Question on distribution on schedule k-1

[yekasi]

Hello.

I have some questions where to put in the distribution (should be non-taxable based on my understanding)

- Using turbotax Business to file tax for our SCorp.

- this is a Single person SCorp.

- The total business income for the year is about 186k.  

- Expenses / deduction is about 56k

- Reasonable Salary is at 54k

- Payment to contract $1400

On the K-1 , Box 1 shows $75k as Ordinary Business Income (Loss).  Why is it a "Loss"?

On THe K-1, QBI pass through entity reporting.  W-2 wages shows 54k.  So i thought I am suppose to take this K-1 and only report the 54k from W2 - does it mean i have to claim K-1 into my personal tax return which will have an additional 75K as income?

I thought there is a place where the 75k will be shown as a Distribution to shareholders and it should be non-taxable.

Another question is, my balance sheet is out of balance by 5k or so according to TurboTax.  This is the first time i am doing this myself, so i want to ask do i have to absolutely make it $0 balanced or risk getting auditing? Looking at my last year's return prepared by an accountant - i think it was also out of balance by likely around 30-40k by my manual calculation.

thanks

Thanks.

[tagteam]

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@yekasi wrote:

Another question is, my balance sheet is out of balance by 5k or so according to TurboTax.  This is the first time i am doing this myself, so i want to ask do i have to absolutely make it $0 balanced or risk getting auditing?

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It is almost impossible to rectify an out of balance scenario with scant details. 

However, you might want to consider whether you even need to complete the balance sheet section.

See https://www.irs.gov/instructions/i1120s#en_US_2021_publink11515kd0e6836

Read Line 11 of Schedule B:

https://www.irs.gov/pub/irs-pdf/f1120s.pdf

[Critter-3]

Being out of balance with the book numbers sounds like a bookkeeping issue that needs to be resolved usually with a journal entry and a return adjustment.

And if you are having trouble doing the return yourself then go back to the accountant and ask lots of questions so you get educated on what needs to be done and how.  

[tagteam]

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@yekasi wrote:

On the K-1 , Box 1 shows $75k as Ordinary Business Income (Loss).  Why is it a "Loss"?

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Why do you believe you have a loss? From the figures you posted you have around $75,000 in net income.

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@yekasi wrote:

On THe K-1, QBI pass through entity reporting.  W-2 wages shows 54k.  So i thought I am suppose to take this K-1 and only report the 54k from W2 

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If the income qualifies for the QBI deduction, your K-1 will have a "V" code on Line 17 of your K-1 and a statement (Statement A) will be generated with the amount to report on your 1040.

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@yekasi wrote:

I thought there is a place where the 75k will be shown as a Distribution to shareholders and it should be non-taxable.

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In TurboTax Business, you will have to make a distribution in order for it to appear on your K-1. The figure will appear on Line 16 of your K-1.

[yekasi]

@tagteam 

I know i have a 75k in net income for the business, but because the K-1 box 1 says, "Ordinary Business Income (Loss)" and not "Ordinary Business Income (Profit)".  So i am assuming that it is a marked as a "loss" and I want to understand why.

I have a V code in Line 17 - which shows a QBI worksheet of "Ordinary Business Income (Loss) of 76k and a W-2 Wages of 54k.... and other deductions.  So this 54k is what I take to 1040 to report as income, and *NOT* box 1 in K-1?   

>> In TurboTax Business, you will have to make a distribution in order for it to appear on your K-1. The figure will appear on Line 16 of your K-1.

Where do i put this "Distribution" in turbotax business? I did not see anywhere that it asked me "If there is any distribution to shareholders".  

[yekasi]

Oh, so Line11 of Schedule B. My answer is "YES" to both, as both were less than $250k.

In this case, does it mean i do NOT need to submit a balance sheet as part of the tax return for the S Corp?  In TurboTax, it keeps asking the same question even tho it should know it is less than $250k - why is that?  Do i just simply ignore all those balance sheet questions, and will it actually submit a empty balance sheet to IRS when I efile?

thanks in advance.

[tagteam]

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@yekasi wrote:

In this case, does it mean i do NOT need to submit a balance sheet as part of the tax return....

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Yes. You do not have to complete Schedule L (balance sheet).

[tagteam]

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@yekasi wrote:

So i am assuming that it is a marked as a "loss" and I want to understand why.

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If there were actually a loss on your K-1, it would appear as a negative number (e.g., -75,000).

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@yekasi wrote:

So this 54k is what I take to 1040 to report as income, and *NOT* box 1 in K-1?  

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That is correct. You will enter the figures from Statement A when you enter the K-1 into your 1040.

[tagteam]

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@yekasi wrote:

Where do i put this "Distribution" in turbotax business? I did not see anywhere that it asked me "If there is any distribution to shareholders". 

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You have to go through the Shareholder Information section of the program to enter a distribution.

[yekasi]

I just looked at TurboTax again. It says althought you don’t need to provide a balance sheet but New York requires it for state.  So I think that’s why it kept on asking me.  

in this case, I will have to make it balance, is it ? Is it usual that small business is out of balance in general or most will make it into a 0?

[tagteam]

If it was out of balance last year, it will be more difficult to get it to balance this year.

You might want to contact the accountant who prepared your return last year.

[yekasi]

Thank you.  Last question, i saw on some tax website that you are allow to setup your child under 18 as employee to further save on taxes (up to certain limit). Do you enter them as regular employee or there is a special place for it?

furthermore, i didnt actually set them up in 2021 and is there a way to retrofit this now we are in 2022?

thanks

[tagteam]

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@yekasi wrote:

furthermore, i didnt actually set them up in 2021 and is there a way to retrofit this now we are in 2022?

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You need to be extremely cautious with the child employee scenario. 

Regardless, you cannot "retrofit" 2021 now that we are beyond that tax year. You need to have filed quarterly reports (e.g., withholding, etc.,) for the child in 2021.

[yekasi]

thank you. One more question.

If let say there was no salary at all (no payroll), that will make the total income to be 76k + 54k = ~130k.

In that scenario, the K-1 Box1 will show 130k and no W2 wages. 

Q1) So this 130k will flow into my personal tax return in total?

Q2) if I make a $70k distribution to ShareHolder1 in TurboTax Business - will this means I only have to report 60k as personal Income or do i still have to report full $130k?

I am asking this becuase this is what happened to me in 2020. I did not setup wages for myself in 2020 and my K-1 Box1 was the full 'profit' and I took it into personal return and pay regular income tax to it.  My accountant at that time told me there isnt much I can do and therefore this year, i did the W2 wages to myself so i can target to save the "distribution" piece.  I wanted to know if the accountant was right or wrong - that if there is $0 W2 wage but a $70k distribution - will that have been a $130k or $60k to my personal return?

[PatriciaV]

@yekasi

If you paid yourself a salary and filed Form W-2, you cannot change how you report that expense now. Those wages will be reported on your personal tax return and taxed along with all your other income. The income from your S-Corp (including Box 1 from Schedule K-1) is also taxable income on your personal return.

You can test how wages versus K-1 income affects your personal taxes in TurboTax Online (free until you actually file). Either set up two returns or change your entries in one return and preview your 1040. See this TurboTax article for instructions: How do I preview my 1040?

You should seek the advice of a local accountant before making a distribution from your S-Corp. There are other implications of this action beyond your taxes.