QBI deduction

[HOPE2]

Hi to all. Client has 1120-S, k-1 and also has a side job received 1099-NEC under his name( not S-Corp) should file sch C for him.

Sch C has net income and K-1 has numbers on box 17 code V for section 199A ordinary income but does not have Wages( Did not have distribution so did not have wage for sole shareholder and no employees) and UBIA. Also, both business are non-SSTB.

I this case for QBI deduction 8995, BOTH ordinary income from S-Corp and net income of sch C (minus 1/2 SE tax minus ... )should go on 8995?

I would greatly appreciated it for any help.

[Jim-from-Ohio]

Both businesses qualify for QBI.  on top of schedule C there is a box to activate the QBI for that particular venture. On the K-1 you have to manually enter the QBI information for the S Corrp at that quick zoom link.  The program should take compute the QBI properly. 

[Dusty2]

@HOPE2  I know that you did not ask this question but:

"To prevent S corporations and their shareholders from avoiding payroll taxes by maximizing distributions and minimizing compensation payments, the IRS requires S corporations to pay shareholders who provide substantial services reasonable compensation."

[BobKamman]

Actually, the IRS doesn't require anything.  The laws passed by Congress require S corporations with a profit to report a reasonable amount of those as compensation subject to payroll taxes.  An S corporation with a loss does not have to add to it by paying a salary to its owner.  Likewise, an S corporation with a $25,000 profit doesn't have to pay $50,000 to its owner just because she had a bad year.  The law requires IRS to enforce the laws that have been enacted.  If there is a disagreement about what the law requires, the IRS is required to follow the rulings of the judicial branch.  

I'm fairly sure @HOPE2 knows all this, so we should probably just MOOB.  

[HOPE2]

Yes, it was not my question but thanks good for other to read and rating.

[HOPE2]

Thanks @BobKamman for description of me.

How about my question?

[HOPE2]

Thanks Jim. If we open up 8995 you mean we can see two numbers one for Sch C and the other for K-1 of S-Corp ? Am I right?

[Jim-from-Ohio]

yes.. two figures on the 8995

[Dusty2]

@HOPE2  So, in your original post you said "Did not have distribution so did not have wage for sole shareholder and no employees", did they  have a profit?  If so did they pay themselves a salary as they are required to?

Dusty

[qbteachmt]

"Did not have distribution so did not have wage for sole shareholder and no employees"

Everyone is pointing out this is backwards. I hope that isn't one of the statements you are arming yourself with for purposes of guiding clients.

Or, you are explaining that the person took no money, so that also means no paychecks? Because distributions are never payroll and not in lieu of payroll. Payroll is primary. Having a paper loss would not preclude payroll, either.

Because Yes, there is an employee. Your Shareholder is the employee, if they are doing the work of the business.

[HOPE2]

My question is about QBI, but in S-Corp when you do not have enough cash to pay yourself paystub so you are not allowed to take distribution. Net income just has FED tax.

[BobKamman]

If the corporation paid no wages, it has no QBI deduction because the formula for that relies on wages being paid.  

And it is perfectly acceptable for an owner to work all year for no wages, if there is no income.  I have seen that, or something close to it, with real estate agents in lean years.  They may put months into a couple listings that finally close in January and earn $50,000 in commissions.  So they can pay themselves in that year, for the work they did the year before.  

[HOPE2]

Thanks but just  for reminding, Qualified Business Income Deduction included :

-Qualified business income (net income)

-Qualified wages paid

-UBIA , Qualified business property

QBI deduction is : the lesser of 

20% * QBI ( net income) 

or greater of          each of them                     A- (50%* W-2  )    B-(25%*W-2 + 2.5%*UBIA)

Also should be check it out the threshold of income

By the way when no W-2 and UBIA, QBI calculation goes on net income that is why we have statement A --- QBI pass-Through Entity Reporting that there is on first line Ordinary business income(loss) so  box 17 code V in Schedule K-1 will be generated. However, other items like royalty section 1231, section 179,...are considered.

[qbteachmt]

But this isn't true, either: "but in S-Corp when you do not have enough cash to pay yourself paystub so you are not allowed to take distribution."

That's two different things you just tied together. The one does not preclude the other.

You can be running an S Corp which has loans and/or grants (ie hurting for ready cash), and they need to pay payroll to whoever is doing the work. Having enough cash isn't the definition; if they had cash and used it unwisely or to acquire assets or pay down debt, for instance, that's just bad management.

Now, is it a good idea for a business entity having debt to use the funds to give distributions or even bonuses to staff? Probably not, unless they also know they have contracts settling later, for instance. But that's exactly what some startups will do; go into debt to cover operating costs until they are up and running. Or, give a bonus to staff that wrote a grant request or landed a big loan.

It's not unusual for a flailing business to pay retention bonuses to hold on to some high performing staff, to keep everyone that could turn around the business from jumping ship prematurely. And plenty of times, a distribution is taken where it becomes taxable income to the shareholder, as opposed to paying out retained earnings (prior taxable income). It isn't advisable, but they still take it, "Because we were sitting on all that cash, anyway. Why shouldn't I take some home?" So, that's an example of them having cash, but it wasn't theirs to take personally.

Until you run into the variables of how all of this is intertwined, you might want to pull back from your definitive statements.

[HOPE2]

You’ll need to pay reasonable compensation only if you (and/or other shareholders) perform service for the S Corp and take distributions from the S Corp’s profits. If you’re not taking distributions, there is no requirement to take reasonable compensation.

But lets back to QBI question please.

[Dusty2]

@HOPE2I Don't think you understand (or it is me).

You said "You’ll need to pay reasonable compensation only if you (and/or other shareholders) perform service for the S-Corp."

That statement stands for itself.  It has nothing to do with distributions.  If they made a profit and they perform services for the S-Corp they have to pay themselves a salary.

Example:  If the S-Corp makes a profit of $100,000 and the Sole Shareholder provides services for the S-Corp they have to pay reasonable compensation.  They cannot say "I took no money out so I don't have to pay myself a salary".

Dusty

PS:  If I am wrong please educate me!

[qbteachmt]

"If I am wrong please educate me!"

Dusty is correct. I know Hope is trying to learn. This is stated incorrectly: "perform service for the S Corp and take distributions from the S Corp’s profits"

There is no and relationship. Stop relating them. Here's what has been reviewed with Hope in the past: Taking a distribution, and no payroll, indicates there was money taken by that person, and if they are the person doing the work, the first requirement would be reasonable compensation through payroll, not just taking money. The one hinges on the other; not an And condition, but a "not in lieu of." Don't take distribution and avoid payroll, because that is avoiding payroll taxes, as well.

It's not even a 60/40 or other weird generic or "rule of thumb" formula you find from a web search result. Reasonable compensation is an informed amount.

Yes, it is a pass-through entity type. All taxable profit is reported, even if never taken out of the corporation. That's why distributions of available funds from a carryover year or even shown to be the current year, at the end of the year, is not the taxable event (in most cases). It is a taxable event if the shareholder no longer has an invested interest in the corporation (such as, took distributions beyond their previous taxed profit and even beyond basis). That's a simplified summary, of course.

Once again, you stated this as an absolute and associated, and it's not correct:

"If you’re not taking distributions, there is no requirement to take reasonable compensation."

What has been explained is, when there is no money taken through any method because there supposedly is not enough operating profit to pay wages, there had better not be any other sign that the unpaid employee-shareholder benefited any other way. Let's try this a different way:

"there is no requirement to take reasonable compensation."

Yes, there is, per the IRS. It has nothing to do with the following part:

"If you’re not taking distributions"

There is no requirement to give or take distributions. If there is more than one shareholder, then distributions need to be proportionate to ownership.

Notice how payroll is related to Work performed, but Distributions are related to Ownership?

That's why Payroll and Distribution don't relate to each other.

"But lets back to QBI question please."

You can't properly work on QBI, if you haven't dealt with all the inputs and dependencies. It's good you brought this up, because it is on a public forum where you would not want to mislead anyone.

[BobKamman]

@Dusty2 "That statement stands for itself.  It has nothing to do with distributions.  If they made a profit and they perform services for the S-Corp they have to pay themselves a salary. PS:  If I am wrong please educate me!"

Yes, you are wrong, but you can educate yourself by following through with an explanation of what IRS does in an S-corp audit.  The issue is payroll taxes, not income tax.  They can recharacterize distributions as salary, and assess FICA and FUTA.  But they can't recharacterize nothing into something.  

For example, a corporation has a profit of $100,000 but uses it to pay off the loan on the machinery and equipment it needs to manufacture products that create sales.  If it did not pay off the loan, the bank would repossess it and they would be out of business.  An IRS auditor is not going to tell the owner, "instead of paying the bank, you should have written yourself a check, then closed up shop."  

There are no court cases where no distributions were taken but payroll taxes were assessed.  The only arrow IRS has in its quiver is to claim, "you worked, you received payments, therefore you were paid taxable compensation."

[HOPE2]

https://rcreports.com/blog/what-if-an-s-corp-owner-can-t-afford-to-pay-reasonable-compensation/

[HOPE2]

Ok, I am sending you a link to read it please. Sometimes S-Corp has no enough money just has for covering expenditure ( assume no loan no debt to lender..) basically they formed S-Corp wrongly since is not wealthy better stayed Sch C than S-Corp what do you think about paystub, nothing since no money right?

Of course when shareholder perform service can have paystub but how? no money. Do you think about a big wealthy company or if we have other non wealthy company? Do not think about start-up company and other they have a lot PP&E.

Assume gross receipt $32000, Expenses without wages( sole shareholder - no employees) $28000 net income $4000 but wages per RCreport can be $6000 per month, so what happens at this situations?  and so no payroll, no distribution . Please do not debate in continue about why they formed S-Corp, I did not suggest them, and if I knew them before definitely I told them do not form it.

If you disagree with Rcreport's view I am glad to hear and learn here since I follow their articles. 

https://rcreports.com/blog/what-if-an-s-corp-owner-can-t-afford-to-pay-reasonable-compensation/

By the way thanks a lot to share your point of view.

[qbteachmt]

"but wages per RCreport can be $6000 per month"

Can be.

No, that's not reasonable given the scenario you present, if they are only netting $4k annually. Establishing reasonableness will take into account the success or failure of being in business.

If the person working over 2,000 hours a year ends with $4k gross business profit, there would be no expectation of $6k a month wages. That's not reasonable.

A person spending 1,000 hours a year and paying themselves $4k payroll for the year and taking $60k as distribution would be violating reasonableness.

Facts and circumstances apply.

It's similar to the "hobby or not" conditions.

[HOPE2]

Thanks, did you read RcReport article? Was that helpful? I think you and @Dusty after reading that article understanding me. We can stop this conversation. No need to open new conversation or bring a new idea since business's world has a lot of different cases unlimited!! Yes, reasonable comp for him is $6000/month as a whatever . I checked salary.com and the U.S. Bureau of Labor Statistics (https://www.bls.gov/ $6000/ month was fine. But S-Corp did not make money since no offer not have a lot of customers  or ... (new business) we cannot say since he worked 2080 hours in his/her  office so consider 2080 hours* $34=$72000 would be his gross, not at all. Yes, we can say he stayed and worked (both) 2080 hours in there but made $32000 based on bank statement, different scenarios and do not mix them, he did not work for other company, yes, if he worked for other employer you right. Should not be $32000 it should be $72000 more and less as like as similar job (cost approach). It usually happens it is normal for the first year or when the Covid was even loss came in on P&L. I am sure that I did my homework well. Search more articles to find out may other conditions there are in business. Some of people without understanding of S-Corp formed it but after that they regretted and back to Sch C. let's back to my QBI question and forget about it. 

[HOPE2]

https://rcreports.com/blog/what-if-an-s-corp-owner-can-t-afford-to-pay-reasonable-compensation/

[rudimagcalas]

How do I pay 

[HOPE2]

@rudimagcalas What do you mean, How do I pay!!