Question

Jacob is a member of WCC (an LLC taxed as a partnership). Jacob was allocated $100,000 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 .9 percent additional Medicare tax.

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:

1)

Particulars	Amount	Working
Business income allocation	$100,000
QBI deduction	$0	Income doesn't qualify
Less: Deduction for 50% of SE tax	($1,339)	($100,000*92.35%*2.9%*50%)
Net income taxable business income	$98,661
Income tax paid by owner	$36,504	($98,661*37%)
Self employement tax	$2,678	($100,000*92.35%*2.9%)
Additional medicare tax	$831	($100,000*92.35%*0.9%)
Owner level tax	$40,013	($36,504+$2,678+$831)

2)

Particulars	Amount	Working
Business income allocation	$100,000
Deduction for 50% of SE tax	($1,339)	($100,000*92.35%*2.9%*50%)
QBI deduction	$19,732	($100,000 -$1,339)*20%
Net income taxable business income	$78,929	($100,000 -$1,339-$19,732)
Income tax paid by owner	$29,204	($78,929*37%)
Self employement tax	$2,678	($100,000*92.35%*2.9%)
Additional medicare tax	$831	($100,000*92.35%*0.9%)
Owner level tax	$32,713	($29,204+$2,678+$831)

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