 Hello and welcome to this session in which we would look at the limitation on qualified business income deduction section 199. Now before we start I would like to do a quick review of what we learned so far because it's important that you know the prior knowledge. The first thing in the first session what we did is we learned generally speaking about what is the qualified business income deduction which is the lesser of qualified business income or modified taxable income assuming no limitation that's the general rule then we stated that Congress is a generous to a point and the point becomes we have limitation just like everything in taxation well we learn about one limitation in the prior session which is that applies to high income taxpayer that have non SSB businesses specified service business and in the prior sessions we make sure we understood what's taxable income what's qualified business income what's modified taxable income what's a qualified trade or business so if you are not familiar with these terms because we're going to be using some of the formulas that we learned in the prior session for example the limitation how it applies to high income taxpayer the same formula or slightly adjusted will apply to specified service business which we'll be discussing in this session we looked at the three limitation of the three limitation we looked at the overall limitation that's done in the prior session we covered the limitation that applies to high income taxpayers in this session we're going to work the formula that applies to certain type of service businesses specified service businesses let's go ahead and get started before we proceed any further i have a public announcement about my company farhat lectures dot com farhat accounting lectures is a supplemental educational tool that's going to help you with your cpa exam preparation as well as your accounting courses my cpa material is aligned with your cpr view course such as becker roger wiley gleam myles my accounting courses are aligned with your accounting courses broken down by chapter and topics my resources consist of lectures multiple choice questions true false questions as well as exercises go ahead start your free trial today it's very important to go back and look at the threshold and in the prior session i had a slight slight mistake here the taxable income for single starts at 181 100 not 81 200 it's a slight mistake to simply put if you are a single taxpayer your taxable income is below 181 182 100 it doesn't matter you're gonna go you're gonna get the full 20 qbi deduction if your income exceeds 181 100 up to 231 200 which is an a 50 000 dollar range once you get to 230 to 100 here it depends whether you're an ssp business or a non ssp business if you're an ssp business you are done if you're a non ssp business see prior session how to do that if you are within the range of an ssp business then this is what we would learn in this session same thing applies to merit file in germany except the threshold starts at a higher amount we have a bigger range and the upper limit is obviously bigger you are dealing with a merit filing jointly so what is an ssp or specified specified the service business we discuss this but well let's do we discuss this in the prior session but let's do it again doctors dentists lawyers accountant consultant investment advisor entertainers athletes coaches youtubers mentors financial advisors any business where you the individual is the business itself your reputation your expertise your abilities your initiative is the business itself is a is an ssb an ssp business okay so that's why it's important to differentiate whether it's an ssp or a non ssp business so if it's a non ssp business okay if it's a non ssp business what's going to happen we're going to have a limitation based on wages other than yourself and capital investment in the same form same format that we use for the non ssp business we're going to be using this session with a slight adjustment adding to it something called the applicable percentage don't worry we'll look at it just also know that engineers and architects are not considered ssbs now for ssbs the irs they're trying to be fair there's something called the minimus rule states that a trade won't be categorized as a specified service or an ssp simply because it provides a limited amount of service in a specified activity so simply put you might have a business where some of your some of the work that you do is considered specified service well if it's some of the work you're fine but what's some of the work well if your business has a gross receipt of 25 million or less you could have up to 10 percent of specified service and still be considered non ssp business if your business has more than 25 million in gross receipts you could still have a little bit of specified service but only five percent okay simply put less than 25 million you could have up to 10 percent of your services a specified service income more than 25 percent you have five percent allowed let's take a look at an example computer services generates 10 million in annual revenue great they sell computers 10 9.5 million of the 10 million is selling computers and peripheral equipment what about the remaining half a million that revenue comes from consulting installation and training services which is considered a specified service now since the consulting service the other service accounts for less than 10 percent half a million divided by 10 million is five percent and this business is what this is less than 25 million in sales therefore the company overall still considered a non specified business so they're good to go they don't fall under the specified service business so simply put how about if let's assume you're less than 25 percent and less than 25 million and 12 percent of your business is specified service business are you tainted is the whole business tainted now well the the minimus rule provides some relief okay because a lot of businesses it's hybrid but what happened if you exceed that amount does the entire business get affected for example if you have a hybrid business total sales 10 million of that 7.5 is product sale 2.5 is specialized consulting and service business well based on the current limitation if those this is the same business you are tainted you are tainted as an ssp business because 25 percent of your income is from from services so what can be done from a tax planning perspective here what what can be done you have to treat the other business separately separate employees separate sets of books separate banking account separate billing if you can do that then you can separate if you can separate those businesses in actuality which is you might be able to then you have two two type of businesses then this will be non ssb and this will be treated as an ssb business now let's dive into how we compute the limitation for ssp because this session is all about ssp's once again if you are below the lower threshold there's nothing to do you get the 20 deduction if you once you reach the threshold you are done no deduction for you so the only thing we have to focus on is the rate if one when someone is an ssp business and fall within the range the first thing we have to do is we have to compute something called the applicable percentage how do we compute this we're going to take 100 percent just given to us minus the taxable income minus the lower threshold divide this by the range what's the range depending whether you are single the range could be 50 000 merit filing jointly the range is 100 000 let's plug in some numbers 2023 a single taxpayer has modified the income of 217 of which 217 means in between between 182 and 232 150 attributable to sole proprietorship and accounting that pays wages of 100 000 that's fine let's compute the applicable range we're going to take taxable income to 17 100 minus 182 let's see how much is that to 17 minus 180 to 100 that's 35 000 you are 35 000 above the upper above the lower limit 35 000 divided by the range that's 70 percent 100 percent minus 70 percent equal to 30 percent so the applicable percentage is 30 percent it means you are only going to include when you do the qbi deduction 30 percent of that and when you do the wages you're going to only include 30 percent and when you include the asset the unadjusted asset you're going to multiply by 30 percent so it's going to go back and remind ourselves how do we how do we limit the how do we do the limitation based on wages and capital investment well we're going to compute the greater of 50 percent of the w2 wages or 25 percent of the w2 wages plus 2.5 percent of the unadjusted basis of a qualified property and remember of these two a and b we choose the greater the greater of a and b then we compare the greater to the qbi don't worry we're going to look at an example let's assume in 2023 sarah and john have a combined taxable income of 400 000 200 prior to the qbi well what's relevant about this number well the range goes from 364 200 to 464 200 so they fall in this category and we're going to assume this is an ssb uh taxpayer remember if the taxpayer falls below this amount they're good they'll get the 20 qbi or modified taxable income the lower of these two if they fall above this amount of their sbi the answer is zero they don't get anything but we are in between so what do we have to do if we are in between well sarah works part-time as a financial advisor which is characterized as specified service business sarah's qbi amount to 75 000 and she pays an employee 20 000 worth of wages so she has wages in her business also sarah has a business property with an unadjusted basis of 90 000 so we have wages and we have property now we're going to compute how much can sarah and john takes and qualified business income deduction well it's a it's an ssb business so we have to compute first the applicable percentage which is 100 minus the 400 200 taxable income minus the lower threshold so they are how much if we take 400 minus 364 there are 36 000 into the threshold divided by 100 000 it's 36 percent 100 percent minus 36 percent the applicable range is 64 percent now we are ready to compute few figures we're going to take first qbi times 20 percent this is what we always do remember we do qbi times 20 percent the only difference here is we have an ssb business and that ssb business fall within the range so what we do is we'll take these figures and multiply by this applicable percentage so we'll get an answer of 9600 then this is the first number the second number it's not gonna it's not gonna be the greater of it's gonna be the greater of not it's gonna be the greater of 20 000 times 50 percent which is w2 wages 20 000 that she pays her employee times 50 percent times 64 percent again if this was not an ssb if we are dealing with a high income taxpayer non ssb we don't have to prorate by the percentage 6400 a b the other computation is wages times 25 percent times 64 percent that's 60 64 plus 2.5 percent times 90 000 times 64 percent let me fix this 64 percent i know the computation is right let me fix this times 64 percent and this is gonna give us the second computation is 4640 dollars well between 6400 and 4664 we choose the greater of these two lower of 9600 and the greater of these two a and b 6400 and the answer will be 6400 but that's not what we are dealing with we are dealing with an ssb that falls within the range so we have to use the same formula that we used from the prior session we have to find the difference between the general 20 percent qbi which we just did it's 6 9600 9600 and w2 wages capital slash capital investment amount which is 6400 the difference between those two this is step one step two find the reduction percentage there's an applicable percentage and there's a reduction percentage the reduction the reduction percentage is your taxable income before qbi minus the threshold divided by the range the range here happens to be 100 000 for this purpose for the purpose of this example step three find the the reduction in the wages which is by taking step one times step two then step three a step four taking whatever we got in step three and deduct this from the 20 qbi deduction don't worry i'm gonna show you the numbers on the next slide starting with step one find the difference i just showed you the numbers which is 9600 minus 6400 step two calculate the reduction ratio well taxable income 400 200 minus the threshold divided by 100 000 the reduction ratio is 36 percent now we're gonna step three step one times step two which is 3200 step one times step two 36 percent will give us the reduction amount of the wages 11 52 step four take 20 of qbi which is 9 000 i'm sorry 3200 now i'm sorry 9600 minus 1152 which will give us 8 448 so this will be the qbi what should you do now if you have what you do now is go to farhat lectures and look at additional resources examples that's gonna help you understand this topic better lectures multiple choice true false additional maybe examples i'll be posting and this will help you tremendously qbi is important whether you are an enrolled agent CPA exam candidate or accounting student good luck study hard and of course stay safe