The IRS is waiving the requirement to include international tax information Schedules K-2 and K-3 for most domestic partnerships and S corporations for tax year 2021 (IR-2022-38, February 16, 2022.)
The passthrough entity tax is a workaround for the $10,000 individual income tax limit on the deduction for state taxes adopted in the Tax Cuts and Jobs Act of 2017. On February 9, 2022, Governor Newsom signed SB 113, which fixes some of the issues with California's passthrough entity tax.
Since proposed regulations were not issued for owner/beneficiary information relating to the 20% of qualified business income deduction until August 8, 2018 and it wasn’t listed on the 2017 forms, that information was omitted on many passthrough entity income tax returns for fiscal years ending in 2018. According to proposed regulations issued on August 8, 2018, that information should be included on the 2018 income tax returns for the owner. (Proposed Regulations Sections 1.199A-1(f)(2) and 1.643(e)-(2)(ii).) If that information is listed on the owner’s Schedule K-1, it’s presumed to be zero. (Proposed Regulations Section 1.199A-6(b)(3)(iii).)
This week’s interview on Financial Insider Weekly is with attorney Bernard Vogel III of the Silicon Valley Law Group. Our interview subject is "Choices of forms for doing business."
Since the 35% federal penalty tax on excessive passive investment income and threat of termination of the S election only apply when the S corporation has undistributed C corporation earnings and profits, these issues can be eliminated by distributing those earnings and profits. The distribution can be "deemed" to be made without making a distribution of cash or assets by election of the S corporation's shareholders. A low 15% federal tax currently applies to these distibutions, scheduled to increase to up to 43.4% after 2012.
Although S corporations have some disadvantages compared to partnerships and limited liability companies, they also have some important advantages.
2010 might be the last chance for S corporations to make a special election that may protect their status as S corporations and the related tax benefits.