Key Takeaways
- Reasonable Compensation: 5-factor Elliotts test.
- QBI (§199A): 20% deduction for pass-through income.
- Tax Year 2024 QBI thresholds: $191,950 (Single), $383,900 (MFJ).
- SSTB phase-out: complete at $241,950 (Single), $483,900 (MFJ).
- S-Corp: SE tax savings but salary required.
- C-Corp: tax-free fringe benefits for shareholder-employees.
Last updated: January 2026
Entity Selection: Reasonable Comp & QBI
Why This Matters for the Exam
Reasonable Comp and QBI are heavy exam topics. Know the thresholds and SSTB rules.
Expect at least 3-4 questions on entity selection.
Reasonable Compensation (5 Factors)
| Factor | Description |
|---|---|
| 1. Role | What does owner do? (Hours, responsibilities) |
| 2. External comparison | What would non-owner be paid? |
| 3. Company condition | Size, complexity, profitability |
| 4. Conflict of interest | Is salary a tax avoidance tool? |
| 5. Internal consistency | Compare to other executives |
QBI Deduction (§199A) - Tax Year 2024
| Filing Status | Threshold | Fully Phased Out |
|---|---|---|
| Single/HOH | $191,950 | $241,950 |
| MFJ | $383,900 | $483,900 |
SSTB (Specified Service) Treatment
| Income Level | SSTB Deduction |
|---|---|
| Below threshold | Full 20% |
| In phase-out range | Partial |
| Above phase-out | $0 |
S-Corp vs. C-Corp Fringe Benefits
| Benefit | S-Corp (>2% owner) | C-Corp |
|---|---|---|
| Health insurance | Included in W-2 | Tax-free |
| Group life (≤$50k) | Included in W-2 | Tax-free |
| Educational assistance | Limited | Tax-free |
Real-World Scenario
Scenario: MFJ accounting firm (SSTB) with $500,000 taxable income.
- Threshold: $383,900.
- Fully phased out: $483,900.
- $500,000 > $483,900
- QBI deduction: $0 (fully phased out).
On the Exam
Expect 3-4 questions on selection, typically:
- Threshold Questions: "MFJ QBI threshold?"
- SSTB Questions: "$500,000 SSTB income—QBI deduction?"
- Reasonable Comp Questions: "What triggers Elliotts test?"
The key is to remember: QBI = 20%. MFJ threshold = $383,900. SSTB above $483,900 = $0. S-Corp = salary required. C-Corp = tax-free fringes.
Test Your Knowledge
MFJ accounting firm (SSTB), $500,000 taxable income. QBI deduction?
A
B
C
D
Test Your Knowledge
Tax Year 2024 QBI threshold for Single filers?
A
B
C
D
Test Your Knowledge
Which entity offers tax-free health insurance to shareholder-employees?
A
B
C
D