Are S Corp distributions in excess of basis subject to net investment income tax?

Are distributions in excess of basis subject to net investment income tax?

Any gain recognized on the distribution of money in excess of a partner’s adjusted basis in the partnership interest is also treated as gain from the sale or exchange of the partnership interest, for purposes of the NII tax.

Are S corporation distributions subject to net investment tax?

An S corporation can save certain shareholders—shareholders who are treated as non-passive under Section 469—the 3.8% net investment income tax. The 3.8% net investment income tax is imposed to the extent the taxpayer’s modified adjusted gross income exceeds $250,000 for married couples and $200,000 for individuals.

Does NIIT apply to S Corp distributions?

In short, an S corporation shareholder’s allocated income and the shareholder’s gain from the sale of the S corporation stock will generally be exempt from the NIIT to the extent they meet the following conditions: (1) they are attributable to a trade or business of the S corporation or its passthrough subsidiary11; (2 …

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How are S corporation distributions in excess of basis taxed?

A non-dividend distribution in excess of stock basis is taxed as a capital gain on the shareholder’s personal return. It is a long-term capital gain (LTCG) if the S corporation stock has been held for longer than one year.

How do you avoid net investment income tax?

Strategies to Reduce Your Modified Adjusted Gross Income:

  1. Invest more taxable investment funds in municipal bonds. …
  2. Invest taxable investment funds in growth stocks. …
  3. Consider conversion of traditional IRA accounts to ROTH accounts. …
  4. Invest in life insurance and tax-deferred annuity products. …
  5. Invest in rental real estate.


Are liquidating distributions subject to net investment income tax?

Unless the corporation can elect S status prior to the shareholder’s sale of stock, the gain on the sale of stock is subject to net investment income tax. Likewise, the liquidation gain to the shareholder of a C corporation is subject to net investment income tax.

What is excluded from net investment income tax?

The NIIT doesn’t apply to certain types of income that taxpayers can exclude for regular income tax purposes such as tax-exempt state or municipal bond interest, Veterans Administration benefits, or gain from the sale of a principal residence on that portion that’s excluded for income tax purposes.

Who is not subject to the net investment income tax?

The net investment income tax (NIIT) is a 3.8% tax on investment income such as capital gains, dividends, and rental property income. This tax only applies to high-income taxpayers, such as single filers who make more than $200,000 and married couples who make more than $250,000, as well as certain estates and trusts.

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Is S Corp income investment income?

Any income from a passive trade or business activity is net investment income. Thus, an S-corp shareholder generally will include all income from the corporation in his or her net investment income if the corporation is a passive activity for the shareholder.

How is the sale of an S Corp taxed?

Corporate earnings are taxed at 21 percent. Then, earnings distributed to shareholders are taxed as qualified dividends at the individual level up to 23.8 percent (20 percent long-term capital gains + 3.8 percent net investment income tax).

Is S Corp income passive?

Income from rental activities conducted by an S corporation is generally considered passive regardless of the shareholder’s participation. There are exceptions to the rule for certain rental activities in which: Significant services are provided (like a chartered boat or jet).

What is a Section 1411 adjustment?

Basics of the Net Investment Income Tax

The Net Investment Income Tax is imposed by section 1411 of the Internal Revenue Code. The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts.

Where do you report distributions in excess of basis on 1040?

16510: 1040 – Distributions in Excess of Basis from 1065

No. Distributions entered in box 19 only flow to the Adjusted Basis worksheet, line 6. You must determine if a distribution was made in excess of basis and if it is taxable as a capital gain.

Can you take a distribution in excess of basis?

The IRS has the right to reassign distributions as salaries, making them subject to employment taxes. … Distributions that exceed the stock basis will be generally taxed as long-term capital gains on the personal tax returns of shareholders. Currently, the rate for long-term capital gains is 15 percent.

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How do I pay myself from a S Corp distribution?

Here’s a simple strategy that you can try, and it’s called the 60/40 rule:

  1. Pay 60% of your business income to yourself in the form of employee salary.
  2. Pay yourself 40% of your business income in the form of distributions.
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