Problem 10-50 (LO. 7, 8, 9, 11) Amy and Mitchell share equally in the profits, l

Question

Problem 10-50 (LO. 7, 8, 9, 11)

Amy and Mitchell share equally in the profits, losses, and capital of the accrual basis AM Products LLC. Amy is a managing member of the LLC (treated as a general partner) and is a U.S. person. At the beginning of the current tax year, Amy's capital account has a balance of $300,000, and the LLC has debts of $200,000 payable to unrelated parties. The debts are recourse to the LLC, but neither of the LLC members has personally guaranteed them. Assume that all LLC debt is shared equally between the partners. The following information about AM's operations for the current year is obtained from the LLC's records.

Year-end LLC debt payable to unrelated parties is $140,000. Assume all transactions are reflected in her beginning capital and basis in the same manner.

Assume also the following: (1) Amy's ordinary business income from AM is qualified business income; (2) Amy's taxable income excluding capital gains is $500,000; and (3) Amy has no income from REITs, publicly traded partnerships, or other qualified businesses.

a. Calculate Amy's deduction under § 199A for qualified business income.

Amy's tentative QBI deduction is $___?___. The tentative QBI for this trade or business is subject to the greater of two limitations. The first limitation is based on the LLC's W-2 wages is $___?___ and the second limitation based on the LLC's W-2 wages and property basis is $__?___. Therefore, Amy's QBI deduction is $__?___.

Ordinary income $900,000 W–2 wages to employees 200,000 Depreciation expense 300,000 Interest income 4,000 Short-term capital loss 6,000 Long-term capital gain 12,000 Charitable contribution (cash) 4,000 Cash distribution to Amy 20,000 Unadjusted basis of partnership depreciable property 1,600,000

Explanation / Answer

QBI of business is

Ordinary income less wages less depreciation = 900000 - 200000 - 300000 = 400000

Amy share of QBI is 400000/2 = 200000

QBI Deduction is 20% Of 200000 = 40000

This deduction is limited to 20% of amy taxable income minus capital gain = 20% of ( 500000 - (6000/2)) = 497000 = 99400

Thus tentative QBI deduction is 40000

First limitation based on wages is 50% of wages = 200000/2 = 100000

Second limitation based on wages and property is

25% of wages plus 2.5% of UBIA

= 25% of 200000 plus 2.5% of 1600000

= 50000 + 40000 = 90000

Amy QBI deduction is 40000.

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