Items from Other Entities

Question 1

Flow through entities

Answer 1

1. partnership or limited liabilities company => K1 , Schedule E
2. S corporation => K1
3. Sole proprietorship or single-member LLC => schedule C

Question 2

K1

Business income
(Business expenses)
(guranteed payments) - deduction for partnership
——————————————
1)ordinary biz income or loss ( loss allowed up to basis)
2) guaranteed payment to partners
……….

Answer 2

K-1: Each partner gets one
- each partner reports their share of net income/loss on their 1040 on schedule E

• taxed when the business earns and reports the income
• not when distributed

Question 3

S corp

Answer 3

1120S by March 15

per-share, per-day basis

same as partnership
but S corp shareholders can be an employee of the corporation

income is not self employed income ( coz they are employees of the company)

Question 4

Guaranteed payments are subject to what tax

Answer 4

self-employment tax (social security and medicare)

and income tax

Question 5

Section 199A

Qualified business income deduction for flow-through entities

Answer 5

Exclusion = 20% of Qualified business income

• > qualified trade or biz: any biz other than a specified service trade or business (SSTB)
• > SSTB: trade or biz involving direct services in fields of health, accounting, law, performing arts, athletics, financial services

Exception from SSTB: Engineering and Architecture

Question 6

QBI deduction test

Category 1
Category 2
Category 3

Answer 6

Test 1: W2 & property limitation
Greater of
a) 50% of W2 for the biz OR
b) 25% of W-2 for the biz + 2..5% of the unadjusted basis immediately after the acquisition(UBIA) of all qualified property (PP&E)

Test 2: overall limitation
Lesser of
a) combined QBI deduction for all qualifying biz OR
b) 20% of the taxpayer’s taxable income (before the QBI deduction) in excess of net capital gain.

Question 7

QBI deduction test

Category 1
Category 2
Category 3

Answer 7

Category 1: below the income level
QTB get whole 20%, no test required

SSTB get whole 20% , Test 1 not required, do test 2

Category 2 : above income level
QTB: full test 1

SSTB - no deduction allowed

Category 3: between the income limitation
Phase-out

QTB:
step 1: do the QBI * 20%
Step 2: test 1 limitation
Step 3: Excess ( step 1 - step 2)

step 4: phase in percentage= ( (taxable income - threshold amount )/phase in range**)

step 5: excess * phase-in percentage

QBI deduction = step 1 - step 5

** phase in range : single 50k , MFJ 100k

SSTB:
step 1: phase in percentage= ( (taxable income - threshold amount )/phase in range**)

step 2:
SSTB applicable percentage = 100-step 1

Step 3:
QBI * step 2%

Step 4:
tentative QBI deduction = Step 3* 20%

Step 5:
Test 1 limitation
(W2* step 2% )* 50%

Step 6:
Excess amount = tentative QBI deduction - step 5

Step 7:
Reduction amount = excess amount * phase-in percentage

Step 8:
QBI deduction = tentative deduction - reduction amount

Question 8

Negative QBI amount ( net loss on QBI)

Answer 8

1) negative QBI with multiple QBIS
= still have net income from QBIS
loss will be pro-rated among the qualifying business with positive QBI

2) negative total QBI
total is a net loss on QBIs
qbi deduction for the tax year is zero
the combined loss is carried forward

Question 9

Aggregate Rules

Answer 9

QTB can

SSTB can only if

1) same person/group own at leat 50% of each biz &
2) at least two of the following:
- products and service are the same
- share facilities
- operated in coordination

Question 10

Estate & trusts

Answer 10

1041 = k-1 to beneficiaries

• capital gains and losses - classified as principal and taxed at the trust or estate (fiduciary level)
  ……………………………
  Income distributed to beneficiaries - K1
• the beneficiary pays the tax
  -taxable up to DNI (distributable net income)
  max amount taxable to the beneficiary , if distributed to them