So you read yesterday’s post and you’re still preparing your own return? You’ve answered the questions you need to ask yourself before starting to put numbers from your S corporation/Partnership/Trust (collectively, “thing”) K-1 onto your 1040 schedules? OK, if you are intrepid enough to be doing your own return here, you are mostly on your own. Don’t shortcut it. This is one chore where you really should read the instructions (S corporation, Partnership, Trust), rather than just opening the box and putting pieces together.
There’s no point in me trying to walk through the whole K-1 with you; that’s what the instructions are for. I will point out a few items on the K-1 (or left out) that frequently cause errors and trigger questions.
On the partnership K-1 the ending capital account is probably not your “basis.” The capital account is frequently useless in measuring basis. It might be the same as your basis if the “Tax basis” box is checked, but the only sure way to track your basis is to keep your own running basis schedule year-by-year. S corporation shareholders can find their basis computation schedule here.
Don’t double-count your gains. The “Unrecaptured Section 1250 gain” in Box 8c of your S corporation K-1 (9c of the partnership return) is a part of the “Net Section 1231 gain” (S corporation box 9, partnership box 10). The total income is the Section 1231 gain, not the sum of the unrecaptured 1250 and 1231 amounts. You use the “Unrecaptured 1250 gain” on your Schedule D worksheet to figure out how much of your Section 1231 gain is taxed at a 25% rate, rather than the normal 20% top capital gain rate.
Don’t double count “investment income.” If you have interest, dividends or capital gains on your K-1, the partnerships is required to tell you how much of that is “investment income” with a code “A” in the “other information” box on the K-1. You only need that number if you are computing an investment interest expense deduction on Form 4952. You don’t add it as additional income on your return.
Beware the “net investment income” disclosure, code “Y” in the “other information” section. The partnership and S corporation instructions for computing this came out late, and this number is likely to be wrong. If you have to fill out Form 8960 to compute your Obamacare net investment income tax, you shouldn’t count on this number, especially for a K-1 with trade or business income. Use instead the separate items from the K-1 that are investment income for Form 8960 purposes.
Be careful out there, and come back tomorrow for a new 2014 filing season tip!
Russ Fox, Bozo Tax Tip #5: Procrastinate. You mean waiting won’t solve my tax problems?
William Perez, Tax Freedom Day 2014. April 21.
Kay Bell, Being DIFferent could prompt a tax audit. Kay points out things that can attract IRS attention on your 1040.
Jeremy Scott, Audit Electability (Tax Analysts Blog). “However, a taxpayer’s choice of entity can have broad tax ramifications, including some consequences unintended even by the complicated U.S. tax regime.”
Stephen Olsen, Summary Opinions for 4/4/2014. (Procedurally Taxing), A good roundup of some recent tax cases, including coverage of the Ohio accounting firm’s unpleasant breakup that we covered last week.
The idea is no more than what the Wizard of Oz told the scarecrow: regulated preparers wouldn’t be any smarter, but they would have a diploma. An IRS-issued Doctorate in Thinkology doesn’t make an inept preparer competent, any more than granting a CPA or a JD makes somebody a good tax preparer. I would much sooner have uncredentailed Robert D. Flach do my 1040 than any number of fully-credentialed CPAs and attorneys I know. All regulation would accomplish would be to raise prices, lining the pockets of the big tax prep franchises while driving many taxpayers to self-prepare or stop filing.
TaxProf, The IRS Scandal, Day 335
Roberton Williams, If You Have High Income, Your Taxes Are Going Up (TaxVox)
Tax Justice Blog, “Tax Extenders” Would Mean Even Lower Revenue than the Ryan Plan
Jim Maule, How Shocking is Tax Evasion?
Radio Iowa, Senator Grassley says fouled up tax system is depressing. He’s depressed? As a senior taxwriter for most of the last three decades, he’s answerable for a lot of the depression.