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.
About National Association of Tax ProfessionalsThe National Association of Tax Professionals (NATP) is the largest association dedicated to equipping tax professionals with the resources, connections and education they need to provide the highest level of service to their clients. NATP is comprised of over 23,000 leading tax professionals who believe in a superior standard of ethics and exemplify professional excellence. Members rely on NATP to deliver professional connections, content expertise and advocacy that provides them with the support they need to best serve their clients. The organization welcomes all tax professionals in their quest to continually meet the needs of the public, no matter where they are in their careers.
The NATP headquarters is located in Appleton, WI. To learn more, visit www.natptax.com.
Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.