Q: We have run into a company that shows a mark on Schedule E / Part 2 that is under “Foreign Partnership”. Do these companies file a Schedule K-1 (Form 1065) even if they are foreign partnerships? It did have its own EIN number.
A: A foreign partnership with a domestic U.S. taxpayer as a partner will issue a Schedule K-1 (Form 1065) to the U.S. partner. Any guaranteed payments or business income reported on Schedule K-1 (Form 1065) must be reported on Schedule E / Part II. Any other pro-rata shares of foreign partnership income, such as interest income, would be reported on Schedule B in Form 1040. And so on.
Q: Is there any way to determine if an individual has ownership interest in a Subchapter C corporation if they do not disclose such information?
A: To our knowledge, there is no organization that compiles ownership information for privately held Subchapter C corporations. With respect to publicly held Subchapter C corporations, a company in question could provide a full list, or response to an inquiry, but would likely not do so for protection of privacy reasons.
Note that if you asked a customer to list all companies for which it may be an owner and the customer provide you with a very incomplete list, this could be called an ethics violation.
Q: For a Schedule K-1 (Form 1120S), does Box E report payment for only shareholder loans or all existing business loans?
A: Box E reports only loans to the specific shareholder – the taxpayer receiving the Schedule K-1 (Form 1120S). Such loan repayments impact his or her basis in the company.
Q: We have a customer, Misty, that owns 100% of Kite LLC. Kite LLC owns 62% of Realty LLC. Misty has no direct ownership of Realty LLC yet both Realty LLC and Kite LLC appear on Schedule E Part II of her Form 1040. I thought an entity only appeared on Schedule E if there was a K-1 associated with it. Realty, LLC doesn’t show a K-1 in Misty's name, only Kite, LLC. Why would Realty, LLC appear on her 1040 without a K-1 for Misty?
A: Please check with a tax specialist if the taxable income or distributions from Realty LLC are significant. If they are trivial, then it may not be worth the effort.
Assumptions:
1. Kite LLC owns 62% of Realty LLC.
2. Misty (the personal taxpayer) owns 100% of Kite but has no direct ownership of Realty LLC.
3. Kite LLC's annual business income includes its pro-rata share of Realty LLC's annual income - 62% in effect.
If the above is correct, Misty receives a single Schedule K-1 from Kite LLC. All taxable business income reported on the Schedule K-1 is carried to Part II on Schedule E in the personal income tax returns. If the Schedule K-1 reports other sources of taxable income, e.g., interest income, this amount is initially reported on Schedule B in the personal income tax returns. And so on.
Either the taxpayer or her preparer appears to have made a mistake by including Realty LLCs business income in Part II on Schedule E. The entry from the Schedule K-1 issued by Kite LLC should include Realty LLC business income either in whole (all of Kite's ordinary business income) or in part (only some of Kite's ordinary business income, which means Kite LLC owns another entity) passed from Kite LLC to Misty the taxpayer. To include amounts from both LLCs appears to be double counting. If there is only one Schedule K-1, you might check for the source of Realty LLC taxable business income.
Course overview: Personal Income Tax Returns and Cash Flow