Technical topics regarding tax preparation.
3-Dec-2021 1:40pm
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Other than a requirement to be a 'non-passive' shareholder, what other limitations (if any) need to be considered before a taxpayer uses tax credits passed through on their S-Corp K-1 to offset their Form 1040 income tax liability? In particular, the K-1 has an ordinary loss which the taxpayer cannot utilize currently due to $0 in end of year basis, but are tax credits subject to any similar basis, at-risk or other limitations in determining whether they can be used or must be carried forward?
3-Dec-2021 3:16pm
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Should have mentioned the tax credits are the Empowerment Zone Employment Credit and Employer SS/Med Taxes Paid on Certain Employee Tips.
6-Dec-2021 7:34am
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It's not subject to basis limitations.
However, most credits (including the credit for FICA tax on tips) result in a disallowance of the related deduction. This increases your ordinary income, which increases your basis, and also increases your nondeductible expenses, which decreases your basis. So the net effect generally is that it's a wash, although you can have some interesting side effects depending on how big these items are and how the ordering of the basis items affects everything.
Also, you mentioned being non-passive: The credits are still allowed for passive shareholders, but the credit allowed is limited on Form 8582-CR to the portion of tax attributable to the passive income.
I'll let someone else comment on at-risk limitations.
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