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 her experience and responsibilities is $200,000. What is Alicia's qualified business income

Answer 1

Answer: $225,000

Step-by-step explanation:

Alicia's qualified Business income will be calculated thus:

Net income = $325,000

Dividends = $250,000

Alicia’s salary = $100,000

Compensation = $200,000

The actual reasonable compensation will be calculated as the difference between the reasonable compensation and the salary of Alicia. This will be:

= $200,000 - $100,000

= $100,000

Alicia’s qualified business income:

= Net income - Actual Reasonable compensation

= $325,000 - $100,000

= $225,000