S-Corp Capital Gain on Distributions, NIIT?

Technical topics regarding tax preparation.
#1
MWEA  
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S-Corp shareholder took distributions beyond his basis in the corp, has capital gain income as a result. Is this income subject to net investment income taxation? The software is showing it as subject to NIIT. Like everyone else, scrambling with the deadline and my initial google search didn't give me an answer. Does anyone have a quick answer? If so, I appreciate it.
 

#2
Nilodop  
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Not a quick answer. I looked it up. Sec 1411(c)(1)(A)(iii) speaks of gain
attributable to the disposition of property
. Your client did not dispose of property.
 

#3
JR1  
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And only capital gain if you don't see that it can be repaid from future profits or money. You can book it as a Note...
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#4
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#5
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IRC 301(c)(3)- treated as gain or loss from the sale or exchange of property

The active trade or business exceptions, added to NILODOP’s cite, would mean not subject to NIIT

1.1411-4(d)(1) makes “disposition” pretty broad... “Definition of disposition. For purposes of section 1411 and the regulations thereunder, the term disposition means a sale, exchange, transfer, conversion, cash settlement, cancellation, termination, lapse, expiration, or other disposition (including a deemed disposition, for example, under section 877A)”

So you’d need to qualify for the active trade or business exception
 

#6
Nilodop  
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But is
treated as gain from the sale or exchange of property
or
treated as sold
(877A) the same as
attributable to the disposition of property
? Possibly, even likely, but not necessarily.
 

#7
MWEA  
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As I stated in the first post - client return is showing NIIT subject to S-Corp distributions beyond his basis in the corporation. Drake Software support tells me there is no way to over ride the program to have it not show as being subject to NIIT. Has anyone dealt with this specifically in Drake before? Wondering if I need to paper file a return.
 

#8
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Drake has an "8960" screen that will let you over-ride anything that ever needs over-riding.
Because on T.A. ten was the most you were allowed
 

#9
MWEA  
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I tried and so did two different people at Drake Support. Most things in there can be overwritten, but not line 5(a).
 

#10
sjrcpa  
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Can you link the deemed sale to the K-1?
I don't use Drake but other software has this feature.
 

#11
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In my software, there is a box to check on the K-1 input screen. Check the box if it is subject to NIIT. Not sure how Drake works, but may want to look at where the K-1 info is input.
 

#12
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Look at the form and instructions. Line 5a has to equal 1040 line 6 plus Schedule 1 line 4. An override for line 5a would be foolish. It would make the return wrong. And it would cause the return to reject for e-file.

This is the whole purpose for line 5b: to back out any amount not subject to NII.

8960 is not a form that gets used all that often. It seems like a lot of people do not understand how it works very well. But if you have clients in that income range you owe it to them to spend some quality time with the instructions as well as the code and regs. The code and regs told you how to determine what is or isn't subject to the NII but you need the form instructions to tell you what that looks like on the tax return.
Because on T.A. ten was the most you were allowed
 

#13
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MWEA wrote: Most things in there can be overwritten, but not line 5(a).

That’s good, because you wouldn’t touch Line 5(a). Maybe start by reading the instructions (as 10letters mentioned) to the Form.
 

#14
MWEA  
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Tenletters wrote:Look at the form and instructions. Line 5a has to equal 1040 line 6 plus Schedule 1 line 4. An override for line 5a would be foolish. It would make the return wrong. And it would cause the return to reject for e-file.

This is the whole purpose for line 5b: to back out any amount not subject to NII.

8960 is not a form that gets used all that often. It seems like a lot of people do not understand how it works very well. But if you have clients in that income range you owe it to them to spend some quality time with the instructions as well as the code and regs. The code and regs told you how to determine what is or isn't subject to the NII but you need the form instructions to tell you what that looks like on the tax return.


Thanks for setting me straight, I appreciate it. You are correct, I did spend some extra time reading today in this area.
 


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