K-1 income for EITC
How does non-passive K-1 income from an 1120S figure
in to EITC eligibility?
1
17766
bTi1ImtSmr4izzacwZ5xHE
03/14/11 10:24pm PDT
Viewed by asker 03/21/11 10:04am PDT
Viewed by asker 03/21/11 10:04am PDT
10 Replies
Charlotte256
Questions asked: 5
Questions answered: 5652
Points earned: 15913
Questions answered: 5652
Points earned: 15913
Accountant Community AllStar
Advisory council of Accountant community power users.
03/14/11 10:55pm PDT
EITC is based on earned income and often reduced by other income..
When anyone doing nothing needs help, I will gladly help that person do nothing.
03/17/11 11:50pm PDT
I am thinking that K-1 income reported as active could be considered earned income. My 1120 S client has a small business. Takes W-2 income and K-1 pass through part as active with no payroll taxes. Not including the K-1 active as earned income would make it seem like they are trying to lower income to qualify. Problem is there is no where to put K-1 1120S K-1 income on EITC worksheet. Partnership income is mentioned but not 1120S. ProSeries does not que for it. Any other thoughts ?
03/18/11 12:37am PDT
The way ProSeries works, and I imagine all tax programs is Schedule E only has passive income and nonpassive income, and by this language neither passive income or nonpassive income includes earned income which affects Schedule EIC. I do not think the IRS will consider the K1 S income even if materially participating as earned income.
03/18/11 5:34am PDT
Rule of thunb: If SS and Medicare tax is paid on the income then it is "earned income" Interest, dividends, rental, pension, SS, corparation, trust, gifts, awards etc are all "unearned income"
For the most part, earned income is wage, non-employee compensation, guaranteed payments from partnerships, tip, etc.
IRMN
Questions asked: 98
Questions answered: 20990
Points earned: 69809
Questions answered: 20990
Points earned: 69809
Accountant Community AllStar
Advisory council of Accountant community power users.
03/18/11 6:02am PDT
TaxandBiz - I'm thinking your thinking is bad thinking. But I'm thinking Sue's thinking is good thinking. If the person isn't paying Social Security and Medicare on the income somewhere in the process, it isn't earned income.
Ninety percent of tax preparation is half mental.
03/18/11 6:06am PDT
And I'm thinking TaxandBiz's client was trying to get out of payroll taxes and shot herself in the foot on EITC.
03/21/11 10:04am PDT
Latest post
Paying or not paying payroll taxes is not what makes it earned or not earned. That is the criteria used to include it on the EIC worksheet . This way the number can just be pulled from the SE worksheet which is very nice and neat. Notary, partnership, income or foreign income for example are potentially earned income but excluded from SS tax. IRS seems to have address how to handle these with regard to EITC, but I see nothing specific about 1120 S Non Passive. But I do agree that not-paying the payroll taxes murk it all up.
essjay
Questions asked: 14
Questions answered: 6128
Points earned: 17957
Questions answered: 6128
Points earned: 17957
Allstar
Advisory council of community power users.
03/18/11 6:29am PDT
I'm with the rest of the crowd on this one, TaxandBiz.. Pass-through income on the 1120s saves the client the soc sec/medicare, but apparently may cost him on the EITC. The IRS rarely lets you have it both ways.
"Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that rnethod which best pays the treasury..." Judge Learned Hand - U S Court of Appeals
Accountant Man
Questions asked: 141
Questions answered: 12265
Points earned: 33964
Questions answered: 12265
Points earned: 33964
Accountant Community AllStar
Advisory council of Accountant community power users.
03/18/11 6:37am PDT
The solution
S corp. income on the k-1 is NOT "earned" income. It is a share of profits, or "unearned" income.
Kind of like dividends from a C corp.
I'm calmer now. Whew!
03/21/11 9:49am PDT
Thanks for the feedback. So long as W-2 compensation is taken to extent of personal services the rest can be passed through on K-1 legit. In this case client qualifies whether I include or exclude the K-1 income because it is such a small amount this year, credit the same. So I am going to view this as "non-earned" "other income" not investment income. They would just be subject to overall AGI limits. Pro series does not view the K-1 passive as investment income against the EIC limits and kick them out of EIC. EITC is on a bell curve so clients with self-employed income could be perceived as either trying to include income to qual or exclude to fall off.
