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Exam 15: Taxing Business Income

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Question 21

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What is a limited liability company? What favorable nontax and tax attributes does the LLC entity form offer taxpayers?

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Similar to the corporate entity form, a ...

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Question 22

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There are three limitations on the qualified business income deduction.An overall limitation (based on modified taxable income), another that applies to high income taxpayers, and a third that applies to certain types of services businesses.

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Question 23

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Qualified property is used to determine one of the limitations to the qualified business income (QBI) deduction. Specifically,2.5 percent of the unadjusted basis (immediately after acquisition) of "qualified property is added to 50 percent of W-2 wages to determine this limitation.

Double taxation of corporate income results because dividend distributions are included in a shareholder's gross income but are not deductible by the corporation.

Jenna Parker owns and manages her single member LLC which provides a wide variety of financial services to her clients.She is married and will file a joint tax return with her spouse, Paul.Her LLC reports $300,000 of net income, W-2 wages of $120,000, and assets with an unadjusted basis of $75,000.Their taxable income before the QBI deduction is $285.000 (this is also their modified taxable income) .What is their QBI deduction for 2018?

A "qualified trade or business" includes any trade or business including providing services as an employee.

Code § 199A permits an individual to deduct 25 percent of the qualified business income generated through a sole proprietorship, a partnership, or an S corporation.

Alicia is the sole shareholder and CEO of ABC, Inc., an S corporation that is a qualified trade or business. During the current year, ABC has net income of $325,000 after deducting Alicia's $100,000 salary. In addition to her compensation, ABC pays Alicia dividends of $250,000. After reviewing comparable companies, you determine that reasonable compensation for someone with Alicia's experience and responsibilities is $200,000. What is Alicia's qualified business income?

The QBI deduction will reduce both the income tax and self-employment taxes owed by a self-employed individual.

Donald owns a 45% interest in a partnership that earned $130,000 in the current year. He also owns 45% of the stock in a C corporation that earned $130,000 during the year. Donald received $20,000 in distributions from each of the two entities during the year. With respect to this information, Donald must report $78,500 of income on his individual income tax return for the year.

An individual in a specified service business, such as accounting, with taxable income over the threshold amounts ($207,500, or $415,000 if married filing jointly) , will not lose the QBI deduction on such income if:

Tanuja Singh is a CPA and operates her own accounting firm (Singh CPA, LLC) . As a single member LLC, Tanuja reports her accounting firm operations as a sole proprietor. Tanuja has QBI from her accounting firm of $540,000, reports W-2 wages of $156,000, and the unadjusted basis of property used in the LLC is $425,000. Tanuja is married and will file a joint tax return with her spouse. Their taxable income before the QBI deduction is $475,000 and their modified taxable income is $448,000. What is Tanuja's QBI deduction for 2018.

Quail Corporation is a C corporation with net income of $125,000 during the current year. If Quail paid dividends of $25,000 to its shareholders, the corporation must pay tax on $100,000 of net income. Shareholders must report the $25,000 of dividends as income.

Tomas owns a sole proprietorship, and Lucy is the sole shareholder of a C corporation. In the current year both businesses make a net profit of $60,000. Neither business distributes any funds to the owners in the year. For the current year, Tomas must report $60,000 of income on his individual tax return, but Lucy is not required to report any income from the corporation on her individual tax return.

Dawn is the sole shareholder of Thrush Corporation, a C corporation. In the current year, Thrush earned $350,000 and distributed $75,000 to Dawn. Kirk is the sole shareholder of Swallow Corporation, an S corporation. In the current year, Swallow earned $350,000 and distributed $75,000 to Kirk. Contrast the tax treatment of Thrush Corporation and Dawn with the tax treatment of Swallow Corporation and Kirk.

The QBI deduction is set to expire after 2020.

Taylor, a single taxpayer, has taxable income before the QBI deduction of $187,500. Taylor, a CPA, operates an accounting practice as a single member LLC (which he reports as a sole proprietorship) . During 2018, his proprietorship reports net income of $150,000 and W-2 wages of $125,000 and $10,000 of qualified property. What is Taylor's qualified business income deduction?

A C corporation with taxable income of $100,000 in the current year will have a tax liability of $22,250.

Tammy has $200,000 of QBI from her neighborhood clothing store (a sole proprietorship) .Tammy's proprietorship paid $30,000 in W-2 wages and has $20,000 of qualified property.Tammy's spouse earned $50,000 of wages as an employee, they earned $20,000 of interest income during the year, and will be filing jointly.What is their QBI deduction for 2018?

Danielle is a partner in, and sales manager for, DG Partners, a domestic business that is not a specified service trade or business. During the tax year, she receives guaranteed payments of $250,000 from DG Partners for her services to the partnership as its sales manager. In addition, her distributive share of DG Partners' ordinary income (its only item of income or loss) was $175,000. What is Danielle's qualified business income?