Gwinnett CPA Firm Presents Preparing the Georgia S Corporation Income Tax Return (Form K-1)
Gwinnett CPA Firm Presents Preparing a Georgia Schedule K-1 as Part of Form1120S: An Atlanta CPA’s Guide to Preparing Corporate Income Taxes
CPA Serving Atlanta GA & Beyond
Continuing to unlock the mystery of the practical aspects of preparing a Corporation Income Tax Return is critical to a business owner not only understanding the nuances of how the return works but also its tax consequences.
In our past article we addressed the hypothetical example of ABC Company while presenting its cash based Profit & Loss statement. As a business owner, you are to list all of your valid business expenses to determine the company’s net income per the internal books and records. As an S Corporation is a “flow through” entity it does not pay any income taxes at the corporate level but instead these earnings flow down to the owners personal return where the profits (loss) are reported and accordingly reflected on the owners own Form 1040. It is there when combined with the other personal income tax issues of the owner that the S Corporation taxable income is determined and paid. In beginning to lift the veil on how to properly prepare a K-1, we have reflected below only the book to tax adjustments of our sample ABC Company to illustrate how the K-1 is prepared. This reconciliation shows how tax preference and adjustment items are reflected on the K-1 (which is a part of the proper filing of Form 1120S/the S Corporation Income Tax Return).
Cash Based Net Income Per the Company P & L $ 6,000
Add Meals and Entertainment (fifty percent deductible) 2,000
Add Section 179 Depreciation (a tax preference item)* 10,000
Add Contributions, which are also tax preference item 1,000
Taxable Income Per the Return $19,000
*Section 179 Depreciation is limited by tax law to both statutory limits and the amount of profit a business has (i.e., Section 179 Depreciation can be cannot be utilized in a tax year that it creates or there is a loss). Also care should be taken on the personal return to ensure that maximum amounts of Section 179 are not “blindly” reflected as the statutory limits apply at the personal return level, as well. This is usually not a problem with a single owner business, but can be potentially problematic when an individual may have investments in several different business ventures where, when aggregated, the maximums may be a limiting factor. Generally any Section 179 that is not available in a given year to generated a current tax deduction, may be carried forward to future tax years on the returns where there may be no such limiting factors (such as maximums or profits in a roll-forward year).
A K-1 reflects an owners pro rata share of the corporations income, deductions etc. If you are the sole owner of an S Corporation then you will reflect the whole of the K-1 items on your personal return. However, if you are in an S Corporation where there is more than one owner, then the K-1 will reflect only your proportional share of the business operating results. Thus in the above example if you were a owned sixty percent of an S Corporation, then you would receive $11,400 ($19,000 Taxable Income Per the Return (see above example) times your sixty percent ownership) with other owners receiving a K-1 for their respective portions.
A shareholder who receives a K-1 will be responsible for the payment of the applicable income taxes whether or not any of the earnings or profits are distributed. Thus, shareholders should expect to pay taxes on monies when they are made and not when the actual cash profits are distributed and received into the owners personal bank account. Unlike an LLC, LLP or Partnership an S Corporation K-1 owner will not be responsible for the payment of self-employment taxes for reported income on a K-1 as monies from an S Corporation are not self-employment income, by tax law definition. Due care, however, should be exercised to always ensure that a reasonable salary is paid to all active owners as required by law. The best test of what would constitute a fair salary is what a business would have to pay an independent party for the same services being rendered by a shareholder to the business.
Generally an individual taxpayer will report items on their personal return in the same way that they are reflected on the K-1 and the Corporate Income Tax Return itself; Form 1120S. If you believe a K-1 has been issued to you in error, then you should contact the company’s management or CPA, as appropriate, and resolve any conflicting issues and to receive a corrected and amended K-1, if correction is needed. When you are filing your personal return you should not attach the K-1 to your personal return or Form 1040 as the original or amended K-1 returns have already been filed with the corporation return (Form 1120S) as a part of their filing.
When ABC Company prepares the K-1 as part of the return it will list in Section A its Federal Identification Number or EIN and in Section B the full company name and address. In Section D ABC Company will list a taxpayer’s identifying number or Social Security number, in Section E the shareholder’s name, address, city, state and ZIP code, and in Section F the shareholder’s percentage of stock ownership for the tax year. For purposes of our synopsis we will address first the example of ABC Company above and where its attendant items will be reflected on a K-1 and then will then review many of the more frequently used sections of the K-1.
ABC Company and its K-1
-One line 1 and Page 1 of the K-1, ABC Company will reflect the $19,000 of cash based taxable income or profit. Please be reminded that in our example our shareholder is the sole owner of the K-1, otherwise the $19,000 profit would be reduced to the shareholder’s pro rata portion. Also please note that the amount reported here is not the same as the Cash Based Net Income per the ABC Company’s internal books and records. As S Corporation earnings and “certain tax preference items” flow down to the individual personal return they are denoted or the appropriate lines of the K-1 so that each owner will be advised of items and certain tax nuances applicable to their return.
-On line 11 and Page 1 of the K-1, ABC Company will reflect the $10,000 of Section 179 Depreciation that has been claimed on the corporate return will be listed.
Page 2 of the schedule K-1 details not only where certain items will be reflected on the respective shareholder’s individual or personal return, but also details many subcategories for the lines and sections listed. For example on Line 12 there are eighteen subcategories which are detailed by a letter and description. If applicable then these subcategories are denoted on page 1 of the return and the appropriate amount listed.
-One line 12 and Page 1 of the return, ABC Company will reflect as subcategory A (or as 12A on the return) the $1,000 of Charitable Contributions.
-On line 16 and Page 1, ABC Company will show the non-deductible portion of Meals & Entertainment (M&E) or $2,000 as per tax law only 50% of domestic M&E to be tax deductible. Line 16 also has several subcategory options and the $2,000 of non-deductible Meals & Entertainment, in our example, will be show as 16C on the face of the K-1.
All of the above items reflect where the items will be recorded on the books for ABC Company for the used illustration. However, there are many more tax preference and non-tax deductible items that are frequently use on the first page of the K-1 and examples of many of those most commonly used are listed below:
-Interest Income will be reflected on line 4 of the K-1 while Ordinary Dividends should be listed on line 5a and any Qualified Dividends listed on 5b.
-Net short-term capital gains (loss) and Net long-term capital gain (loss) would be reflected on line 7 and 8a respectively.
-Any Alternative Minimum Tax (AMT) items will be reflected on line 15 using the appropriate designation of the six subcategories listed.
-Property distributions including those made in cash are to be reflected as 16D on the K-1.
-If an S Corporation owner also has medical insurance paid out of the company on behalf of the owner or dependents, then this amount for a shareholder will be reflected on the Supplemental Information of this return and labeled typically as Owner’s Medical Insurance.
Preparing a K-1 is not for the meek, faint-hearted or ill-prepared. However using this information as a guide will do much to shed light on what would otherwise appear to be too daunting of a task. Although just as a doctor cannot write an article and thereby “teach” you to do a major surgery, this article will do much to remove the mystique of preparing a K-1 and give you a broader understanding of a K-1 works, is prepared and intersects with the Corporate Income Tax Return.
If this article leaves you seeking more information you will find it here:
When looking at what type of entity your business should be, we strive to balance the legal protection issues vs. the tax savings. Over the years, we have developed the mindset that there is no perfect election but there are ones that are better than others. To learn more about the Advantages and Disadvantages of Incorporating as a Subchapter S Corporation, C Corporation, Limited Liability Corporation or Partnership visit www.hiscpa.com/article2.html There will also discover the rules of becoming an S Corporation, how your LLC can convert to an S Corporation for tax purposes and a hypothetical example of tax nuances and differences see www.hiscpa.com/article6.html
Corporate Returns www.hiscpa.com/business-tax-returns.html
Discover what type of returns your corporation is required to file and its corresponding due dates ensuring that you do not miss an important deadline resulting in unnecessary penalties and interest.
To discover more about your Personal Tax Return (Form 1040) and how your K-1 is reflected, visit these fine articles:
Determining Filing Status and Dependents www.hiscpa.com/personal-returns.html
The first step in filing your personal Federal tax return is to determine your correct filing status and the number of deductions you can claim. It sounds simple, but it can make a difference in the amount of tax you pay.
Determining Your Adjusted Gross Income (AGI) www.hiscpa.com/agi.html
The first page of Form 1040 is used to calculate the taxpayer’s adjusted gross income. While many people think of their income as what is reported on form W-2, there are some other additions (and possibly some deductions) that have to be made as well.
Claiming Itemized Deductions on Your Tax Return www.hiscpa.com/itemized-deductions.html
Itemizing deductions on your personal return can result in paying a smaller tax. However the rules on what can be deducted and what can’t are fairly strict. Use this guide to determine what’s deductible
Written by John Dillard CPA of His CPA at 770 814 9304 and visit www.HisCPA.com (a Atlanta Christian CPA firm). At His CPA we march to the beat of a higher drummer where we put the “Golden Rule” to work each and every day by “Serving Him by Serving You…One Tax Return at a Time.”
We advise clients on: IRS representation, Offer in Compromise, Incorporation in GA, Corporate and Personal Income Tax Returns, Part-time CFO, Virtual Controller, Business Planning, Payroll Administration, Bookkeeping.
We serve clients that are located in Atlanta GA, Gwinnett County, North Fulton County, Cherokee County, DeKalb County, Hall County, Clayton County, Cobb County, Forsyth County, Hart County, Jefferson County, Duluth, Alpharetta, Johns Creek, Lawrenceville, Marietta, Milton, Norcross, Snellville, Roswell, Buford, Smyrna, Marietta, Cumming, Grayson, Hartwell, Suwanee, Sugar Hill, Loganville, Lilburn, East Point, Gainesville, Snellville, Buckhead, Buford, Peachtree City, Dunwoody, Kennesaw, Decatur, Conyers, Stone Mountain and Decatur, Barrow, Bartow, Carroll, Cherokee, Clayton, Coweta, Douglas, Fayette, Forsyth, Fulton, Gwinnett, Henry, Newton, Paulding, Pickens, Rockdale, Walton, Barrow, Bartow, Carroll, Henry, Newton, Bartow, Walton, Rockdale, Barrow, Spalding, Coweta, Dawson, Douglas, Fayette, Newton, Paulding, Spalding, Walton, Henry, Paulding, Douglas, Coweta, Canton, Covington, Douglasville, Druid Hills, East Point, Forest Park, Griffin, Lithonia, Mableton, McDonough, Milton, Mountain Park, Newnan, Powder Springs, Stockbridge, Union City, Villa Rica, Winder, Woodstock
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