Sub-S Received K-1 from an LLC Investment

[G2R]

My client's company (Sub-S) invested in another company (LLC, taxed as corp) in 2020.  For 2020, a K-1 was issued from the LLC to the Sub-S for the 2020 profits, however dividends were not issued until 2021. 

Am I correct that the 1120S for 2020 will not show any tax implications, but in 2021, the Sub-S will show dividend income to my client on his 1120S K-1?  

[G2R]

Anyone know the answer to this?

[Lion EA]

I don't know, but doesn't the S-corporation report on its 2020 1120 all the activity reported on the LLC's 2020 K-1 to its parent company?

[Gail in Virginia]

I find the question a little confusing.  If I am following, the sub-s owns the LLC.  The LLC has elected to be taxed as a corporation.  I am assuming it  is taxed as an s-corporation since a k1 was issued.  In my experience, most owners of entities taxed as s-corps pay taxes on the amount reported on the k-1, and any amounts received are usually distributions rather than dividends.  If they are dividends, they should be reported on a 1099-DIV and taxed as dividends.  If they are distributions, they may not be taxable at all since tax on the profits earned was paid based on the k-1 at the time the profit was earned by  the LLC. 

[G2R]

1 hour ago, Lion EA said:

I don't know, but doesn't the S-corporation report on its 2020 1120 all the activity reported on the LLC's 2020 K-1 to its parent company?

Thank you for the reply @Lion EA  & @Gail in Virginia -- Originally I was told the LLC was a C-Corp and I'd never seen an S-corp own a C-corp so I was curious how reporting that information would work. I finally got a copy of the actual K-1, and it's an LLC taxed as a partnership, NOT a C-Corp like they said.    

But for future reference, if the S-Corp DID own a portion of a C-Corp, I assume the dividends would simply be reported through the 1120S K-1 right?

[Lion EA]

If an S-Corp owns a C-Corp, the C-Corp would report dividends on a Form 1099-DIV that the C-Corp issues to the S-Corp. Then the S-Corp issues From K-1 to the shareholders. (This is a more complex transaction than my corporate clients have! I have only a few corporations.)

[Gail in Virginia]

20 hours ago, G2R said:

Thank you for the reply @Lion EA  & @Gail in Virginia -- Originally I was told the LLC was a C-Corp and I'd never seen an S-corp own a C-corp so I was curious how reporting that information would work. I finally got a copy of the actual K-1, and it's an LLC taxed as a partnership, NOT a C-Corp like they said.    

But for future reference, if the S-Corp DID own a portion of a C-Corp, I assume the dividends would simply be reported through the 1120S K-1 right?

If an S-Corp owns a C-Corp, and the C-corp pays dividends out of retained earnings, then the C-Corp would issue a 1099-Div to the S-Corp, which would in turn issue a K-1 to the S-corp shareholders reflecting those dividends.  I think that is what you were saying.

[G2R]

6 minutes ago, Gail in Virginia said:

If an S-Corp owns a C-Corp, and the C-corp pays dividends out of retained earnings, then the C-Corp would issue a 1099-Div to the S-Corp, which would in turn issue a K-1 to the S-corp shareholders reflecting those dividends.  I think that is what you were saying.

Yes Gail, that's exactly what I was saying.  Thanks for confirming it too!

[Abby Normal]

A partnership K1 should be entered on the K1 Input form in 1120S, and it will flow thru to the shareholder(s).

Be careful with basis, but since it's a partnership, lack of basis isn't normally a problem, BUT you still need to track the S corp's basis in the partnership.