Reporting information from a partner’s Schedule K-1 (Form 1065) or a shareholder’s Schedule K-1 (Form 1120-S) can be a challenging task for preparers. In a three-part webinar series, we will debunk the process of reporting pass-through items on the owner’s return.

Below, you’ll find a few of the top questions from a recent webinar on the topic and their accompanying answers. If you choose to attend the on-demand version of this webinar, you can access the full recording and the entire list of Q&As.   

Q: What is an example of use of capital? Can you define that and how it differs from a payment for services?

A: A guaranteed payment for the use of capital isn’t a payment for services provided to the partnership. It’s a payment for the partnership’s use of a partner’s contributed capital.

Q: If other net rental income is always passive, why is it subject to self-employment (SE) tax?

A: Other net rental income is passive because it involves rental activity. If the partnership regularly and continuously rents out tangible personal property to make a profit, general partners are subject to SE tax on other net rental income. However, limited partners are not subject to SE tax on this income.

Q: Are you using the term “partner” to denote people actively involved in the business and “shareholders” to denote passive members (LLC) who are not subject to SE tax?

A: No. She’s referring to partnerships and S corporations, so she means a partner in a partnership or a shareholder in an S corporation. S corporation shareholders are not subject to SE tax on their pass-through income. However, general partners are subject to SE tax on their pass-through income and guaranteed payments.

Q: What criteria must be considered to qualify for the $25,000 special allowance for real estate rental activities if the partner or S corporation shareholder is not a real estate professional?

A: The partner or shareholder must own at least 10% of the partnership or S corporation, and they must have participated in making management decisions or arranging for others to provide services (such as repairs) in a significant and bona fide sense. Except as provided in regulations, limited partners aren’t treated as actively participating in a partnership’s rental real estate activities.

To learn more about understanding Boxes 1-3 of K-1s for partners and shareholders, you can watch our on-demand webinar. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to learn more, join our completely free 30-day trial at natptax.com/explore. 

Question: Aaron is 25 and serves as a member of the Army Reserve. He was ordered to active duty for 190 days. One month after being ordered to active duty, he took a distribution of $10,000 from his 401(k) retirement plan. The distribution was entirely allocable to elective deferrals, and Aaron met all of the requirements to take the qualified reservist exception to the 10% early distribution penalty. One year after his active-duty period ended, he decided he wanted to put the $10,000 back into his retirement account. Can Aaron repay the distribution, or will it be considered a new contribution into his account?

Answer: Yes, Aaron can repay the qualified reservist distribution. Although the distribution was originally from his 401(k) plan, he should make the repayment to an individual retirement plan such as an IRA or individual retirement annuity. To qualify, the repayment must be made within the two-year period beginning on the day after his active-duty period ends. He is not required to make a lump-sum repayment, but his repayment cannot exceed the original distribution amount and is nondeductible. It is also not included when determining his allowable IRA contribution for the year; meaning he can also still make a full IRA contribution as long as he otherwise qualifies to do so [IRC Sec. 72(t)(2)(G)(ii)].

With the ever-changing landscape of tax laws and regulations, there has never been a better time to invest in your education and expertise. A Master of Science in Taxation (MST) could be your ticket to unlocking new opportunities and advancing your career in this dynamic field. Here are three compelling reasons why pursuing an MST might be the right move for you:

1. Meeting the industry’s demands

The taxation industry is in constant flux, with frequent updates and revisions to tax laws both domestically and internationally. As such, there is a pressing need for tax professionals who possess specialized knowledge and skills to navigate these complexities effectively.

An MST equips you with the expertise needed to tackle the intricate challenges of tax planning, compliance and consulting, making you an invaluable asset to businesses, accounting firms and government agencies alike. By investing in your education with an MST, you position yourself to meet the growing demands of the industry head-on.

2. Flexibility to suit your lifestyle

Balancing work, family and education can be a challenge, but pursuing an MST doesn’t have to be. With the rise of online and after-hours programs, obtaining your master’s degree has never been more accessible or convenient. Online programs offer the flexibility to study at your own pace, from the comfort of your own home, while after-hours programs allow you to attend classes outside of traditional working hours.

3. Investing in your future

Earning an MST isn’t just about gaining knowledge – it’s an investment in your future career and earning potential. Employers highly value advanced degrees like the MST, recognizing the specialized expertise that comes with it.

With a master’s degree under your belt, you open doors to higher-level positions and increased earning potential in roles such as tax manager, senior tax consultant or tax analyst.

Furthermore, the advanced skills and knowledge you acquire through an MST can pave the way for specialized career paths in areas like international tax planning or forensic accounting, further enhancing your career prospects and opportunities for growth.