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Exam 15: Taxing Business Income

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Question 1

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Compare the basic tax and nontax factors of doing business as a partnership, an S corporation, and a C corporation. Circle the correct answers.

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Question 2

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Katherine, the sole shareholder of Penguin Corporation, has the corporation pay her a salary of $300,000 in the current year. The Tax Court has held that $90,000 represents unreasonable compensation. Katherine has avoided double taxation only to the extent of $210,000 (the portion of the salary that is considered reasonable compensation).

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Question 3

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A partnership will need to report wages paid to its employees as a separate line item on Schedule K-1 to help partners calculate their QBI deduction.

Rebecca and Brad are married and will file jointly.Rebecca earns $300,000 from her single member LLC (a law firm).She reports her business as a sole proprietorship.Wages paid by the law firm amount to $40,000? the law firm has no significant property.Brad is employed as a tax manager by a local CPA firm.Their modified taxable income is $375,000 (this is also their taxable income before the deduction for qualified business income).Determine their QBI deduction for 2018.

The corporate marginal income tax rate is lower than the top individual tax rate.

Aaron 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 Aaron's $100,000 salary. In addition to his compensation, ABC pays Aaron dividends of $250,000. What is Aaron's qualified business income?

Ginger is a self-employed driver finding rides via a few different platform companies such as Lyft. She is single and claims the $12,000 standard deduction. For 2018, Ginger's income from driving is $67,000 and she has no other income. Ginger's QBI deduction for 2018 is $13,400.

Sam and Betty, each single, each generate sole proprietor income of $240,000. Sam's income is generated from a wholesale business while Betty's is earned from her law practice. Neither has any employees or qualified assets. Both claim the standard deduction and have other income equal to the standard deduction amount.

Which of the following self-employed individuals are in a specified service trade or business? (circle all that apply)

Ellie (a single taxpayer) is the owner of ABC, LLC.The LLC (a sole proprietorship) reports QBI of $900,000 and is no services" business.ABC paid total W-2 wages of $300,000, and the total unadjusted basis of property held by ABC is $ taxable income before the QBI deduction is $740,000 (this is also her modified taxable income) .What is Ellie's QBI de 2018?

Ben owns and operates as a sole proprietorship, a machine repair shop that generates a profit of about $150,000 annually. The business pays wages of about $50,000 annually. The building and most of the equipment is leased so there is no qualified property. Ben files as single and claims the standard deduction. He has a large unrealized gain in bitcoin that he acquired in 2014 and is wondering when he should sell it and whether he should sell it all in one year or over a few years. Advise Ben as to how the sale of the bitcoin and its resulting capital gain can affect his QBI deduction.

Susan, a single taxpayer, owns and operates a bakery (as a sole proprietorship). The business is not a specified services business. In 2018, the business pays $60,000 in W-2 wages, has $150,000 of qualified property, and $200,000 in net income (all of which is qualified business income). Susan also has a part-time job earning wages of $11,000, receives $3,000 of interest income, and will take the standard deduction. What is Susan's qualified busine income deduction?

Once a taxpayer reaches certain taxable income thresholds, § 199A limits the qualified business income (QBI) deduction. These thresholds ($315,000 for married taxpayers filing jointly and $157,500 for all other taxpayers) are indexed for inflation after 2018.

Eagle Company, a partnership, had a short-term capital loss of $10,000 during the current year. Aaron, who owns 25% of Eagle, will report $2,500 of Eagle's short-term capital loss on his individual tax return.

The QBI deduction percentage matches the 21% tax rate applicable to C corporations.

Under the "check-the-box" Regulations, a two-owner LLC that fails to elect to be to treated as a corporation will be taxed as a sole proprietorship.

Rajib is the sole shareholder of Robin Corporation, a calendar year S corporation. In the current year, Robin earned net profit of $350,000 ($520,000 gross income - $170,000 operating expenses) and distributed $80,000 to Rajib. Rajib must report Robin Corporation profit of $350,000 on his Federal income tax return.

Which of the following taxpayers is potentially eligible for a qualified business income deduction based on the noted activity? (circle all that apply)

The qualified business income deduction is severely limited for "specified services" businesses. What is a "specified services" trade or business?

Which of the following taxpayers is eligible for a qualified business income deduction regarding the activity noted? (circle all that apply)