How JustAnswer Works:

  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.

Ask Jax Tax Your Own Question

Jax Tax
Jax Tax, Tax Attorney
Category: Tax
Satisfied Customers: 1377
Experience:  JD, LL.M in Business and Taxation, IRS Enrolled Agent. Expert in Business and Tax Transactions
59761513
Type Your Tax Question Here...
Jax Tax is online now
A new question is answered every 9 seconds

We need to explain the K1 report to new shareholders (whom

Customer Question

We need to explain the K1 report to new shareholders (whom have not had this type of exposure before). The new shareholders are non-voting children of the long-time owner of the business. I find the K1 to be rather confusing to most anyone other than tax professionals. Do you have a simplified method you are able to suggest . . . making it somewhat clear to the recipients? Your advise would be appreciated.
Submitted: 2 years ago.
Category: Tax
Expert:  Jax Tax replied 2 years ago.

Jax Tax : Certain businesses are not subject to income tax which is generally a good thing. When this happens, someone must pay tax on the business income. So, the business files an 1120s or 1065 which produces a K1.
Jax Tax : A K1 is similar to a w2 or a 1099. It simply show what your portion of the business income / loss / or other reductions is.
Jax Tax : Since the business is not taxed, the owners must report the profit or loss on their personal return.
Jax Tax : There is a small difference here than typical w2 income. That is the K1 reflect the business profit or loss not exactly what the individual owners actually receive.
Jax Tax : For example. A business has profit of $100k and two owners. The k1 to each will show $50k profit which will be taxed. This does not mean the owners received $50k only that the business earned it. The business could retain the entire $100k and make no distributions. The good side is that later down the road if the $50k is distributed, it is not taxed because it already has been.
Jax Tax : To summarize, tax is based on business profit passed on the k1. Distributions themselves are not generally taxable.
Jax Tax : I want to point out that the children cannot be non voting shareholders. This is a violation of the rules and will change your tax status. All owners mustbhave the exact same shareholder rights. This is not negotiable. The last thing you want is one getting older and getting a lawyer and owning the business when it is all said and done.
Jax Tax : Not to mention the IRS changing your tax status.
Jax Tax : There can be only one type of stock which must have the exact same voting rights.
Customer:

Yes, understood, it is daunting though to tie the K1 to the book results of the company. And in this case, the distribution will be for their estimated tax liability.

Customer:

I understand one type of stock, however on advice of attorney, we were told we could have voting and non-voting shares. Do you have a reference I could read on this, so I am clear we are not in conflict with any regulations? Thanks

Jax Tax : It is good you ensure the estimates are covered and I am working on the cite for the voting issue.
Jax Tax : Section 1361 is consistent with your attornies statement regarding voting rights. Alley having different voting rights does not.disqualify a sub S. This seems to stem from the LLCs ability to make such fordable arrangements. But, if an LLC, you would have members not shareholders so I am assuming to S election was made by a corporation.originally. This may cause.issues. An LLC uses a membership agreement to set forth such rules.
Jax Tax : A corporation would typically do so by issuing different classes of stock.
Jax Tax : To summarize, I would just run this by he attorney to male 100%. Here is the statute language.
Jax Tax : (4) Differences in common stock voting rights disregardedFor purposes of subsection (b)(1)(D), a corporation shall not be treated as having more than 1 class of stock solely because there are differences in voting rights among the shares of common stock.
Jax Tax : I will assume he is correct but it is worth talking to him about unless you are an LLC which case you are fine.
Customer:

We are a S Corp. Thank you very much for your candid comments.

Jax Tax, Tax Attorney
Category: Tax
Satisfied Customers: 1377
Experience: JD, LL.M in Business and Taxation, IRS Enrolled Agent. Expert in Business and Tax Transactions
Jax Tax and other Tax Specialists are ready to help you
Expert:  Jax Tax replied 2 years ago.
Have a good new year.

JustAnswer in the News:

 
 
 
Ask-a-doc Web sites: If you've got a quick question, you can try to get an answer from sites that say they have various specialists on hand to give quick answers... Justanswer.com.
JustAnswer.com...has seen a spike since October in legal questions from readers about layoffs, unemployment and severance.
Web sites like justanswer.com/legal
...leave nothing to chance.
Traffic on JustAnswer rose 14 percent...and had nearly 400,000 page views in 30 days...inquiries related to stress, high blood pressure, drinking and heart pain jumped 33 percent.
Tory Johnson, GMA Workplace Contributor, discusses work-from-home jobs, such as JustAnswer in which verified Experts answer people’s questions.
I will tell you that...the things you have to go through to be an Expert are quite rigorous.
 
 
 

What Customers are Saying:

 
 
 
  • I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
< Last | Next >
  • I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
  • I WON!!! I just wanted you to know that your original answer gave me the courage and confidence to go into yesterday's audit ready to fight. Bonnie Chesnee, SC
  • Great service. Answered my complex tax question in detail and provided a lot of additional useful information for my specific situation. John Minneapolis, MN
  • Excellent information, very quick reply. The experts really take the time to address your questions, it is well worth the fee, for the peace of mind they can provide you with. Orville Hesperia, California
  • Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help. Mary C. Freshfield, Liverpool, UK
  • This expert is wonderful. They truly know what they are talking about, and they actually care about you. They really helped put my nerves at ease. Thank you so much!!!! Alex Los Angeles, CA
  • Thank you for all your help. It is nice to know that this service is here for people like myself, who need answers fast and are not sure who to consult. GP Hesperia, CA
 
 
 

Meet The Experts:

 
 
 
  • Wallstreet Esq.

    Tax Attorney

    Satisfied Customers:

    570
    10 years experience
< Last | Next >
  • http://ww2.justanswer.com/uploads/KU/KUMI95/2013-9-30_195031_kumar.64x64.jpg Wallstreet Esq.'s Avatar

    Wallstreet Esq.

    Tax Attorney

    Satisfied Customers:

    570
    10 years experience
  • http://ww2.justanswer.com/uploads/CU/Cuttinggirl/2011-10-29_03719_wcrop2.64x64.jpg Wendy Reed's Avatar

    Wendy Reed

    Enrolled Agent

    Satisfied Customers:

    3052
    15+ years tax preparation and tax advice.
  • http://ww2.justanswer.com/uploads/CATax/2009-08-04_204548_Mark.jpg Mark D's Avatar

    Mark D

    Enrolled Agent

    Satisfied Customers:

    985
    MBA, EA, Specializing in Business and Individual Tax Returns and Issues
  • http://ww2.justanswer.com/uploads/IN/insearchoftheanswer/2013-8-16_0233_attorney.64x64.jpg Richard's Avatar

    Richard

    Tax Attorney

    Satisfied Customers:

    3229
    29 years of experience as a tax, real estate, and business attorney.
  • http://ww2.justanswer.com/uploads/MY/MyVirtualCPA/2012-7-5_44024_cookmegan1.64x64.jpg Megan C's Avatar

    Megan C

    Certified Public Accountant (CPA)

    Satisfied Customers:

    6121
    Licensed CPA, CFE, CMA who teaches accounting courses at Master's Level
  • http://ww2.justanswer.com/uploads/JG/jgordosea/2012-6-7_43138_GordosVeritas.64x64.jpg jgordosea's Avatar

    jgordosea

    Enrolled Agent

    Satisfied Customers:

    2783
    I've prepared all types of taxes since 1987.
  • http://ww2.justanswer.com/uploads/OZ/ozaukeecpa/2012-6-7_193219_Picture1croppedandshrunk.64x64.jpg MequonCPA's Avatar

    MequonCPA

    Certified Public Accountant (CPA)

    Satisfied Customers:

    2231
    CPA, Over 30 yrs experience w/individuals and small businesses. Masters in Tax.