Question

Henry is a 80% partner in HJ Partnership. This year, the tax form he receives from HJ (Schedule K-1 of Form 1065) shows business income of $59,000. During the year, Henry received a $14,000 distribution from HJ. Assume Henry's basis in the partnership is $28,000.

a. How much must Henry report on his Form 1040 from HJ for the tax year? $ 47,200

b. Assume HJ is a S corporation. How much must Henry report on his Form 1040 from HJ for the tax year?

Answer 1

a. Every partner is liable only for taxes due on hos distributive share of partnership income, as reported on schedule K-1, regardless of whether the distribution is actually made to the partner.

Thus Henry must report =59000*80% = $47,200 on his form 1040 from HJ for the tax year.

b. As S corporations are only subject to single level of tax, distributions from an S corporation are generally not subject to taxation for shareholders, as the shareholders has already been taxed on the income yearly when it passes through on the shareholder's K-1.

distributioon to the extent of basis in stock is not subject to tax, it reduces basis in stock and is treated as return of capital.

Thus $14000 distribution is less than the basis of 28000 and thus nothing is taxable.