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%. The business allocation is subject to 2.9% of self-employment tax and 0.9% 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 duduction?

Answer 1

A) $40,014

Computation:-

	Amount	Description
1) Business income allocation	$1,00,000
2) QBI deduction	0	income does not qualify
3) Deduction for 50 percent of SE tax	($1,339)	(1) × 0.9235 ×0.029 ×0.5
4)Net income taxable business income	$98,661
5) income tax paid by owner	$36,505	(4) × 0.37
6) self employment tax	$2,678	(1) × 0.9235 × 0.029
7) Additional medicare tax	$831	(1) × 0.9235 × 0.009
Owner - level tax	$40,014	(5) + (6) + (7)

Note:- 92.35% rate is derived by the fact that self employed tax payers can deduct the employer's portion of tax, which is 7.65% (100% - 7.65% = 92.

35%)

(B) $32,614

	Amount	Description
1) Business income allocation	$1,00,000
2) QBI deduction	($20,000)	$1,00,00 × 20%
3) Deduction for 50 percent of SE tax	($1339)	(1) × 0.9235 × 0.029 ×0.5
4) Net income taxable business income	$78,661
5) income tax paid by owner	$29,105	(4) × 0.37
6) self employment tax	$2,678	(1) × 0.9235 × 0.029
7) Additional medicare tax	$831	(1) × .9235 × 0.009
Owner - level tax	$32,614	(5) +(6) +(7)