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 and the net investment income (NII) tax? (Disregard the additional Medicare tax on upper-income taxpayers.)
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.

Question

Quizplus · Accepted Answer

Meredith's distributive share of income ($50,000) from the LLC is not subject to self-employment tax because she is a passive investor and does not actively participate in the business. However, this income is subject to the net investment income tax (NII tax) as it is considered investment income. The guaranteed payment of $40,000 for the use of her capital is also subject to the net investment income tax, making a total of $90,000 subject to the NII tax. Guaranteed payments are not subject to self-employment tax when they are for the use of capital rather than for services.

Meredith Is a Passive 30% Member of the MNO LLC