Q: How do you calculate Line 22 in Part I on Schedule E?
A: The total of passive losses on Part I / Schedule E cannot exceed the amount of passive income earned on other investments. As Part II / Schedule E indicates, passive income from Information Access Partners was $35,774. Therefore, the total of passive losses from rental properties on Part I / Schedule E cannot exceed – or was limited to – $35,774. Since $35,774 is the total maximum that can be used to offset the passive income of the same amount, the percentage that each individual property represents of the total passive loss amount on Line 21 in Part I is used to allocate the $35,774 on Line 22 to each property.
Q: Where in Part II / Schedule E would we see Guaranteed Payments reported at Line 4 on Schedule K-1 (Form 1065)?
A: Guaranteed payments are reported as taxable income in the same section used to report a partners’ share of ordinary business income. Ordinary business income may be offset by a Section 179 Deduction (also reported in Part II / Schedule E) but that deduction cannot offset or diminish guaranteed payments.
Q: We have received several K-1 forms with an amount at line 17, coded W. According to the instructions, this is “W-2 wages.” However, the owners do not report it on the wages and salaries line of the 1040. In some no distributions were reported, whereas in prior years, the distributions amount was close to that shown at line 17 W. Asking the accountant, in more than one case, we’ve been told part or all of the W amount was given as a distribution to the owners. However, my reading of the IRS’s instructions indicates that the W amount is simply a mathematical calculation and does not represent distributions.
What should we do with this? Should we count it as cash? Based on my reading of the IRS instructions, it seems that the K-1 forms have been filled out wrong. But it is happening in multiple locations with multiple accounting firms—so am I wrong? Should we count this line 17 W amount as cash income to the shareholder?
A: The amounts reported at Lines 17V through 17Z provide information that determine whether owners' of Subchapter S corporation may reduce their taxable income by 20% of their qualified business income in accordance with the Section 199A Deduction. Line 17W should exactly match the owner's W-2 wages. The other two lines - Line 17V and 17X are determined according to IRS guidelines and figure in the mix that determines the final deduction that applies to the taxpayer and owner.
These amounts are definitely not distributions. They are amounts that determine a tax deduction and, therefore, the taxable income for the owner and taxpayer in question. If they were distributions, they would be reported at Line 16 for a Subchapter S corporation. That is the line that captures activities that impact "basis", a topic near and dear to the IRS. If an accountant claims the amounts reported at Line 17V through Z are distributions to the owner / taxpayer that is incorrect.
These amounts are NOT cash to the owner / taxpayer. They are identical in impact to the Section 179 Deduction in that they reduce the owner / taxpayer's taxable personal income. W-2 wages are cash to the owner / taxpayer, but they are already accounted for as revenue in any personal cash flow computation. REIT dividends at Line 17Y are cash to the owner / taxpayer but they, too, have already been accounted for as revenue in any personal cash flow computation - or should have been.
Course overview: Understanding Schedules K-1