Question 1 (18 Points) Britta and Sheila plan to fom a consulting business in 20

Question

Question 1 (18 Points) Britta and Sheila plan to fom a consulting business in 2018. Britta will contribute $66,000 in exchange for a 33% ownership interest and Shelia will contribute $134,000 in exchange for a 67% ownership interest. The business will also borrow $80,000 from a bank to pay for its start-up costs. Britta and Shelia will both actively manage the consulting business. Their business plan projects $650,000 of profits annually. Neither Britta nor Sheila will draw a salary, but the business plan includes a total annual distribution of $250,000 to Britta and Sheila at the end of the year. The distribution is allocated pro rata based on ownership percentage. Britta and Sheila's only source of income and deductions is from the consulting business operations. Britta is single and Sheila is married to John and John file jointly. John is a stay at home dad and has no source of income . Britta Assuming the business plan projections are accurate in 2018 and the consulting business is organized as a general partnership, what amount of federal income tax would the business, Britta, and Sheila each pay in 2018 from the consulting business' operations? Only consider income taxes in your computations (i.e. ignore payroll tax and NIT). Please show your work and explain your calculations. a. (6 points)

Explanation / Answer

Answer :Calcutation of federal Income tax for Britta & Shella.

(a) As Question says that Britta & shella forming a consulting businedd with contribution of $ 66,000 by Britta for 33% ownership right & by Shell $ 134,000 for 67% ownership right.

(b) Profit of business is $ 650,000 annually.

(c) Britta & Shella will get $ 250,000 on the basis of ownership %.

(d) business is running as GENERAL PARTNERSHIP.

So now we have all information in points to calculate Britta & Shella's Income tax.

Note :- 1. As per federal IRS , profit of GENERAL PARTNERSHIP which not be taxable as seprate it would be consider as partners's income and taxable as partners's income tax. So now profit of GENERAL PARTNERSHIP is $ 650,000 from this $ 250,000 will be distributed between Partner's on the basis of Ownership % and balance amount will be distribute in equal portion ( As per rule).

2. As per federal IRS Income tax bracket is 2018.

3. In case of Joint Return filling tax bracket would be changed.

Calculation Of GENERAL Partnership Income.

Annual Profit = $ 650,000

Less: distribute to partners's = $ 250,000 ( This would be distribute in ownership %)

Income = $ 300,000 ( Which would be distribute between partners in Equal basis)

So Now Calculation of partners income.

Britta Shella

Distribution to Partners Annually on ownership % (A) $ 82500 $ 167,500

( 33% for Britta & 67% for Shella) ( 33% of 250,000) ( 67% of 250,000)

Distribution of Business Income (B) $ 150,000 $ 150,000

( Equal Distribution) ( 50% of $ 300,000)   ( 50% of $ 300,000)

Total Income (A)+(B) = $ 232,500 $ 317,500

Now Calculation of Britta's jointly Income Tax.

Britta's total Income is $ 232,500 and her husband's income is NILL so Total income for Jointly Tax Filling Is $ 232,500 and as per Jointly tax Filling rule their jointly income will get some extra benefit so up to $ 19050 tax rate is 10% = $ 1905

From $ 19051 to 77400 tax rate is 12% = 7002

from $ 77401 to $ 165,000 tax rate is 22% = $ 19,272

from $ 165,001 to $ 232,500 tax rate is 24% = $ 16,200 So Britta's Jointly Total Income Tax is =

$ 44,379.

Now Calculation of Shella Income Tax.

Shella' Income is $ 317,500

up to $ 9525 is 10% = $ 952.5

From $ 9526 to $38700 is 12% = $ 3501

from $38701 to 82500 is 22% = $ 9636

from $ 82501 to $ 157,500 is 24% = $ 18000

from $ 157,500 to $ 200,000 is 32% = $ 13600

from $200,000 to $317,500 is 35% = $ 41125 so Shell's Total Income Tax Is $ 86814.5

% of Tax Amount of Tax ($) 10% 0-9525 12% 9526-38700 22% 38701-82500 24% 82501-157500 32% 157501-200000 35% 200001-500000 37% more than 500000

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