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- One of the more significant changes to the tax landscape in recent years is the new 3.8% tax on net investment income under Sec. 1411. This tax, which was further clarified in recently finalized regulations, will affect many entities and taxpayers including S corporations and their shareholders.
www.thetaxadviser.com/issues/2014/apr/clinic-story-10.htmlImpact of Sec. 1411 on S Corporations and Their Shareholders
People also ask
What is the net investment income tax?
How is corporate income taxed?
Does materially participating in a s Corp count as a net investment income?
Do S Corp owners have to pay taxes?
Effective for tax years beginning on or after Jan. 1, 2013, Sec. 1411 imposes a tax of 3.8% on the lesser of (1) an individual’s net investment income or (2) the excess (if any) of the taxpayer’s modified adjusted gross income over certain thresholds.
- Basics of The Net Investment Income Tax
- Who Owes The Net Investment Income Tax
- What Is Included in Net Investment Income
- How The Net Investment Income Tax Is Reported and Paid
- Examples of The Calculation of The Net Investment Income Tax
- Additional Information
1. What is the Net Investment Income Tax (NIIT)?
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.
2. When did the Net Investment Income Tax take effect?
The Net Investment Income Tax went into effect on Jan. 1, 2013. The NIIT affects income tax returns of individuals, estates and trusts, beginning with their first tax year beginning on (or after) Jan. 1, 2013. It does not affect income tax returns for the 2012 taxable year filed in 2013.
3. What individuals are subject to the Net Investment Income Tax?
Individuals will owe the tax if they have Net Investment Income and also have modified adjusted gross income over the following thresholds: Taxpayers should be aware that these threshold amounts are not indexed for inflation. If you are an individual who is exempt from Medicare taxes, you still may be subject to the Net Investment Income Tax if you have Net Investment Income and also have modified adjusted gross income over the applicable thresholds.
4. What is modified adjusted gross income for purposes of the Net Investment Income Tax?
For the Net Investment Income Tax, modified adjusted gross income is adjusted gross income (Form 1040, Line 37) increased by the difference between amounts excluded from gross income under section 911(a)(1) and the amount of any deductions (taken into account in computing adjusted gross income) or exclusions disallowed under section 911(d)(6) for amounts described in section 911(a)(1). In the case of taxpayers with income from controlled foreign corporations (CFCs) and passive foreign investm...
5. What individuals are not subject to the Net Investment Income Tax?
Nonresident Aliens (NRAs) are not subject to the Net Investment Income Tax. If an NRA is married to a U.S. citizen or resident and has made, or is planning to make, an election under section 6013(g) or 6013(h) to be treated as a resident alien for purposes of filing as Married Filing Jointly, the final regulations provide these couples special rules and a corresponding section 6013(g)/(h) election for the NIIT. A dual-resident individual, within the meaning of regulation §301.7701(b)-7(a)(1),...
8. What is included in Net Investment Income?
In general, investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities and businesses that are passive activities to the taxpayer (within the meaning of section 469). To calculate your Net Investment Income, your investment income is reduced by certain expenses properly allocable to the income (see #13 below).
9. What are some common types of income that are not Net Investment Income?
Wages, unemployment compensation; operating income from a nonpassive business, Social Security Benefits, alimony, tax-exempt interest, self-employment income, Alaska Permanent Fund Dividends (see Rev. Rul. 90-56, 1990-2 CB 102) and distributions from certain Qualified Plans (those described in sections 401(a), 403(a), 403(b), 408, 408A or 457(b)).
10. What kinds of gains are included in Net Investment Income?
To the extent that gains are not otherwise offset by capital losses, the following gains are common examples of items taken into account in computing Net Investment Income: 1. Gains from the sale of stocks, bonds, and mutual funds. 2. Capital gain distributions from mutual funds. 3. Gain from the sale of investment real estate (including gain from the sale of a second home that is not a primary residence). 4. Gains from the sale of interests in partnerships and S corporations (to the extent t...
15. If I am subject to the Net Investment Income Tax, how will I report and pay the tax?
Individuals, estates, and trusts will use Form 8960PDF and instructionsPDFto compute their Net Investment Income Tax. For individuals, the tax will be reported on, and paid with, the Form 1040. For estates and trusts, the tax will be reported on, and paid with, the Form 1041.
16. Is the Net Investment Income Tax subject to the estimated tax provisions?
The Net Investment Income Tax is subject to the estimated tax provisions. Individuals, estates and trusts that expect to be subject to the tax in 2013 or thereafter should adjust their income tax withholding or estimated payments to account for the tax increase in order to avoid underpayment penalties. For more information on tax withholding and estimated tax, see Publication 505, Tax withholding and Estimated Tax.
17. Can tax credits reduce my NIIT liability?
Any federal income tax credit that may be used to offset a tax liability imposed by subtitle A of the Code may be used to offset the NII. However, if the tax credit is allowed only against the tax imposed by chapter 1 of the Code (regular income tax), those credits may not reduce the NIIT. For example, foreign income tax credits (sections 27(a) and 901(a)) and the general business credit (section 38) are allowed as credits only against the tax imposed by chapter 1 of the Code, and therefore m...
19. Single taxpayer with income less than the statutory threshold.
Taxpayer, a single filer, has wages of $180,000 and $15,000 of dividends and capital gains. Taxpayer’s modified adjusted gross income is $195,000, which is less than the $200,000 statutory threshold. Taxpayer is not subject to the Net Investment Income Tax.
20. Single taxpayer with income greater than the statutory threshold.
Taxpayer, a single filer, has $180,000 of wages. Taxpayer also received $90,000 from a passive partnership interest, which is considered Net Investment Income. Taxpayer’s modified adjusted gross income is $270,000. Taxpayer’s modified adjusted gross income exceeds the threshold of $200,000 for single taxpayers by $70,000. Taxpayer’s Net Investment Income is $90,000. The Net Investment Income Tax is based on the lesser of $70,000 (the amount that Taxpayer’s modified adjusted gross income excee...
21. Other than these FAQs, is there additional information available about the Net Investment Income Tax?
Yes. You can find additional information about the NIIT in the 2013 final regulationsPDF and in a new 2013 proposed regulationPDFpublished on Dec. 2, 2013.
22. The proposed regulations that were published on Dec. 5, 2012, are effective for tax years beginning after Dec. 31, 2013, but the Net Investment Income Tax went into effect on Jan. 1, 2013. May...
Yes. For taxable years beginning before Jan. 1, 2014 (e.g., calendar year 2013), taxpayers may rely on the 2012 proposed regulations (published on Dec. 5, 2012), the 2013 proposed regulations (published on Dec. 2, 2013), or the 2013 final regulations (published on Dec. 2, 2013) for purposes of completing Form 8960. However, to the extent that taxpayers take a position in a taxable year beginning before Jan. 1, 2014 that is inconsistent with the final regulations, and such position affects the...
Dec 21, 2023 · S corporation owners are required to pay themselves a reasonable salary, which they pay self-employment and payroll taxes on.
May 16, 2024 · Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income. This is one of the most appealing features of an S corporation.
- Prableen Bajpai
Mar 1, 2024 · As pass-through entities, S corps are not subject to double-taxation, but S corps typically have employees, which means paying payroll taxes and providing certain employee benefits, such as healthcare and retirement accounts, all of which have tax consequences—some favorable, some not.
Oct 23, 2023 · Typically there is not an S Corp net investment income tax associated with your K-1 income since you are materially participating.
Sep 19, 2022 · Net Investment Income Tax. S corporation shareholders who are not employed by the business do not pay FICA taxes. But they might qualify for the Net Investment Income Tax established by the Affordable Care Act.
