Level 5

Question

Partnership Income for EITC

18 replies
115 views

I guess this is more of a general tax question.

I have a client whose only income is on a partnership K-1. The partnership did not pay the partners through payroll. It's a family partnership: mom, dad, and son, and they all live in the same house, which is also where the business is. The partnership pays all the home expenses (and yes, I know not all of those expenses are deductible, that's a totally different question for the partnership return) so the son doesn't really have any expenses. So he doesn't need an "income" per se. He just works at the family business, which pays all his bills. Mom and dad have retirement income and social security.

The son is the client I'm asking about. The partnership absolutely did not pay him, even giving him any draws. But he does get to claim 50% of the partnership profit as active, qualified income. However, when I select that as active, qualified business, it doesn't seem to kick in the EIC. Am I doing something wrong, or is partnership income not considered "earned income" for the purpose of EIC?

I've read several different sources of IRS instructions on EIC and I don't see anything that says anything about partnership income except salary received from a partnership. Nothing about K-1 income. Does anyone know if my hunch is correct, and that the son would not be eligible for EIC?

ProSeries Professional

This topic has been closed for replies.

T

TaxGuyBill

@ShoeBox Taxes wrote:

He just works at the family business

If he is working for the business, it is subject to SE tax. Box 14 of the K-1 should show the income subject to SE tax, and that is what should trigger it as "earned" income.

qbteachmt

Level 15

"except salary received from a partnership."

"The partnership did not pay the partners through payroll."

Partners don't get paid through Payroll, unless they elected to be treated as a Corporation.

If he was not a partner in the formation documents, he would be an employee and would be paid through payroll. Two different ways a person contributes to and benefits from the business operation.

"The partnership pays all the home expenses"

It's sad that people have no idea how to determine how the business is performing, because they do not manage the money correctly. I wonder if they are prepared for what that tax filing is going to show.

"He just works at the family business, which pays all his bills."

It seems time for him to learn to be in business, then. I've seen this is called "Adulting."

"The partnership absolutely did not pay him, even giving him any draws."

Yes; that's exactly what that gets treated as. Personal expenses paid from the business = draws. That would be part of the 1065 and his K-1.

"So he doesn't need an "income" per se"

He let mommy and daddy manage it, through the business.

Don't yell at us; we're volunteers

ShoeBox TaxesAuthor

Level 5

He is a partner in the partnership documents.

They were a Sole Prop before, doing business use of home, and didn't have a separate bank account. I was doing their taxes, and figured the correct amounts based on square footage. I kept telling them they needed to set up separate accounts, and pay their business expenses from a different account, but they actually kept really good records, so it wasn't hard to split everything out correctly.

Last year, they asked how they could make it so their son could take over the business, and I said it sounded like they needed to incorporate. I told them I wasn't a lawyer, and that they should probably talk to a lawyer or someone who knew more about that than I did. So they did. I told them to make sure they started a new business account under the new business, and make sure they set things up so that the business wasn't paying home expenses.

The lawyer who set them up did it as a partnership, and they claim he said they could continue using business funds to pay home expenses. The "partnership docs" that this lawyer drew up were terrible. They don't have a % assignment in them. They don't have what each partner is bringing in. Nothing. Fortunately they only paid the guy $5k, which isn't much, but still, for that kind of money he should have given them actual partnership documents. (It's a one-page document that lists the names of the 3 partners, their addresses, and states that they will be in business as the name of the business in perpetuity, with all 3 signatures and dates of signing.) Hell, I know nothing about this, and even I could have done better than that!!!

I set up the home as being rental income to mom and dad, in the amount of the cost of property tax and utilities (mortgage is paid in full) and the % of depreciation, with the expenses being just the %.

Anyway, thanks for the help. Sounds like I should book the son's room and board as "partner draws" in the books, and issue that as income. Thanks!

qbteachmt

Level 15

Are they even registered with their State? Did they get FEIN?

"I set up the home as being rental income to mom and dad"

You can't rent your own house to yourself and pay yourself rent.

"in the amount of the cost of property tax and utilities (mortgage is paid in full) and the % of depreciation, with the expenses being just the %."

Are you explaining the business use only? And is that exclusive, and not "this corner of the kitchen and the shelves in the garage?"

"Sounds like I should book the son's room and board as "partner draws" in the books, and issue that as income."

Did the parents take these amounts from the business in lieu of "room and board" from the son?

There seems to be a whole lot wrong here.

Don't yell at us; we're volunteers

Sign up

Login with SSO

Let's get you signed in

Login with SSO