Schedule K-1 & Earned Income

[DoDesign]

I made an S-corp election last year, filed my business taxes online with turbo tax, and received my K-1 form. 

Now I am filing my personal income taxes and finding after inputting all K-1 info it is using the "Ordinary Business Income" and not the W-2 wages. Questions:

1) Will the tax return only reflect the Ordinary Business Income or will also show the W-2 wages? 

2) The amount that should be owner distribution is under Part III, Box D.

Or Shareholder and Debt Basis Limitations, Part I: Shareholder Stock Basis, Line 6 Distributions (excluding dividend distributions). 

Is this correct? Will it not appear on my personal income tax filing as income? 

Thanks 

[tagteam]

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@DoDesign  wrote:

1) Will the tax return only reflect the Ordinary Business Income or will also show the W-2 wages? 

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You need to enter the information from your W-2 separately. Your K-1 does not reflect the W-2 salary/wages paid to you by your corporation. In other words, the W-2 figures are not included in your K-1.

Did you not receive a W-2? Who prepared your 1120-S?

[tagteam]

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@DoDesign  wrote:

2) The amount that should be owner distribution is under Part III, Box D.

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Yes, Part III on Line 16 with a "D" code is where a distribution should appear. 

The distribution is not taxable unless all or part of it exceeds your basis in the corporation (unlikely scenario). It does, however, reduce the basis of your shares in the corporation.

I'll page @Rick19744 for further input.

[Rick19744]

A few more comments:

• I concur with all of @tagteam comments and open questions.
• As a shareholder in an S corporation, you are responsible for maintaining your tax basis in this entity structure.
  • This can be done using excel
  • The IRS created form 7203 that is required to be included with your personal tax return if you meet certain criteria.  Based on the limited information, you need to include this when filing your personal tax return.
• Your question title may need a little understanding.  The income reported on the S corporation Schedule K-1 is not earned income.  Your W-2 earnings is earned income, but that is reported separately from the K-1 information as noted by @tagteam 
• You will need to understand how form 7203 works as the amounts do not necessarily pull from the K-1, nor do they potentially limit what is input in other areas of the TT input.
• As you may know, your personal tax return is now late.  Also not sure the timing of TT being able to efile this return;  TT will close the ability to efile returns as we get closer to the new tax season.  Just not sure when this happens.
• Based on the questions, it is most likely in your best interest to get some professional help; this minimal investment may certainly outweigh the cost of any potential filing errors.  Pass-through entities get complicated very quickly and may easily generate correspondence from the IRS if something looks out of line compared to their internal algorithm(s). 

[DoDesign]

HI Rick19744 , 

Thank you for your input. I would like to clarify and reply to a couple of items: 

• The IRS created form 7203 which is required to be included with your personal tax return if you meet certain criteria.  Based on the limited information, you need to include this when filing your personal tax return.
  • Is form 7203 automatically attached to TT efiling or am I to do this manually? There is no mention of it in TT and was not provided after filing business taxes. 

• The income reported on the S corporation Schedule K-1 is not earned income.  Your W-2 earnings is earned income, but that is reported separately from the K-1 information as noted by @tagteam.
  • This is understood and the W-2 earnings are reported. However, upon inputting the Schedule K-1 information it drastically changes my tax liability. It appears as though Box 1 (Ordinary business income) is now reported as personal earned income. 

• As you may know, your personal tax return is now late.  Also not sure the timing of TT being able to efile this return;  TT will close the ability to efile returns as we get closer to the new tax season.  Just not sure when this happens.
  • An extension was filed but TT has set a deadline for 10/31 (today).  Not sure if this is just a TT-imposed deadline. TT also continues to offer past-year filing options using the desktop version but includes no help or options for tax advisors. 

• Based on the questions, it is most likely in your best interest to get some professional help; this minimal investment may certainly outweigh the cost of any potential filing errors.  Pass-through entities get complicated very quickly and may easily generate correspondence from the IRS if something looks out of line compared to their internal algorithm(s). 
  • TT markets itself as a tool for S-corp small business owners but provides little support. Would you recommend these types of taxes be done by a professional and not use TT? 

[Rick19744]

@DoDesign  

Sorry, unless I am tagged as noted above, I am not in the community much post deadlines.

Responses:

• The form 7203 will be included with the efile, but many of the fields will need to be input manually.  As noted previously, this form needs to be included with your personal return, not the business return.
• Yes, box 1 on the K-1 is ordinary income.  This is due to the fact that pass-through entities are not taxed and all income / loss is passed out to the respective shareholder(s).  These amounts are taxed at the individual level AND either increase or decrease your tax basis in the S corporation; this is where you only have one level of tax.  S corporations then make distributions (when there is income) to shareholders in order to cover the tax liability of the shareholder.  These distributions are not taxable to the shareholder as long as there is tax basis.  As a result, maintaining accurate tax basis is critical.
• If you are past the ability to efile the tax return, then if you send in a paper version make sure you send it certified mail return receipt.
• Pass through entity tax gets complicated quickly.  TT does a good job in providing the forms and providing some support / explanation when preparing, but the preparer needs to know how to address the issue when asked questions.  So unless you have a good grasp of S corporation tax and the interplay it has on your personal tax situation, then a tax professional is a good choice.  Keep in mind that these individuals prepare hundreds of returns sometimes, get backed up, and your timing of getting the return completed may not correlate with their timing.