Your client has just dropped off a Schedule K-1 for an S-Corporation! Where do you begin? What questions do you ask, and what do you need to know?
As tax professionals, we all have clients that are shareholders in S-Corporations and therefore have flow-through items for their individual tax return. For the most part, the financial information needed is on the shareholder’s K-1, issued by the S-Corporation. But before we take the K-1 and incorporate it into the 1040, we first need to determine a few items such as basis and at-risk limitations, as well as material or active participation.
The checklist below will help you through the process of gathering the pertinent information for the shareholder and covering your due diligence to report accurate information.
| Yes | No | |
|
1) Is it the right person for the K-1? Check name and federal ID numbers |
||
| 2) Is this a final year K-1? | ||
| 3) Is this an amended K-1? | ||
| 4) Is the individual more than a 2% shareholder? | ||
| 5) Do I have the basis information? | ||
| 6) Is there a difference of inside and outside basis? | ||
| 7) Do I have the last 3 years of returns to check for carry forward / carryback items? | ||
| 8) Does this shareholder have any loans with the S-Corp? | ||
| 9) Does this shareholder actively participate in the S-Corp business? | ||
| 10) Does this shareholder have a W-2 from the S-Corp as well as a K-1? | ||
| 11) Have I done my due diligence checking for a reasonable salary and profit distributions? | ||
| 12) Does the shareholder have any ownership in any property rented to the S-Corp? |
Once you have gone through this checklist with your shareholder / client, you will the information necessary to appropriately incorporate the K-1 information into the 1040. And remember…. It’s not enough to just have the K-1!
Don’t miss the upcoming LIVE webinar:
Dealing with the S Corporation K-1 on the 1040
September 18 2:00 PM ET Register now
In this session we will show you how to take the K-1 items to the 1040 return; the huge issue of the new Net Investment Income Tax, and the always problematic basis issues. We will give you court cases you should be aware of, potential hazards, as well as real stories from tax season.
Presented by Kathy Hettick, EA, ABA, ATP, RTRP and Gene Bell, EA, ATA, CFP, RTRP