Jacob is a member of WCC (an LLC taxed as a partnership). Jacob was allocated $80,000 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:
|
Computation (A) |
|||
|
S.No |
Amount |
Description |
|
|
1 |
Business Income Allocation |
$ 80000 |
|
|
2 |
QBI Deduction |
$ 0 |
Income Does not qualify |
|
3 |
Deduction of 50% of SE tax |
($1071) |
Business Income Allocation X 0.9235 X 0.029X0.50 |
|
4 |
Net Income Taxable (Business Income) |
$ 78929 |
(Business Income Allocation)-(QBI Deduction +Deduction of 50% of SE tax) |
|
5 |
Income Tax Paid by Owner |
$ 29204 |
Net Income Taxable X 0.37 |
|
6 |
Self Employment Tax |
$ 2143 |
Business Income Allocation X 0.9235 X 0.029 |
|
7 |
Additional Medicare Tax |
$ 665 |
Business Income Allocation X 0.9235 X 0.009 |
|
Owner Level Tax |
$ 32011 |
Income tax Paid by Owner + Self Employment Tax + Additional Medicare Tax |
|
|
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%) |
|||
|
Computation (B) |
|||
|
S.No |
Amount |
Description |
|
|
1 |
Business Income Allocation |
$ 80000 |
|
|
2 |
QBI Deduction |
($ 16000) |
Business Income Allocation X 0.20 |
|
3 |
Deduction of 50% of SE tax |
($ 1071) |
Business Income Allocation X 0.9235 X 0.029X0.50 |
|
4 |
Net Income Taxable (Business Income) |
$ 62929 |
(Business Income Allocation)-(QBI Deduction +Deduction of 50% of SE tax) |
|
5 |
Income Tax Paid by Owner |
$ 23284 |
Net Income Taxable X 0.37 |
|
6 |
Self Employment Tax |
$ 2143 |
Business Income Allocation X 0.9235 X 0.029 |
|
7 |
Additional Medicare Tax |
$ 665 |
Business Income Allocation X 0.9235 X 0.009 |
|
Owner Level Tax |
$ 26091 |
Income tax Paid by Owner + Self Employment Tax + Additional Medicare Tax |
|
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