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mmjp
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| Posted: 29 Dec 2009 at 21:16 | IP Logged
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I would like someone to help me with this MCQ.
BISK 39th edition PS NO.7
Freeman, a single individual, reported the following income in the current year
Guaranteed payment from services rendered to a partnership $50,000
Ordinary income from an S corporation $20,000
What amount of Freeman's income is subject to self-emplayment tax?
a 0
b20,000
c 50,000
d 70,000
Answer c 50,000
Guaranteed payments from a partnership for services rendered are income from self-employment.Ordinary income received from an S corporation was earned by the S corporation, not the shareholder, and retains its character as it passes through to the shareholder.
I don't understand why ordinary income of $20,000 is not included.
Is he a partner of this partnership?If he is not, then why he includes guaranteed payment in the computation?
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goldengold
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| Posted: 29 Dec 2009 at 22:24 | IP Logged
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Guarantee payment from a partnership is self-employment income. It is a rule and I don't know why but my Becker said so.
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mmjp
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| Posted: 29 Dec 2009 at 22:32 | IP Logged
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goldengold,
Thank you very much for your post!
I see, then I'll just memorize the rule.
So now I only don't understand why
"Ordinary income from an S corporation $20,000"
is not included in
"Freeman's income subject to self-emplayment tax"
by explaining
"Ordinary income received from an S corporation was earned by the S
corporation, not the shareholder, and retains its character as it
passes through to the shareholder."
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cpa0123
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| Posted: 29 Dec 2009 at 22:33 | IP Logged
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1) Guaranteed payments are made to a general partner in partnership for services rendered by the partner without regard to income. It is allowed as a deduction for partnership & taxed as SE income for the partner. It is just like a salary paid however no payroll taxes are withheld. The rationale behind this treatment is that general partners derive their income from rendering services, while limited partners derive income from capital.
2) On the other hand, income from S corp is taxed in the hands of a shareholder as an ordinary income. Such income is not received out of any 'service' rendered to the corp. Therefore it is treated as ordinary.
This is what i could understand after reading some of IRS pubs. Hope this helps.
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mmjp
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| Posted: 29 Dec 2009 at 22:51 | IP Logged
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cpa0123,
Thank you very much for your explanation!
I could have a new idea.
Now I understand this problem as following
Guaranteed payment goes to Schedule SE,
Ordinary income of S corp goes to Schedule E.
If these are wrong, correct these please.
Thank you.
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