Form 8960, NIIT, and S Corp distributions

[sunnygirl123]

Hi everyone,

First time poster here! We have a new accountant this year because our accountant retired. My husband is a physician with an S Corp for which he is the only employee. Our accountant is saying that his non-salary S Corp distributions are "dividends" and are subject to the 3.8% NIIT. I disagree but wanted to ask you all what you thought. Also, if she is incorrect, I don't really know how to handle the situation so any tips on this would be great.

Thanks!

 

[MichaelB]

I'll wait for the experts to confirm, but I'm pretty sure that's incorrect. My understanding is that since he is an "active" participant in the S Corp, he is exempt from the NIIT on distributions.

[sunnygirl123]

Thanks MichaelB! Do others agree with this?

[Sergio Estavillo]

Passive income is subject to NIIT:

https://www.irs.gov/uac/newsroom/net-investment-income-tax-faqs

What is Included in Net Investment Income

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).

[sunnygirl123]

Thank you Sergio - but isn't my husband's income "active"?

[Bartl007]

From my reading, your husbands income is active and thus not subject to NIIT

https://www.crowehorwath.com/folio-pdf/Income-Tax-Implications-for-S-Corp-Bank-Shareholders_FS-16003-027C.pdf

 

I am not an accountant but maybe you need a new one?

[sunnygirl123]

Thank you Bart. I agree with you. I wrote her an email yesterday with an article. I'm not trying to be a pain, just trying to be accurate with our taxes. I will be looking for a new accountant for next year but I think it is too late for this year? I don't really know what to do if she writes back and says she wants to keep it the way it is...

[Bartl007]

I would ask to speak with the manager of the accounting firm that you use. Everybody makes mistakes and maybe this is a simple oversight that you were fortunate to catch. Conversely,  maybe this is the tip of the iceberg and there are lots of other errors in your return that are costing you more money than it would cost to have another firm do your taxes (correctly) this year. You do still have to sign off on the finalized return, right? Just refuse to sign it and tell them that you would like a second opinion from a 3rd party firm prior to submitted your return for 2016. If no other firm is willing to do your return given the timing and filing deadline, you could always try it on your own with turbotax, though your audit risk may be high given the complexity.

[pulmdoc]

An S-corp that your husband 100% owns is pretty obviously not passive investment income. The IRS explicitly states that all income from nonpassive business ventures is not subject to NIIT taxation. Not realizing this is a pretty glaring error. I agree with speaking with the accountant's boss about your displeasure, going over your returns with a fine tooth comb this year, and moving on next year.

[sunnygirl123]

Thank you all for your input. She and her husband own the firm. I was referred to her by two other physicians whose taxes she does but they both work for Kaiser so different tax scenario although also complex. She just wrote back and said she is having an outside research firm look into it, but that it looks like I am correct. It seems to me that she doesn't understand the s corp is a pass through entity if she thinks they are "dividends". I will be going through the rest of the return very carefully. Thank you for the advice.

[jfoxcpacfp]

S-corp income distributions are not "dividends" nor are they "passive" income. It is amazing how many CPAs do not understand how s-corporations are taxed. Of course, you said "accountant" not "CPA" - are you sure you have hired an experienced professional?

[sunnygirl123]

Thank you Johanna. I mistakenly just went by the physician referrals and assumed she was a CPA, but what I see now is that she is an EA and her husband is the CPA. Our previous CPA was our first and we were with him for 5 years before he retired. He was great. I didn't realize that many CPAs and other tax professionals wouldn't understand S Corp taxes, but now I will be more picky at the first meeting.

[Sergio Estavillo]

Sorry I wasn't more clear...your husband's income is not passive.

[jfoxcpacfp]

sunnygirl123 wrote:

Thank you Johanna. I mistakenly just went by the physician referrals and assumed she was a CPA, but what I see now is that she is an EA and her husband is the CPA. Our previous CPA was our first and we were with him for 5 years before he retired. He was great. I didn’t realize that many CPAs and other tax professionals wouldn’t understand S Corp taxes, but now I will be more picky at the first meeting.

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You might want to read the article from last year on WCI about finding a CPA if you haven't read it yet. Good luck!