How to handle K1 distributions flowing into an S-Corp? (Need help with partnership income flowing to my S-Corp)

Does this mean the OP could potentially avoid self-employment taxes on the K-1 income coming from the partnership? And would this impact their ability to make retirement plan contributions based on that income?

Does the K-1 income from the partnership also get counted when determining my reasonable salary requirements? I'm wondering if I need to increase my S-Corp salary since the overall business income is higher than just my 1099 work.

The K-1 income generally doesn't factor into reasonable compensation determinations since it's passive investment income rather than earned income from your active business operations. Reasonable compensation should be based on the services you personally provide to the S-Corp. For retirement plan contributions, the rules get a bit more complex. Your contribution limits are generally based on your W-2 wages from the S-Corp, not the total income flowing through. This is actually one reason some business owners prefer the S-Corp structure.

I've been looking for something like this! Does taxr.ai handle more complex situations? I have rental income flowing through multiple entities and my CPA seems overwhelmed.

Sounds interesting but I'm always skeptical of these tax tools. How does it compare to just talking with a CPA? And how do they handle state-specific tax issues with flow-through entities?

Yes, they definitely handle complex scenarios! I had both ordinary income and some weird passive activity losses flowing through, and they explained exactly how everything would be reported and what forms would be affected. The detailed explanations were actually better than what my CPA provided. They have experts who understand state-specific issues too. In my case, they pointed out a California-specific filing requirement I would have missed otherwise. Unlike typical tax software, they actually review and explain your specific documents rather than just giving generic advice.

Wait, how does this service actually work? They can really get the IRS to call you back? I've spent literal days on hold this year trying to figure out similar pass-through entity issues.

I'm highly doubtful the IRS would provide detailed tax guidance on complex entity structures over the phone. Their phone support is usually just for basic questions and account issues. Seems like you got lucky if you actually received useful S-Corp advice.

The service works by holding your place in the IRS phone queue so you don't have to stay on hold. When you're about to reach an agent, they call you and connect you. It's that simple - they just save you from the hours of waiting on hold. You're right that IRS agents don't typically give complex tax advice, but they absolutely can and do clarify filing requirements, which is what I needed. In my case, I specifically asked about where to report the income on my 1120-S and whether it would affect my self-employment tax calculation. Not comprehensive tax planning, but essential filing guidance that saved me from a potential issue.

Thanks for this! My LLC was never a C-Corp so I don't think I have accumulated E&P to worry about. But I'm curious - what counts as passive income in this context? The partnership I own is an active business that I don't personally manage, so I'm getting K-1 income but not actively participating. Is that considered passive?

Since your LLC was never a C-Corp, you're correct that you don't need to worry about the excess net passive income tax. That's a relief! Regarding what counts as passive income - for this specific tax concern, the IRS has a particular definition of passive investment income that includes rents, royalties, dividends, interest, and annuities. Income from a partnership where you don't materially participate would typically be considered passive for passive activity loss rules, but that's different from the S-Corp passive investment income test. Your partnership income would likely be characterized based on the nature of the income itself (business income, rental income, etc.).

This is super important! I missed this when I was in a similar situation and ended up taking distributions that exceeded my basis. Had to report them as capital gains and paid a lot more tax than necessary. Tracking basis correctly is critical with multi-entity structures.

Thanks for pointing this out! I hadn't even thought about how this would impact my basis calculations. Are there any specific tracking methods you'd recommend? My accountant hasn't mentioned anything about basis adjustments.