SEE-1 - Deductions and Credits (20% of the exam) - Section 3.2

Calculate the Qualified Business Income (QBI) deduction under Section 199A, including income thresholds, W-2 wage limitations, and specified service trade or business rules.

Calculate the Section 199A qualified business income (QBI) deduction, applying the W-2 wage and unadjusted basis limitation that phases in above the taxable income threshold. Recognise that owners of a specified service trade or business (SSTB) - such as law, health, or consulting - lose the deduction entirely once income exceeds the upper phase-out limit.

Section 199AQBI deductionSpecified service trade or businessW-2 wage limitation

Practice question for this objective

Free sampleDeductions and Creditshard

Felicity Aldenmoor is single and runs an independent financial-advisory practice, a specified service trade or business (SSTB). For 2024 the practice produces qualified business income of 200,000 dollars and pays W-2 wages of 70,000 dollars, with no qualified property. Her taxable income before the QBI deduction is 300,000 dollars, which exceeds the 241,950 dollar top of the Section 199A phase-out range for a single filer, and she has no net capital gain. What is her Section 199A qualified business income deduction for 2024?

A0 dollars Correct
B40,000 dollars
C35,000 dollars
D14,000 dollars

Recognise that an SSTB produces no Section 199A deduction once taxable income exceeds the upper end of the phase-out range. Above the upper threshold the specified-service exclusion is fully phased in, so the applicable percentage of an SSTB's qualified business income, W-2 wages, and unadjusted basis is zero; with no qualified business income remaining there is nothing for the wage limitation to cap and the deduction for that business is zero.

Why A is correct: For a specified service trade or business with taxable income above the upper threshold, the SSTB's QBI, W-2 wages, and qualified property are all reduced to zero, leaving no qualified business income and a deduction of zero.

Why B is wrong: This is 20 percent of the 200,000 dollar qualified business income as though the practice were a qualifying business, but above the upper threshold none of an SSTB's income counts as qualified business income.

Why C is wrong: This applies the W-2 wage cap of 50 percent of 70,000 dollars as if the practice were a non-service business above the threshold, but the SSTB exclusion removes the income before any wage limitation is reached.

Why D is wrong: This treats the W-2 wage limitation as 20 percent of the 70,000 dollars of wages, but the wage limitation is never applied to an SSTB above the upper threshold because its income is excluded entirely.

See more SEE-1 practice questions, answers explained.

Exam traps in Deductions and Credits

Answers that look right on this material and are not. Each one is a distractor from a different question in the SEE-1 bank for this domain.

Both the W-2 wage limitation and the SSTB exclusion apply, so only the non-service business qualifies
Why it is wrong: This describes treatment above the threshold; below the threshold neither restriction is in force, so the statement overstates the limitations that apply to Devon.
20,000 dollars
Why it is wrong: This computes each business separately, capping the first at 50 percent of its 20,000 dollar wages equals 10,000 dollars and the second at its 20 percent of 50,000 equals 10,000 dollars, for 20,000 dollars total, but a valid aggregation combines the figures before applying the limit.
20,000 dollars, because the deduction is capped at 50 per cent of the 40,000 dollars of W-2 wages paid by the business.
Why it is wrong: This applies the full W-2 wage limitation as though Marcus were above the top of the phase-in range. Inside the phase-in range the wage limitation is only partially applied, so capping at the full 50 per cent figure of 20,000 dollars overstates the limitation and understates the deduction.

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