Question

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?

Answer 1

Answer: $225,000

Step-by-step explanation:

Given that,

Net income = $325,000

Alicia’s salary = $100,000

Dividends = $250,000

Reasonable compensation = $200,000

Actual Reasonable compensation = Reasonable compensation - Alicia’s salary

= $200,000 - $100,000

= $100,000

Alicia’s qualified business income = Net income - Actual Reasonable compensation

= $325,000 - $100,000

= $225,000