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REG CPA Practice Questions: The QBI Deduction
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May 3, 2024
In this video, we walk through 5 REG CPA exam practice questions on deducting charitable contributions as itemized deductions. Important Links Link to the free study training webinar mentioned in the video: https://www.superfastcpa.com/strategic-study See the full post for this video: https://www.superfastcpa.com/reg-cpa-practice-questions-explained-how-to-calculate-the-qbi-deduction/ See the other REG walkthrough videos here: https://www.superfastcpa.com/free-reg-cpa-practice-question-walkthroughs/ 00:00 Intro 00:51 Question 1: The Basic QBI Deduction 03:42 Question 2: Applying the QBI Deduction to an SSTB 05:52 Question 3: The General QBI Limitation 08:29 Question 4: Qualified Trade or Business Income Limitation When Over the Phase Out Range 11:55 Question 5: Specified Service Trade or Business Income Limitation When Over the Phase Out Range 14:47 Pillar Topics
View Video Transcript
0:00
Welcome to another Reg Walkthrough video
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I'm Logan and in today's video, we're going to be going over calculating the qualifying
0:06
business income or QBI deduction. And we're going to be doing that the Superfast CPA way, which is diving straight into questions
0:13
to learn the material. If this is the first thing you're seeing from us or if you don't know much about our strategies
0:17
be sure to go to superfastcpa.com and check out our free one-hour training webinar where
0:22
we go over the six key ingredients to passing the CPA exam. The link will be in the description and it will look like this
0:28
It will save you so much time and struggling with your process. Definitely go check it out
0:33
Also, if you like the idea of going through questions to learn the material, be sure to
0:37
check out our Superfast CPA app where we not only have audio notes and review notes that
0:41
you can access, but also five question mini quizzes that you can easily access on your
0:45
phone all throughout your day to continually be learning. With all that said, let's dive straight into the questions. Okay
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As we get into these questions, one thing I want to say about QBI, QBI can be simple
0:57
or it can be extremely complex. As far as the CPA exam goes, we're going to just be covering the basics because that's
1:04
all you need to know for the exam. I personally, when I worked in taxes, really struggled to understand QBI because a lot
1:11
of the situations I was handling were the complex QBI situations. But again, we're going to be doing the more simple and basic stuff for the exam in this video
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So let's go ahead and start with question one. John and Jane Doe are married and file jointly
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They own a small design firm that is considered a qualified trade or business
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This year, the firm made a net profit of $120,000. What is the qualified business income or QBI deduction for John and Jane Doe
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So if you don't know anything about QBI, then you're not going to know how to do this calculation
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So let's go ahead and go straight into the answer to learn what the basics are. Okay
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So 24,000, the basic calculation for the QBI deduction is 20% of the net profit from the
1:54
qualified business. In this scenario, John and Jane Doe's QBI deduction would be 20% of their firm's net
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profit of $120,000, which is $24,000. This calculation is straightforward and does not yet involve any of the limitations that
2:07
can apply to the QBI deduction. Again, there is more complexities. We're going to dive a little bit into some of the limitations in a few questions
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A qualified trade or business for the purposes of the qualified business income deduction
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is any trade or business except for the trade or business of performing services as an employee
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or QTB. Generally, the IRS considers a QTB to be any business under section 162 of the Internal
2:30
Revenue Code, which includes most profit seeking activities that are continuous and regular
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Now with that said, that doesn't mean that if you work in a service industry that you're
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totally blocked from the QBI deduction. Let's read a little bit more
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However, there are specific service businesses known as specified service trades or businesses
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or SSTBs, which may not qualify for the QBI deduction if the taxpayer's income exceeds
2:53
a certain threshold. They can qualify for it underneath a certain threshold
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If the taxpayer's income from an SSTB is below the threshold, the QBI deduction is applied normally
3:04
So applied the same way as it would be to a QTB. SSTBs include fields like health, law, accounting, consulting, financial services, performing
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arts, and others where the principal asset is the reputation or skill of one or more
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of its employees or owners. So it's less about the product and more about what the people can provide
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So we learned the basics there. Essentially, the QBI deduction is typically 20% of the qualifying business income and
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that applies to qualified trader businesses and also to specified service trades or businesses
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although there are limitations that we're going to be learning in the next few questions. So let's go ahead and go to the next question
3:42
Here's question two. Samantha is a successful attorney running her own law practice
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During the tax year, her practice earned a net income of $180,000
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Samantha files as a single taxpayer with a total taxable income of $210,000
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The threshold for a single taxpayer to fully qualify for the QBI deduction without any
4:01
phase out is $250,000 this year. What is Samantha's qualified business income deduction
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Okay, so it sounds to me like this is an SSTB, you know, a service business because she's
4:13
operating a law practice. So let's dive into the answer to see how this differs, if it differs at all from the first question
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Samantha's taxable income is $36,000 and that looks like that's 20% of the qualifying business income. Okay
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Since Samantha's total taxable income is $210,000, which is below the single filer threshold
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of $250,000 for the QBI deduction, her income from the SSTB is fully eligible for the QBI deduction
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The QBI deduction is calculated as 20% of the qualified business income
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Therefore, Samantha's QBI deduction would be 20% of her net income from the practice
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which is 20% of 180,000 coming to $36,000. So this is just another example
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Again, very simple as long as you're underneath that threshold, but now we're starting to
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introduce it. There is a phase out limit. This is not the actual phase out limit for 2023, 2024
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This is just a generic phase out limit because again, in these videos, we're not trying to
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teach you the specific numbers for reg because in all honesty, the AICPA in most situations
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is not trying to test you on specific phase out limit numbers and things like that
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They want to make sure you understand how it works because the numbers are going to
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change from year to year. So we just need to know that there is a phase out limit each year
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And since this is an SSTB, we would need to consider that
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And you do consider it for qualified trades or businesses as well, but it's a little bit different
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But since Samantha is under that threshold, it's treated the same way as it would be if
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this was a qualified trader business instead of an SSTB. Okay. So I just wanted to show how similar they are there
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Now let's start getting into a few of the limitations and let's go to the next question. Okay
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Here's question three. Michael is a single filer who owns a consulting business, which qualifies as a qualified trader business
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His net income from the business for the tax year is $250,000. Additionally, he has a taxable income of $260,000, which includes the net income from his business
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and no net capital gain. The consulting business paid $70,000 in W2 wages
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What is Michael's QBI deduction? Okay. So we've learned the basic 20% QBI deduction
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So see if you can get the correct answer. But as I said, we are going to start introducing some of the limitations in this question and
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the following questions. So go ahead and pause the video if you need to see if you can get the correct calculation
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And when you're ready, come back and we will look at the answer to learn a little bit more about some of the limitations that come up with QBI
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And here is the answer. To determine the QBI deduction, we calculate 20% of Michael's QBI, which is 20% of $250,000
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equaling $50,000. So again, that's normal. However, and we haven't considered this up to this point because we haven't really needed to
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There is a general limitation that states that the deduction is the lesser of all QBI
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deductions or 20% of the taxpayer's taxable income less any capital gain
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Since Michael's taxable income is $260,000 and he has no net capital gain to subtract
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we calculate 20% of $260,000, which equals $52,000. Therefore, the general limitation on his QBI deduction is not triggered and Michael can
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take the full deduction of $50,000. So this is the first limitation and this is an overall limitation, a general limitation
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that you apply to all QBI situations. We haven't really needed to consider it because the total taxable income of each person so
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far has been pretty close to the QBI or the qualified business income
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But this is important because if a person has QBI, but then has a lot of other taxable
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income on top of that QBI, this limitation is important because it can limit how much
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of the QBI the person can take. By the way, this right here, the 20% of the taxpayer's taxable income less any capital
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gain is before the QBI deduction. So you don't take into account the QBI deduction right here
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And also when it says lesser of QBI deductions, that's because you can have qualified business
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income from multiple different sources. So you calculate 20% of all that qualified business income and add that all up together
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and then it's the lesser of that or the 20% of the taxpayer's taxable income less any
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capital gains. So again, this is a general thing that you want to consider for all QBI situations
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So with learning that limitation, let's go to the next question. Okay, here's question four
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Alex is a single filer and the sole owner of a marketing agency, a qualified trade or
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business with a net income of $500,000 for the tax year. His total taxable income for the year is $550,000, which includes the net income from his business
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The agency paid $100,000 in total W-2 wages to its employees and holds qualified property
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with an unadjusted basis immediately after acquisition of $400,000. The threshold for a single filer's taxable income to be eligible for the full QBI deduction
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without any limitations is $170,000. And again, just a reminder, that's not the actual limitation in 2023 or 2024
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It's just for this question. Since Alex's taxable income is well above this threshold, he must consider the limitations
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on his QBI deduction. What is the maximum QBI deduction Alex can claim under the limitations
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Okay, so we learned about the general 20% of taxable income less any capital gains or
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all the QBI deductions together. You know, we learned that general rule, but there are a few more limitations that we want
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to learn in this video that you need to at least know about for the CPA exam
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And with that said, let's go straight into the answer for this one because this is where it starts getting a little bit more complicated
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So the answer would be $50,000. All right, let's dive into this. When the taxpayer's income exceeds the threshold, the QBI deduction will be limited to the greater
9:50
of 50% of the W-2 wages paid by the business or the sum of 25% of W-2 wages plus 2.5% of
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the unadjusted basis of qualified property. Okay, so just before we dive into that calculation, this is for qualified trades or businesses
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And we're going to look at service trades or businesses in the next question
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But for qualified trades or businesses, there is a phase out limit for how much taxable
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income you can have and still have the QBI deduction. And we're not going to dive into the complexities of once you reach the bottom of that limit
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how it calculates in the phase out range. What we're going to talk about is when you're below that phase out range, the QBI deduction
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is normal. And when you're above the full phase out range, so again, we're not talking about all this
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stuff in the middle of the phase out range. Once you're above the phase out range for QTBs, this is the calculation that you do
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So again, it's either 50% of W-2 wages or 25% of W-2 wages plus 2.5% of the unadjusted
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basis of qualified property. So that would be 50% of $100,000, that's $50,000 or the 25% of $100,000 and 2.5% of $400,000
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equaling $35,000. And it's the greater of these two. So between the greater of these two, that's what you take as the QBI limitation or the
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QBI deduction. No longer can you take the 20% of QBI, it is limited to the greater of these two
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Now that again, that can be a little bit complicated and that's about as complicated as we're going
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to get in this video. We're not going to dive in to the complexities of figuring out exactly how much of the QBI
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deduction is limited when you're in the phase out range. We're only talking about when you're below the phase out range and when you're above
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the phase out range for qualified trades or businesses and specified service or trade businesses
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So again, this is the most complicated we're going to get for the CPA exam. I wanted to make sure you knew about this
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Hopefully you won't have to deal with this complicated situation, but I felt it was important
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that you should know about it. Let's go to the last question and see how these kinds of situations affect SSTBs instead
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of QTBs. Okay, here's question five. Emma and Liam are married and file jointly
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Emma is a partner in a health clinic, which is considered a specified service trade or business
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The clinic earned a net income of $450,000 for the tax year, which represents Emma's
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share of the QBI. The couple's total taxable income, including Emma's QBI, is $700,000
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The threshold for the full QBI deduction for married couples filing jointly is $340,000
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with a phase out range up to $440,000. So again, the range in this situation is $340,000 to $440,000
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There's calculations that can happen in between there, but we're only focusing on the fact
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that they are actually way over that max phase out range. So given their income level, how much is the QBI deduction for Emma's share of the clinic's income
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Again, this is different for SSTBs compared to QTBs. So let's go into the answer to see how this works
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Okay, so the answer is $0. So for SSTBs specifically, this is how it works
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Since Emma and Liam's combined taxable income of $700,000 exceeds the phase out range for
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the QBI deduction for an SSTB, Emma is not eligible for the QBI deduction for her share
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of the clinic's income. The threshold and phase out range for married couples filing jointly mean that the QBI deduction
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completely phases out above $440,000 of taxable income. Therefore, the QBI deduction for Emma's SSTB income would be $0
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Okay, so this is different than with a qualified trade or business
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When it comes to qualified trades or businesses, once you pass that phase out range limit
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that's when the full 50% of W-2 wages or 25% and 2.5%, you know, that whole rule that we
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just went over for QTBs, that's when that applies. So you can still take some of the QBI deduction with QTBs, even if you're over the phase out range
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But with SSTBs, once you're in that phase out range, it starts diminishing the deduction
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And once you're above the full range, your taxable income is just too high
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You don't get to take the QBI deduction at all for SSTBs. So that's the difference there
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And that's what I wanted to go over in this video was the basic calculation
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And this is what you'll encounter in most situations on the CPA exam is just 20% of
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QBI, or sometimes it is the lesser of, you know, all the QBI deductions or the taxpayer's
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20% income, less any capital gains. That's about as complicated as it will probably normally get
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But just in case you ever see this, if you're ever above the range for a QTB, you may need
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to apply the 50% of W-2 wages or 25% and 2.5% of the unadjusted basis
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Or if it's an SSTB, if you're above that range, you don't get to deduct any of the QBI
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So with that said, let's go ahead and finish the video by doing one more part of the super
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fast CPA strategy, which is something called pillar topics. Pillar topics is essentially as you're going through the questions and after you go through
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the questions to learn the material, you will notice the three or four things that you obviously
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were supposed to learn from those questions. These are things that you constantly saw throughout the questions and that your review course
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was obviously trying to teach you. So you take a second and write those down so that you know them for the future
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So let's go ahead and look at the pillar topics for this video. Okay, here are the pillar topics and we're going to go over them to finish the video
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The QBI deduction is typically 20% of qualified business income from a QTB or an SSTB
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So again, typically it's the 20% of the QBI. If the taxpayer has taxable income other than the QBI, then you do need to take into consideration
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the general QBI deduction limit, which is taking the lesser of all QBI deductions or
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20% of the taxpayers taxable income less any net capital gains. And again, that's before taking the QBI deduction
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The QBI deduction is applied the same way for QTBs or for SSTBs if the taxpayer's taxable
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income without the QBI deduction is below a certain threshold. So again, if you're underneath the threshold, it's the same whether you're a QTB or an SSTB
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Once their income passes the threshold, that's when the other limitations start applying
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QTBs start to look at W2 wages paid and unadjusted basis of assets put into service to start
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reducing the QBI deduction. SSTBs start reducing the QBI deduction in the phase out range
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And once above the phase out range, the QBI deduction is not allowed to be taken
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So again, this is the most complicated it gets. We didn't go over how it works in the phase out range because that's where it gets the
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most complex because you're still taking into account the W2 wages and the unadjusted basis
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in the range, but it affects it differently depending on how far into the range you are
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And same thing with SSTBs, the calculation is phased out in the range, but we didn't
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go over how to calculate that. So the most important thing you need to know is that when you're underneath the phase out
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range, this is what you focus on. And when you are over the phase out range, you apply this limitation for QTBs and for
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an SSTB, you don't get to take the QBI deduction at all. With that said, that is the end of the video
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Just as a reminder, be sure to go to superfastcpa.com and check out our free one-hour webinar training
17:02
We teach the six key ingredients passing the CPA exam. It will be well worth your time
17:07
Also, if you'd like to go into the questions as your main learning material, make sure you check out our SuperfastCPA app where we have five question mini quizzes that you can
17:14
continually access throughout your day to always be learning and improving. If you liked this video, make sure to like it and leave a comment
17:21
I hope this was helpful and I will see you in the next video
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