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Form 1120S


Christian

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A client came in  and included in his info a Form 1120S which was not received in prior years. He had bought stock in a local assisted living nursing home complex some years back and normally an annual Form 1099-DIV for dividends is received. Last year the corporation converted to an S corporation so he got the usual Form 1099-DIV and the additional Form 1120S. Since he has no active participation in management of the corporation I would usually assume the income items reported are passive in nature. What got my attention is a statement from the corporation stating the corporation is a "specified service trade or business" for purposes of computing the qualified business income deduction. This being the case do I need to change the client's status to active ? I prepare a tiny number of returns having K-1 forms and usually in cases of things being unclear I send them to someone else but this client is a longtime client and friend so I need to go the extra mile. Any input is appreciated.

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There's no need to change the designation from passive to active.  Keep it as "passive" if that is the client's actual participation. Even though your client is passive, he still has a share in the S corp's trade or business income that is flowing through to him as reported on his K-1, and he may have the QBI deduction depending on his taxable income.  Enter everything as it is reported on his K-1.

The specified service trade or business designation (SSTB) means that and the QBI deduction has additional limitations.  If the taxable income is at or below $315,000 for joint filers ($157,500 all others), then the SSTB limitation on QBI deduction does not apply.  Above that, the limitation on QBI begins to phase in between $315,000-$415,000 for joint filers and 157,500-207,500 for others.

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I very much appreciate your clarifying this for me. He did not understand the presentation made to the stock holders last year by management and ask me why income he did not receive and reported on his return as taxable income should be taxed. I have no answer for this as I myself do not understand why this is so. I referred him back to management to explain this. 

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