Executive has substantial ownership interest via shares in a mortgage business LLC. He has significant responsibilities and works his interest on a full time basis. 2020 was a very profitable year resulting in a K-1 reporting millions of ordinary income. Is this income subject to NIIT? and if not, would it be subject to SE tax?
Yes, a K-1 is in the making for 2020. I have concluded the taxpayer meets the test for material participation and therefore is not subject to NIIT on the LLC income. However, I am anticipating the K-1 will report the income in Box 14. If that is the case, can you envision any circumstances that would support not reporting SE income?
Any thoughts you have would be appreciated.
I’m not aware of any theory under which the income avoids being treated as SE income. Note that this tax applies only to the first $137,700 of SE income for 2020, so it will be a small fraction when the K-1 shows millions in income.