Alex and Megan are both clients of the firm. They are unmarried but live together at 123 Sounder Lane, Anytown. They both came in with questions about their 2020 taxes and, in particular, are wondering about their QBI deductions. They also want to know how much tax they will owe for 2020.

I met with Alex and Megan today, and I’ve summarized the relevant issues for you below. Assume that all of the below information is correct, each will use a single filing status and the standard deduction, and that they have no other tax considerations beyond what is below.

Please complete the assigned task activity, and then prepare a client letter for each of them. They both want to learn about how the calculations were made, so if you could summarize those as well (perhaps in a table), that would be helpful.

My Notes, and Your Tasks:

Alex operates a sole proprietorship where she trains elite high school athletes. During 2020, her business generates $155,000 of business income, $47,000 of deductible business expenses (including her self-employment tax deduction, utilities, and insurance), and $4,400 of interest income from her business deposits. She has no other sources of income.

Task: Calculate Alex’s AGI, QBI deduction, taxable income, and amount of tax due. Use the tax tables to find the tax due.

Megan has taxable income from her legal practice before the QBI deduction of $193,300. She operates her practice as a single member LLC (which she reports as a sole proprietorship). During 2020, her proprietorship generates qualified business income of $180,000, W–2 wages of $135,000, and $15,000 of qualified property.

Task: Calculate Megan’s AGI, QBI deduction, taxable income, and amount of tax due. Use the tax tables to find the tax due.