Question

Jacob is a member of WCC (an LLC taxed as a partnership). Jacob was allocated $60,000 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

SOLUTION:

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

PARTICULARS	AMOUNT($)	EXPLANATION
1. Business Income Allocation	60,000
2. QBI deduction	NIL	Business Income is not Qualified Business Income(QBI)
3. Deduction of 50% of SE tax	(803)	60,000*0.9235*0.029*0.5
4. Net Taxable Business Income	59,197	(1) + (2) + (3)
5. Income Tax Paid by Owner	21,903	59,197*0.37
6. Self Employment Tax	1,607	60,000*0.9235*0.029
7. Additional Medicare Tax	499	60,000*0.9235*0.009
Amount of Tax Jacob will owe	24,009	(5) + (6) + (7)

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?

PARTICULARS	AMOUNT($)	EXPLANATION
1. Business Income Allocation	60,000
2. QBI deduction	(12,000)	60,000*20% (Section 199A)
3. Deduction of 50% of SE tax	(803)	60,000*0.9235*0.029*0.5
4. Net Taxable Business Income	47,197	(1) + (2) + (3)
5. Income Tax Paid by Owner	17,463	47,197*0.37
6. Self Employment Tax	1,607	60,000*0.9235*0.029
7. Additional Medicare Tax	499	60,000*0.9235*0.009
Amount of Tax Jacob will owe	19,569	(5) + (6) + (7)