Question

Kiyara (single) is a 50 percent shareholder of Jazz Corporation (an S Corporation). Kiyara does not do any work for Jazz Corp. Jazz Corp. reported $350,000 of business income for the year (2020). Before considering her business income allocation from Jazz Corp. and the self-employment tax deduction (if any), Kiyara’s adjusted gross income was $300,000 (all employee salary). Answer the following questions for Kiyara.

Assuming the income allocated to Kiyara is qualified business income, what is Kiyara’s deduction for qualified business income?

What is Kiyara’s additional Medicare tax liability (include all earned income)?

Answer 1

1) Kiyara's share of income from S corporation = $350,000 * 50% = $175,000

Max Qualified business deduction = $ 350,000 * 20% = $70,000

The qualified business income deduction is for people who have “pass-through income” — that’s business income that you report on your personal tax return. However to claim deduction your income level matters. If your total taxable income — that is, not just your business income but other income as well — is at or below $163,300 for single filers or $326,600 for joint filers, then in 2020 you may qualify for the 20% deduction on your taxable business income.

But if your income is above these limits, now’s the time to reach for a bottle of aspirin as above those income limits, your ability to claim the pass-through deduction depends on the precise nature of your business. And even if your business qualifies, there’s a chance you won’t get to enjoy the full 20% tax break, as the qualified business income deduction is phased out for some businesses.

If you’re over the income limit, there are a few tests that determine whether you qualify for the qualified business income deduction. One of such test include the amount of your deduction is based on a calculation tied to the amount of wages you paid to employees (including yourself), as well as the value of the property the business owns. The higher those figures, the better your chances of being able to qualify for the deduction.

Your QBI is limited to whichever of these options is the least:

• 20% of your QBI

OR

• 50% of the company’s W-2 wages OR the sum of 25% of the W-2 wages plus 2.5% of the unadjusted basis of all qualified property. You can choose whichever of these two wage tests gives you a greater deduction.

So, based on above

option I : 20 % of QBI = $ 70,000

Option II: 50% of W-2 wages i.e $300,000 * 50% = $150,000

Allowable deduction is $ 70,000

2)  Taxpayers may be required to pay an Additional Medicare Tax if their income is over a certain limit.The Additional Medicare Tax rate is 0.9 percent. The tax applies to the amount of wages, self-employment income and railroad retirement (RRTA) compensation that is more than a threshold amount i.e $200,000 for single fillers.

So additional medicare tax = 0.9% of ($300,000 - $200,000) = $900