The IRS has released draft instructions for trusts, estates and individuals to calculate and pay their Section 1411 net investment income (NII) tax liability and for partnerships and S corporations to report information on NII to shareholders and partners.
The Section 1411 Medicare tax became effective for the first
time in 2013, and imposes a 3.8% tax on NII to the extent modified
adjusted gross income exceeds $200,000 for single filers, $250,000
for joint filers and $11,950 for estates and trusts.
Individuals, trusts and estates will report the tax on new Form
8960, Net Investment Income Tax – Individuals, Estates, and
Trusts, which is filed with the annual tax return. The draft
instructions to the form generally follow the final regulations
that were issued on Nov. 26, 2013. The draft instructions contain
several worksheets to help taxpayers calculate net gain or loss,
determine what portion of a net operating loss can be used against
NII and allocate deductions to NII.
Partnerships and S corporations also have new reporting requirements. The instructions for Form 1120-S, U.S. Income Tax Return for an S Corporation, Form 1065, U.S. Return of Partnership Income, and Form 1065-B, U.S. Return of Income for Electing Large Partnerships, all impose reporting when shareholders or partners who materially participate dispose of an interest in the entity (and do not qualify for a safe harbor). The S corporation or partnership must report the taxpayer’s pro rate share of net gain and loss from a deemed sale of the entity’s property.
Partnerships and S corporations must also include new information on NII on the Schedule K-1. The instructions to all the forms add a new code for partnerships and S corporations to report “any information that may be relevant to [shareholders or partners] to figure their net investment income when the information is not otherwise identifiable on Schedule K-1.” The draft instructions do not offer any more specific requirements, but give several examples of information that should be reported under the new codes — such as rental income or gain or loss from a Section 212 for-profit activity and not a Section 162 trade or business.
This information is reported under code U in box 20 on the Schedule K-1 for S corporation, code U in box 17 on the Schedule K-1 for electing large partnerships and code Y in box 20 for other partnerships.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.