Meredith is a passive 30% member of the MNO LLC. She is not a managing member and she does not participate in any activities of the LLC. Her interest is more in the nature of an investment. In the current year, Meredith's distributive share of income from the LLC was $50,000 . In addition, she received a guaranteed payment of $40,000 for the use of her capital. Assume that her income from other
sources exceeds $500,000 . How much of Meredith's LLC income will be subject to the self-employment (SE) tax (under the Proposed Regulations) and the net investment income (NII) tax? (Disregard the additional Medicare tax.)
a. $0 SE tax; $0 NII tax.
b. $0 SE tax; $40,000 NII tax.
c. $0 SE tax; $90,000 NII tax.
d. $50,000 SE tax; $40,000 NII tax.
e. $90,000 SE tax; $0 NII tax.
c
RATIONALE: Because Meredith is a passive LLC member, none of her distributive share is subject to SE tax. However, as a passive activity, the distributive share ($50,000) is subject to the NII tax. Similarly, the guaranteed payment ($40,000) is for the LLC's use of capital (rather than services), and so is subject to the NII tax rather than the SE tax. Meredith is subject to NII tax (but not SE tax) on her entire $90,000 of income from the LLC.
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