Based on the assumption that this is an LLC that has elected to be treated as an S corporation I have the following comments:
- S corporations, in general, do not pay tax at the entity level. All earnings / losses are passed-through to the shareholder's based on their respective ownership. This is done via the K-1 you received.
- S corporation shareholder's need to maintain a basis schedule of their investment. This is very important as it determines whether losses can be taken at the individual level, taxability of any distributions and the overall gain or loss upon disposition.
- Both the K-1 and the W-2 are reported separately on your personal tax return. The wages are the earnings for services. There is no double tax as all W-2 wages are subtracted from any S corporation earnings in arriving at the income reported on the K-1.
- Since your husband works for the S corporation, when you respond to the K-1 interview questions make sure you reflect that he is either active or materially participates in the activity. This is important as depending on the circumstance, could have an impact on your tax liability.
- Generally, when S corporations generate income the entity will make distributions to the shareholder's to cover the estimated tax liability.
- See the attached link to IRS commentary on basis for an S corporation shareholder:
*A reminder that posts in a forum such as this do not constitute tax advice.
Also keep in mind the date of replies, as tax law changes.
