REG 1 - Items from Other Entities

Question 1

What are the four legal entities the tax system in the US recognizes? How do the four legal entities distribute income to the individuals?

Answer 1

1) Partnership - Flow through entity - Form 1065 (K-1)
2) S Corporation - Flow through entity - Form 1120S (K1)
3) Sole Proprietorship - Flow through entity - Form 1040 (Schedule C)
4) C Corporation - Not a flow through entity - separately taxed - Form 1120

Question 2

Where does the K-1 of Partnership income and losses get reported?

Answer 2

Schedule E of individual 1040.

Question 3

What is the deadline for filing partnership returns?

Answer 3

March 15 (extension granted to Sept 15)

Question 4

How are guaranteed payments treated on a partnership return. How are guaranteed payments treated on an individual return?

Answer 4

1) Partnership return - expensed

2) Individual return - shown separately on K-1 as partner’s income (separate line item)

Question 5

Explain how to allocate S Corporation income and losses for individuals?

Answer 5

Allocations of income/loss are made on a per-share, per-day basis:

Example: $120,000 income for Rick, Tim, Peter, and George in S Corporation. Peter sold George 1/3 share on Feb 1.

Rick (120,000 x 1/3) = 40,000
Tim (120,000 x 1/3) = 40,000
Peter (31/365 *40,000) = 3,397
George (334/365 x 40,000) = 36,603

Question 6

How is self-employment tax treated for partners in partnership?

Answer 6

• Partners get paid for services (they are self-employed)

- Partners in partnership are subject to self-employment tax

Question 7

How is self-employment tax treated for shareholders in S Corporation?

Answer 7

• Shareholders are considered employees
• Shareholders are not subject to self-employment tax
• The S Corporation pays the employer portion of payroll taxes, and the shareholder pays the employee portion of payroll taxes on indivudal return.

Question 8

Do general partners or limited partners in partnership pay self-employment tax on their distributive share of income?

Answer 8

• General partners - pay self-employment tax on distributive share of earnings AND guaranteed payments
• Limited partners - do not pay self-employment tax on distributive share of income, but only pay self-employment tax on guaranteed payments

Question 9

Do shareholders in a S Corporation pay self-employment tax on distributive share of income?

Answer 9

No, net earnings on distributive shares of income in a S Corporation are not subject to self-employment tax, but there is personal income tax.

Question 10

What is the maximum taxable portion of income to a beneficiary in a Form 1041 trust?

Answer 10

Distributable Net Income (DNI) - the maximum amount taxable to beneficiary, IF distributed to them

• Taxpayers get taxed on DNI distributed to them only, NOT amount of distributable net income in trust or estate.
• Example: Estate has distributable net income of $60,000 and distributes $50,000. Only the amount of distributed net income of $50,000 is taxable to the beneficiary (taxpayer).