Can anyone provide some background on this? New client came to me last week. They are a married couple. He's a contractor and I registered him as a LLC, sole prop. Wife is a court reporter. I assume she's also a Schedule C. Upon receiving their 2017 tax return, she is set up as a UBO, being taxed as a partnership. She is listed as 100% partner in profits and losses and 99.999% for capital. The remaining .001 for capital is for the tax firm that set her up and prepared their 2017 returns. The 1065 showed minimal profit, but her K1 showed $55k in Net Income Unit Distribution (NIUD) which flows to their Schedule B as dividends. She also had guaranteed payments of $6,500. Obviously, she's skirting paying self employment tax on the $55k because it's flowing to the Schedule B.
The 2017 1065 had an attachment which read: "A US contractual company is another form of an Unincorporated business. Organization (referred to by IRS as a UBO) pursuant to code section 301.7701, taxpayer elects to file Form 1065. For Federal tax purposes, this unincorporated business organization (UBO) lacks two or more of the four characteristics of a corporation and is NOT a proprietorship, association, corporation, partnership, LLC, or statuary trust."
This is all new to me and want to make sure I'm not jumping into a hornet's nest. TIA.