Problem 1: Andy is an electrician who generates $140,000 in gross income from his sole proprietorship. He incurs $20,000 of expenses in connection with his business. Additionally, Andy earns $2,000 in interest and $3,000 of dividend income during the year from outside investments. Assume Andy is single, claims a standard deduction of $12,000, and has no other tax items for the year.
Required:
(a) Does Andy qualify to take the § 199A deduction and, if so, determine the amount of his deduction.
(b) What result if Andy does not operate a sole proprietorship, but instead earns $120,000 of compensation income by performing electrical services as an employee of a general contracting company?
(c) Assume the same facts as in (a), above, except that, instead of operating a sole proprietorship, Andy is a 50% owner of an LLC that provides electrical services. The LLC generates $280,000 of revenue and incurs $40,000 of deductible expenses, and allocates all of its profits and losses equally between the two owners.
Problem 2: Chase is a 25% partner in a limited partnership that owns a retail shopping center. The partnership purchased the facility ten years ago for $10 million, $2 million of which was allocated to the underlying land. The partnership generates $1 million of rental income each year, and pays employees $200,000 a year to manage the leasing operations. Assume Chase has sufficient income apart from his share of profits from the partnership to subject him to the full range of limitations under § 199A.
Required: Discuss the application of § 199A to his distributive share of income from the partnership.
Problem 3: Doc is a veterinarian who owns a 25% interest in an LLC that operates a veterinary clinic. Doc's distributive share of profits from the LLC is $120,000, and she is not entitled to receive any guaranteed payments for her services. Doc's spouse earns an annual salary of $80,000 as an employee.
Required:
(a) Assuming Doc and her spouse file a joint return, do they qualify to take a § 199A deduction and, if so, determine the amount of the deduction.
(b) How does your answer change if Doc's distributive share of profits is $500,000?
(c) Assume the same facts as (b) above, except that Doc also owns a 25% interest in a limited partnership that leases a commercial facility exclusively to the veterinarian clinic. Will Doc's distributive share of profits from the real estate partnership qualify for the § 199A deduction? Assume the limited partnership and LLC are owned by the same parties in the same proportions.