S Corp

[SunTaxMan]

I have an S-Corp, two shareholders, one active, one passive -- but I can't find the area in the ATX program where I designate a shareholder as active or passive.

[kcjenkins]

It's a checkbox on the K-1

[SunTaxMan]

Common sense says that's where it would be. but..... The form in ATX does not show any "active" or "passive" checkbox. Form form IRS.gov does not either.

The only place I found it is in the 1040 K-1 worksheet at the top - to indicate if passive. This seems too late in the process of preparing the 1120S, even though the corp info is at the top of the 1040 K-1 worksheet (in the 1040 program.).

[SunTaxMan]

In the return I am working on, I have losses for the shareholders and the one who IS passive is showing carryforward of losses, which is as it should be, but I cannot figure out how, WITHIN the 1120S program, to indicate that this shareholder is indeed passive.

What brought up the subject is that this shareholder will be becoming an employee and will become active in 2011.

[kcjenkins]

On the K-1 Input sheet on the entity return, the place to indicate active or passive is the Section H boxes on the input sheet. This then carries to the 1040 K-1.

On the 1040 K-1 Input sheet, for one you did not do the entity return and automatically pull it in, you do it by checking the box on the input sheet, or by checking the box on the top of the Detail Sch.

[SunTaxMan]

I am missing something. On the input sheet the only "H" I see is just below the section for "Stock and Loan Basis" and the only items accompanying that "H" are checkboxes for "Final K-1" and "Amended K-1" and the statement to be completed "Shareholder's percentage of stock ownership for tax year......_________%"

Am I looking at the wrong input sheet?

[rfassett]

I don't think you can have active and passive shareholders. Would that not constitute a second class of stock and terminate the S election? If there are loss limits, they will be at the shareholder level.

[kcjenkins]

Sorry, I was thinking about the 1065 K-1, because with an S Corp, you do not actually have 'active' and 'passive' shareholders. If they are 'active' in the business, they get a W-2, but you just indicate whether ordinary income is passive on Sch E, line 28, column (g).

Look at the bottom tab 'Codes' to see details.

[SunTaxMan]

Now it makes sense. Thanks.

[cred65]

This situation came up yesterday by an IRS agent that was auditing two stockholders that had multiple (four) Sub S companies. The agent had the clients prepare an "ACTIVITY LOG" that the feds furnished that detailed the hours spent on each entity and by the type of services performed (Reg 1.469-5T(f)(4)).

The agent determined that one of the companies was passive due to lack of participation. This enity had large taxable income. Today at my office I went into the individual shareholder return to the K-1(Form 1120S)Input Worksheet and checked X for passive activity. There was no difference in the tax computation. However, the client had no PAL's. I will play around with this using different scenarios to see what the results will be.

BTW the agent hinted that the audit had to be completed by 3/18 since the govt may be shutdown! (what as shame).

[jainen]

>>the govt may be shutdown! (what as shame)<<

In my opinion shutting down the government would be disgusting, not shameful. Why can't the majority party pass a budget? This is not the first time the Republicans have blackmailed the nation in this way. They did it to the previous President who wasn't from their own party too.

[Kea]

I read one article a few days ago that said the legislators were motivated to avoid a shutdown this time. They realized that meant their Blackberry accounts would be shut down with everything else.

Interesting priorities!