qualified business income (QBI) deduction, also known as Section 199A, allows owners of pass-through businesses to claim a tax deduction worth up to 20 percent of their qualified business income. It was introduced as part of the 2017 Tax Cuts and Jobs Act.

A pass-through business is a sole proprietorship, partnership, LLC or S corporation. The term “pass-through” comes from the way these entities are taxed. Unlike a C corporation, which pays corporate federal income taxes, a pass-through entity’s business income “passes through” to the owner’s individual income tax return. In other words, “the business” doesn’t file taxes, the owners do.

Qualified business income is the business’ net income, with a few exceptions.

QBI doesn’t include:

• investment income, such as capital gains or losses, dividends, or interest.

• income from businesses located outside of the U.S.

Margarita's QBI deduction for 2019 is;

20% × $100,000 = $20,000

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