S Corp Sch K-1 Income

[floydcpa03]

Is the income reportable from S Corp Sch K-1 (other than interest, dividends, etc) going to be deemed earned income subject to the additional 0.9% medicare tax or will it be deemed investment income subject to the 3.8% tax on investment income? This is for a shareholder that actually works in the S Corp.

[Burke]

Is the income reportable from S Corp Sch K-1 (other than interest, dividends, etc) going to be deemed earned income subject to the additional 0.9% medicare tax or will it be deemed investment income subject to the 3.8% tax on investment income? This is for a shareholder that actually works in the S Corp.

Under current law, it is not deemed earned income so it would not be subject to the 0.9% medicare tax withholding rules. This withholding applies to W-2 wages. Under the provisions of the ACA as I have read it, it is not considered investment income either in the circumstance you describe.

[ChEAr$]

Under current law, it is not deemed earned income so it would not be subject to the 0.9% medicare tax withholding rules. This withholding applies to W-2 wages. Under the provisions of the ACA as I have read it, it is not considered investment income either in the circumstance you describe.

Hmmm, well now. Not earned income; I can agree with that. And not investment income either, I like that.
Sounds like you can have your cake and eat it too. (grin

[veritas]

Yeah!

another tax loophole for me!

[John of PA]

Keep in mind that while the S Corp income does not directly get subject to either of these 2 new taxes, it will raise the AGI which then can end up triggering other investment income subject to the 3.8% that otherwise would not have been. These taxes will not kick in until we prepare 2013 tax returns. Hope this makes sense.

[Gary2]

This thread triggered my curiosity, and I needed another excuse to divert from cramming, so I found the relevant section, 1411 at the Cornell online USC.

There are a couple of caveats that I gleaned from that section: First, if the S Corp income is considered passive to the taxpayer, then it will be treated as investment income (1411(c)(2)(A)). Thus the rents would be subject to the tax unless material participation applies, and the ordinary income is potentially subject to the tax.

Second, a sale of S Corp stock (or a partnership interest, for that matter), is potentially subject to the tax under paragraph (c)(4). It's a bit convoluted, so I'm not sure I'm reading it correctly, but I think the idea is that the portion of a gain or loss on the sale of stock attributable to the unrealized gain/loss in the corporation's property is excluded from the tax, just as it would be if the corporation actually sold it and reported the capital gain/loss on the K-1, but any portion due to the intangible worth of the stock would be subject to the tax. I welcome corrections to my reading; hopefully, the IRS will issue regulations that include an example of applying this paragraph.

[Burke]

Interesting. I started to mention passive income, which IMO would be treated differently, but since the OP said it was for a shareholder who actually worked in the corp, I assumed that would not apply. But a minority interest in a situation where the shareholder has no voice in operations? Very likely. I can see the court cases already. BTW, it appears COD income will escape these taxes as well based on info gleaned from 2 workshops at NATP conference recently.