question archive Alice is a world famous chef who operates Chez Panache (“Chez"), a restaurant structured as an Scorporation
Alice is a world famous chef who operates Chez Panache (“Chez"), a restaurant structured as an Scorporation
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Alice is a world famous chef who operates Chez Panache (“Chez"), a restaurant structured as an Scorporation. She is the sole shareholder. In the current year, Chez generates $2.5 million of gross receipts and incurs $1 million of deductible operating expenses. In addition, the corporation pays Alice a salary of $200,000 and $400,000 in wages to other employees. Chez's net income is thus $900,000, all of which passes through to Alice, who has no income from other sources. Assume that the corporation does not own any "qualified property" within the meaning of $ 199A(b)(6).
(a) Consider whether Alice is entitled to a $ 199A deduction with respect to her income from Chez's business.
(b) Same as (a), above, except Chez does not pay Alice any salary, so that her share of net profits from the business is $1.1 million.
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Answer:
Step 1
QBI- Qualified Business Income is defined as the business incomes, gains, or any sort of profits which are earned due to the regular and legal business trades. The taxation authority has set certain threshold limits for the QBI deductions which are based upon the type of income and limit of the incomes earned by the taxpayer.
Step 2
- Yes, Alice is entitled to a Section 199A deduction, but only up to 20% limit of the operating business income. That is, she is eligible to deduct only 20% of her salary that is $200,000. The amount of deduction will be $40,000.
- As Alice will not receive any amount of salary that means the entire net profit of the business that is of $1.1 million will be allowed for the QBI deduction under section 199A. So, the deduction entitled will be $0.22 million or $220,000.
