Question

Jacob is a member of WCC (an LLC taxed as a partnership). Jacob was allocated $115,000 of business income from WCC for the year. Jacob’s marginal income tax rate is 37 percent. The business allocation is subject to 2.9 percent of self-employment tax and 0.9 percent additional Medicare tax. (Round your intermediate calculations to the nearest whole dollar amount.)

a. What is the amount of tax Jacob will owe on the income allocation if the income is not qualified business income?

b. What is the amount of tax Jacob will owe on the income allocation if the income is qualified business income (QBI) and Jacob qualifies for the full QBI deduction?

Answer 1

Ans:

a. Amount of tax Jacob will owe on the income allocation if the income is not qualified business income:

Sr.No	Particulars	Amount ($)	Explanation
1	Business Income allocation	$115000
2	QBI deduction	Nil	Not a qualified business Income
3	Deduction for 50% of Self employement tax	($1540)	$115000 x 92.35% x 2.9% x 50%
4	Net Taxable Business Income	$113460	Business Income + QBI deduction + Deduction of 50% SE tax = $115000 + 0 - $1540 =
5	Income Tax paid by owner	$41980	Net taxable Business Income x 37% = $113460 x 37% = $41980
6	Self employment tax	$3080	$115000 x 92.35% x 2.9% =
7	Additional medicare tax	$956	$115000 x 92.35% x 0.9% =
	Tax owe by Jacob	$46016	Income tax + Self employment tax + Additional medicare tax

b. The amount of tax Jacob will owe on the income allocation if the income is qualified business income (QBI) and Jacob qualifies for the full QBI deduction:

Sr.No	Particulars	Amount ($)	Explanation
1	Business Income allocation	$115000
2	QBI deduction	($23000)	Sec 199A - Business income x 20%
3	Deduction for 50% of Self employement tax	($1540)	$115000 x 92.35% x 2.9% x 50%
4	Net Taxable Business Income	$90460	Business Income + QBI deduction + Deduction of 50% SE tax = $115000 - $23000 - $1540 =$90460
5	Income Tax paid by owner	$33470	Net taxable Business Income x 37% = $90460 x 37% = $33470
6	Self employment tax	$3080	$115000 x 92.35% x 2.9% =
7	Additional medicare tax	$956	$115000 x 92.35% x 0.9% =
	Tax owe by Jacob	$37406	Income tax + Self employment tax + Additional medicare tax