K1 S Corp with W2

[Nikkinmarie]

Hello,

I have a question on K1 S corporation. I just opened my S Corp with my partner on November 2022, I think I did not materially participate in this S Corp because I did not participate more than 500 hours during the tax year. It will show passive income from schedule K-1 on schedule E page 2.

It is a tea business and this is not a specified service trade or business I guess. 

Schedule K1 line 17 V show statement A-QBI pass through entity reporting 3 items: Ordinary business income,W2 wages, and UBIA of qualified property.

Is this K1 ordinary business income considered passive income and not qualify for QBI? 

If I qualify for QBI, should Ordinary business income be qualified for qualified business income, QBI deduction? 

Please help, thank you! 

[PatriciaV · Accepted solution]

According to the IRS instructions for Form 8995, if you own an interest in a pass-through entity that qualifies as a trade or business, material participation by the taxpayer isn't required for the income to qualify for the QBI deduction. Even though you are a passive investor, the K-1 income should qualify for the QBI deduction if you meet all the other requirements.