13 Reporting of Items from Pass-Through Entities

Question 1

What are the requirements for filing a self-employment income tax return?

Answer 1

Must file a tax return if self-employment income is above $400.

Question 2

True or False: Single-member entities (limited liability companies) are ignored for federal income tax purposes unless election filed to be taxed as a corporation.

Answer 2

True.

Question 3

True or False: Entities with more than one owner are, if not incorporated, taxed as a partnership unless they elect filing to be taxed as a corporation.

Answer 3

True. Such entities are taxed as partnerships unless they elect filing to be taxed as a corporation.

Question 4

Define “disregarded entity.”

Answer 4

Single-member limited liability company that is disregarded for federal tax purposes. For tax purposes, there is no distinction between a sole proprietorship and its owner (a disregarded entity).

Question 5

List the characteristics of self-employment tax.

Answer 5

Social Security is 12.4% of self-employment (SE) income up to an annual cap.
The ceiling is reduced by other wages.
Medicare is 2.9% on all SE income.

Question 6

What is a legal separate entity? Provide an example.

Answer 6

Corporations, LLCs, general partnerships, and limited partnerships are considered legal entities separate from their owners (e.g., shareholders, members, or partners, respectively).

Question 7

Describe a pass-through entity?

Answer 7

Pass-through entities are called such because the net business income (loss) and other tax items from these entities “pass” through to their owners, who are responsible for paying the income taxes. A pass-through entity, such as a partnership or S corporation, is an entity distinct from its owners for tax purposes and is generally not subject to income tax at the entity level.

Question 8

True or False: A corporation is a pass-through entity.

Answer 8

False: C corporations are separate tax-paying entities and use Form 1120 for reporting income, gains, losses, deductions, and credits, and to determine taxable income (TI) and income tax liability.

Question 9

Describe a sole proprietorship.

Answer 9

A sole proprietorship is an unincorporated business structure owned by one individual taxpayer. For tax purposes, there is no distinction between a sole proprietorship and its owner (a disregarded entity).

Question 10

True or False: Distributions from a P/S are considered a return of capital and do not affect the net business income

Answer 10

True

Question 11

What is reported on Schedule K-1?

Answer 11

A Schedule K-1 will report a partner or S corporation shareholder’s share of ordinary business income/loss and share of separately
stated items.

Question 12

Describe a separately stated item and provide two examples.

Answer 12

Separately stated items are not part of the P/S ordinary net business income (loss) because they are subject to statutory limitations or special rules when reported on the individual partners› Form 1040 tax returns. Examples include:
Capital gains and losses, Section 1231 gains and losses, Investment income, Passive income, Charitable contributions, Section 179 depreciation deduction, Tax credits, Tax-exempt income, and Nondeductible expenses.

Question 13

What is a guaranteed payment?

Answer 13

A payment to a partner that is not contingent on the partnership’s profit or income, such as salary or interest, treated as if it were due to a third party but taxed as if a distribution of ordinary income. It is not considered a separately stated item to the partnership paying it, but it is a separately stated item to the partner receiving it.

Question 14

True or False: A 60% general partner must be allocated 60% of the profit or loss from the partnership.

Answer 14

False: The allocation of partnership net business income generally is based on percentages established in the partnership agreement. However, partnerships have flexibility in allocating profit and loss as long as the partners agree, and the special allocations have substantial economic effect.

Question 15

What three hurdles must be cleared in order for a loss to be deducted by a partner or S corporation shareholder?

Answer 15

A partner’s or S corporation shareholder’s deductible loss is limited to the lesser of:
* the tax basis in the entity interest
* the partner’s or S corporation shareholder’s amount at risk
* and the passive activity loss limitations if applicable.

Question 16

True or False: A partner’s loss in excess of basis can be carried forward for five years.

Answer 16

False: Basis may never fall below zero. If allocated losses exceed the year-end basis, any excess loss is disallowed as a current deduction and is carried forward to future years until there is sufficient basis to absorb the loss.

Question 17

Who is subject to self-employment tax?

Answer 17

Self-employed taxpayers (i.e., sole proprietor, independent contractors, general partner in a partnership) are required to pay 15.3% in self-employment (SE) tax (i.e., FICA taxes) on net earnings of $400 or more.

Question 18

Provide two examples of income subject to the self-employment tax.

Answer 18

Examples of self-employment income include:
* Net earnings from a sole proprietorship
* General partners’ distributive share of net P/S business income
* Guaranteed payments made to any partner for services from a partnership that is engaged in a trade or business

Question 19

If a taxpayer is subject to self-employment taxes of $4,800, what deduction for AGI is the taxpayer allowed to deduct?

Answer 19

If the self-employment taxes are $4,800, the taxpayer takes a deduction for AGI of $2,400. To help offset having to pay the additional amount of FICA taxes, self-employed individuals are allowed a deduction for AGI of one-half (50%) of the self-employment taxes (i.e., what an employer would normally pay).

Question 20

True or False: An S corporation shareholder can receive a salary payment and a distribution in the same year.

Answer 20

True: If a shareholder performs services that are considered wages, a W-2 is issued. Distributions generally are not taxed if there is sufficient stock basis.

Question 21

True or False: An S corporation shareholder is subject to self-employment tax on its share of the net business income.

Answer 21

False: Unlike partners, S corporation shareholders are not subject to self employment tax on their distributive share of the net business income.

Question 22

Define a qualified business in regard to the qualified business income deduction.

Answer 22

A qualified business is any business (or trade) that is not:
* A specified service trade or business (SSTB) or
* A service performed as an employee (e.g., guaranteed payments for services, compensation paid to the shareholder)

Question 23

What is not included in qualified business income in regard to the QBI deduction?

Answer 23

Qualified business income does not include the following:
* C Corporation income
* Reasonable compensation
* Guaranteed or other payments to a partner for services
* Investment income
* Capital gains/losses
* Deductions allocable to investment income or capital gains/losses

Question 24

True or False: The QBI deduction is a deduction for AGI.

Answer 24

False: For an individual, the deduction is from AGI to arrive at taxable income.

Question 25

True or False: The QBI deduction is 25% of qualified business income received.

Answer 25

False. The QBI deduction can be up to 20% of qualified business income received. For an individual, the deduction is from AGI to arrive at taxable income.