Question

3.Jacob is a member of WCC (an LLC taxed as a partnership). Jacob was allocated $120,000 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. What is the amount of tax Jacob will owe on the income allocation if the income is not qualified business income?

4.Same facts as in Question 3 above. 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

3	Amount of tax Jacob will owe on the income allocation if the income is not qualified business income
		Particulars		Amount (in $ currency)
	a	Allocated business income for the year	=	120,000
	b	Qualified business income	=	0
	c	Deduction of Self employment tax @50%	=	Allocated business income x 0.9235 x Self employement tax x 50%
			=	120,000 x 0.9235 x 0.029 x 0.5
			=	$1,606.89
	d	Net taxable business income (a-b-c)	=	118,393.11
	e	Income tax paid by Jacob (d x 37%)	=	Net taxable business income x Marginal income tax rate
			=	$ 118,393.11 x .37
			=	$43,805.45
	f	Self employment tax	=	Business income x 0.9235 x 2.9%
			=	$ 120,000 x 0.9235 x .029
			=	$3,213.78
	g	Additional medicare tax	=	Business income x 0.9235 x 0.9%
			=	$ 120,000 x 0.9235 x .009
			=	$997.38
	h	Total tax Jacob owe ( e+f+g)	=	$48,017
4	Amount of tax Jacob will owe on the income allocation if the income is qualified business income
		Particulars		Amount (in $ currency)
	a	Allocated business income for the year	=	120,000
	b	Qualified business income	=	Business income x 20% ( as he qualifies for full deduction)
			=	120,000 x .2
			=	$24,000
	c	Deduction of Self employment tax @50%	=	Allocated business income x 0.9235 x Self employement tax x 50%
			=	120,000 x 0.9235 x 0.029 x 0.5
			=	$1,606.89
	d	Net taxable business income (a-b-c)	=	94,393.11
	e	Income tax paid by Jacob (d x 37%)	=	Net taxable business income x Marginal income tax rate
			=	$ 94,393.11 x .37
			=	$34,925
	f	Self employment tax	=	Business income x 0.9235 x 2.9%
			=	$ 120,000 x 0.9235 x .029
			=	$3,213.78
	g	Additional medicare tax	=	Business income x 0.9235 x 0.9%
			=	$ 120,000 x 0.9235 x .009
			=	$997.38
	h	Total tax Jacob owe ( e+f+g)	=	$39,136