Sched K-1 Questions From an S-Corp Newbie

[GerritB]

This is my first year as an S-corp, so be gentle.  I am the sole shareholder and officer.  I just finished TT Business, which created a K-1 form.  That shows the amount I should pay myself from the corporate profit, right?  Part III line 1 shows total business income, but I also have a line 17 item B showing income minus expensed items.  Which amount do I pay myself?  And lastly, when I do my personal taxes (with TT of course) will there be a 20% reduction to my K-1 payment resulting in the taxable amount? That's my understanding of the 2017 tax law.

[JulieCo]

A few things to share with you in relation to your questions:

The K-1 is an information form used to report income that is required to be recorded on a tax return (like a W-2 or 1099), therefore you as the sole shareholder will be paying income taxes on all the business income reported on the K-1 form, whether you were paid anything from the business or not. 

And, yes, new for 2018, is the Qualified Business Income deduction (QBID) which is a personal tax deduction reported on line 9 of the 1040 form.  The deduction does use self-employed business income in the calculation, but there are several parts to the calculation, so the deduction amount on your 1040 may not end up being a straight 20% deduction of the business income reported on your K-1 form.  See more information on the QBI deduction in the FAQ at the end of this answer.

Also, there is no requirement that a certain amount of income has to be paid out to the shareholders, but when payments are made to the shareholder/officer of the business, the total compensation for the year should not cause the business to bring the equity in the business (retained earnings) to a negative amount.   Therefore, from a tax perspective, using the business income earned last year would be a reasonable guide for compensation.  The decision should also be based upon the cash flow for the business, plus if you need any profit to remain in the business for needs of the future (for example to purchase a large piece of equipment).   See more information here:  IRS: S Corporation Compensation and Medical Insurance Issues. 

Last, below is more information on the Qualified Business Income deduction, including examples of how it is calculated within the different threshold taxable income levels:

https://ttlc.intuit.com/replies/7019998

[GerritB]

Thank you for the thorough reply!  I think I understand the shareholder payout now, which can be *up to* the Sched K-1 amount.  Since I'll pay personal income tax on the full Sched K-1 amount I can see how leaving some of that in the corporation would be okay.

Would the maximum shareholder payout be the amount on Part III line 1, the "ordinary business income" before the Section 179 reduction?

And you're right about the QBID, I was oversimplifying.