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Modeling Different Business Structures - LLCs, Partnerships, and S-Corps

Advisors with self-employed clients may wish to model the tax implications of entity selection. This article lays out key considerations when modeling this within Holistiplan.

To compare the tax implications of various entity selections, model the business activities as a Schedule C, Partnership, or S-Corp in one scenario, and compare that scenario with an alternative business structure. In this article, we cover:

Holistiplan does not currently support business return uploads. For S-Corps, only the net income reported on the Schedule E that is carried over to the taxpayer's Form 1040 will be used within the software.

Modeling LLCs (Filing as a Schedule C):


Sole Proprietorships, Qualified Joint Ventures, and Single-Member LLCs (also referred to as disregarded entities by the IRS), as well as contract "gig" workers that receive 1099s instead of W-2 wage income, generally record business activities on Schedule C. To model an LLC business type entity on Schedule C, navigate to the Schedule C Entities Worksheet by clicking on the pencil icon next to Schedule C Income.


Schedule C Entities Worksheet:


Once in the Schedule C Entities Worksheet, click on the Proprietor drop-down box and assign the business to the appropriate taxpayer. Any client that has been added to the client household can be selected as the business owner.

To add additional entities, click + Add Entity. This button behaves in the same way as the + Add A Scenario button, in that users can create a blank entity and enter the information from scratch, or copy an existing entity.




Next, enter the information for that specific business:

  • SSTB: Make a note if the business entity is a Specified Service Trade or Business (SSTB) by checking this box, if appropriate. Understanding if the business is considered an SSTB is important for the calculation of the QBI Deduction (discussed later).
  • Statutory Employee: Check this box if the income from this business is paid out in the form of a W-2 (not common). Social security and Medicare taxes are withheld from W-2 earnings, so taxpayers do not owe Self-Employment Tax (SE Tax) on these earnings. Statutory employees include full-time life insurance agents, certain agents or commission drivers and traveling salespersons, and certain homeworkers. If the client had both SE income and statutory employee income, record any SE income here and the statutory employee income in the Wages Worksheet within the 1040 Income section.
  • Gross Sales: Enter gross sales as reported on line 7 of Schedule C.
  • Net Profit: Enter net profit after all expenses, not including expenses that are reported on Schedule 1 as business-related deductions (Deductible part of SE Tax; SEP, SIMPLE, and other qualified retirement plan contributions, and SE health insurance deduction). This amount is the amount of Schedule C income subject to SE Tax.

A Field Note may be helpful in notating expenses taken. 

  • At Risk: Check this box if a loss is reported for this business and that loss is equal to the amount the taxpayer could actually lose in the business under the at-risk rules. Schedule C losses will only be deducted from taxable income if this box is checked.
  • Allocable Share W-2: Indicate any statutory employee income here (see above) so that that component of business income can be accounted for with respect to the QBI Deduction on line 4 of Form 8995-A.
  • Allocable Share UBIA: Indicate any allocable share of the unadjusted basis immediately after acquisition (UBIA) of all qualified property owned by the business so that it can be accounted for with respect to the QBI Deduction on line 7 of Form 8995-A.
  • SE Health Insurance: If the business is providing the health insurance coverage for the owner, enter the cost of that coverage here. Holistiplan will automatically incorporate this number into Schedule 1 Deductions, and additionally, reduce QBI by this deduction as a component of the QBI Deduction calculation as well.



Schedule 1 Deductions:


From the entries in the Schedule C Entities Worksheet above, Holistiplan incorporates the business-related Schedule 1 Deductions.  Holistiplan will also calculate QBI for Schedule C businesses based on the entries for net profit, the calculated SE Tax (and deductible portion), Self-Employed Health Insurance, and Self-Employed Plans.


To incorporate any SEP, Solo 401(k), or SIMPLE IRA contributions, the Self-Employed Plans worksheet can be used as shown below. To help with this, Holistiplan will calculate the maximum  contribution that can be made based on the self-employment income entered. The entry here will roll back into the Schedule 1 Deductions section, and the client's QBI Deduction for Schedule C will recalculate automatically.

While Holistiplan will call out the maximum SEP, Solo 401(k), and SIMPLE IRA contributions that can be made from SE Income, if a SE plan contribution is entered and changes to business income are made later, be sure to revisit this SE Plan Contributions section to ensure the entry is still within the max contribution limits.

If a client has multiple 401(k)s or SEP accounts, be mindful of the overall aggregate plan limits across plan types as stated by IRS §415(c).

 

Net Investment Income Tax (NIIT)

Beginning with Tax Year 2022, the Instructions for Form 8960 include Schedule C income on line 4a and require it to be backed out on line 4b. To ensure that Schedule C active income is not subjected to NIIT, the Schedule C net profit must be entered as a negative value in line 4b: Income or Loss in Ordinary Course of Business.

This adjustment should be made for each scenario with active Schedule C income, otherwise the amount of Net Investment Income Tax could be potentially overstated.

 

Qualified Business Income (QBI) Deduction Calculation:


At this point, the Schedule C net profit, SE Tax, the deductible portion of SE Tax, and any SE Health Insurance or retirement plan deductions have been accounted for. The calcualted QBI component will be reflected in the Qualified Business Income from Schedule C Entities field, and the QBI deduction (after income limitations) will show in the QBI Deductions (calculated) field. To see the math behind the scenes, click on the calculator icon circled below for an audit of that calculation as it flows through Form 8995 or Form 8995-A.



The QBI (Override) field should be used only if the client has QBI from both Schedule C and Schedule E sources. If the client only has QBI from Schedule C, leave this field blank.

If QBI from Schedule C and Schedule E exist, combine the QBI from the Schedule C Entities with any Schedule E QBI in the Self-Employed Key Figures Worksheet with the QBI as calculated for your client's Schedule C entities, and enter that combined figure into the field outlined in red above. More on this can be found in our Knowledge Base article linked here
     

Modeling S-Corps:

An S-Corp is not an entity, but an election that passes corporate income, losses, deductions, and credits through to shareholders for federal tax purposes. This necessitates a separate corporate return to report business income - Form 1120-S. The S-Corp return then generates K-1s for all shareholders to reflect their portion of business income on the individual shareholders' tax returns. To model S-Corp business activities, use the Self-Employment Key Fields Worksheet, but there are a few additional wrinkles.

Holistiplan does not currently support calculating Net Income for S-Corps. Only the net income is entered in the Self-Employment Key Fields Worksheet, and no income or expense details are considered. You may choose to use our calculation rows within our Field Notes feature to note those details, entering income as positive numbers and expenses as negative numbers.


  1. Wages Worksheet:
    An S-Corp owner needs to pay themselves reasonable compensation in the form of an appropriate amount of wages, which would be entered at the top of the 1040 Income section in the Wages Worksheet. The employee's portion of the FICA taxes on the wages does not show up on the tax return, but rather as payroll deductions on the W-2. The employer's portion of those FICA taxes reduces net income on Schedule E, as described in #2 below.





  2. Self-Employment Key Fields Worksheet:

    The remaining business income is distributed as net income to the S-Corp shareholders via a K-1, which is generally entered as Schedule E income. However, a K-1 can distribute interest/dividend income or capital gains as well, which would be entered as interest/capital gains in the 1040 Income section or as capital gains in the Schedule D Income section.

    This net income is not subject to SE Tax; however, unlike a Schedule C in the above LLC example, net income for the S-Corp will have to factor in all of the business' expenses, including wages paid to all employees (including the shareholders/owners), employer retirement/health plan contributions, the employer's share of FICA on the reasonable compensation paid as wages, etc. Enter that net income in the "Schedule E Income" field.

    To ensure that any active business income is not subjected to Net Investment Income Tax, be sure to to include the negative net profit in the Adjustments for Net Investment Income field.



    Since S-Corp income is not subject to Self-Employment (SE) Tax, provided there are no other sources of SE income, the SE tax as outlined above should be $0.

  3. Qualified Business Income (QBI) Deduction Calculation:


    If there are QBI Sources outside of Schedule C Entities, Holistiplan cannot currently calculate any part of QBI automatically. Instead, we suggest using an external calculator to determine the total QBI. Holistiplan will then calculate the QBI deduction based on that manually entered QBI.



    Generally, QBI for an S-Corp will be equal to net income from that Schedule E activity, since there aren't any business-related Schedule 1 deductions. In addition, if any of the items below apply to a scenario, expand the Qualified Business Income section, shown in the screenshot above.

    • Allocable Share W-2: Enter the total employee income (not just the owner's portion) so that that component of business income can be accounted for with respect to the QBI Deduction on line 4 of Form 8995-A. 

For S-Corps, since there is a reasonable compensation requirement, users should almost always have an entry in the Allocable Share W-2 field. Note, this represents the total wages paid to all employees of the S-Corp, not just the owner/shareholder's wages.

    • Allocable Share UBIA: Indicate any allocable share of the unadjusted basis immediately after acquisition (UBIA) of all qualified property owned by the business so that it can be accounted for with respect to the QBI Deduction on line 7 of Form 8995-A.
    • SSTB: Make a note if the business entity is a Specified Service Trade or Business (SSTB) by checking this box, if appropriate. Understanding if the business is considered an SSTB is important for the calculation of the QBI Deduction.

Employer contributions to a retirement plan will be reflected on the partnership's tax return and not the personal tax return. Employee salary deferrals to retirement plans are reflected in the Wages Worksheet.

Modeling Partnerships:



Partnerships are modeled the same way as S-Corps, with one main difference - Self-Employment (SE) Taxes. Partnerships file a separate Form 1065 return, but unlike S-Corps, partnership income is subject to SE Tax in the same way that Schedule C income is. The partnership files a separate corporate return to report business income - Form 1065, then generates K-1s to all shareholders to reflect their portion of business income on the individual shareholders' tax returns. To model partnership business activities, you will use the Self-Employment Key Fields Worksheet.

Holistiplan does not currently support calculating Net Income for partnerships. Only the net income is entered in the Self-Employment Key Fields Worksheet, and no income or expense details are considered. You may choose to use our calculation rows within our Field Notes feature to note those details.
  1. Self-Employment Key Fields Worksheet: The net business income is distributed to partners via a K-1, which is generally entered as Schedule E income. However, a K-1 can distribute interest/dividend income or capital gains as well, which would be entered as interest/dividend income in the 1040 Income section or as capital gains in the Schedule D Income section.

    This net income is subject to SE Tax, and the partnership's net income will have to factor in all of the business's expenses, including wages paid to employees (including the shareholders/owners), employer retirement/health plan contributions, the employer's share of FICA, etc. You will enter that net income in the Income or Loss in Ordinary Course of Business field.

    To ensure that any active business income is not subjected to Net Investment Income Tax, be sure to include the negative net profit in the Adjustments for Net Investment Income field.

To reflect the partnership's exposure to SE Tax, include any partnership net income in the Other Self-Employment Income field above in the Self-Employment Tax section of the Self-Employment Key Fields Worksheet.

Employer contributions to a retirement plan will be reflected on the partnership's tax return and not the personal tax return.


Qualified Business Income (QBI) Deduction Calculation:


If there are QBI Sources outside of Schedule C Entities, Holistiplan cannot currently calculate any part of QBI automatically. Instead, we suggest using an external calculator to determine the total QBI, which can be entered in the field outlined in blue below. Holistiplan will then calculate the QBI deduction based on that manually entered QBI.




Generally, QBI for a partnership will be equal to net income from that Schedule E activity less any business-related Schedule 1 deductions, similar to how QBI is calculated for a Schedule C business entity. 

  • Allocable Share W-2: Indicate any statutory employee income here (see above) so that that component of business income can be accounted for with respect to the QBI Deduction on line 4 of Form 8995-A.
  • Allocable Share UBIA: Indicate any allocable share of the unadjusted basis immediately after acquisition (UBIA) of all qualified property owned by the business so that it can be accounted for with respect to the QBI Deduction on line 7 of Form 8995-A.
  • SSTB: Make a note if the business entity is a Specified Service Trade or Business (SSTB) by checking this box, if appropriate. Understanding if the business is considered an SSTB is important for the calculation of the QBI Deduction.


Compare Tax Implications of Various Business Forms:

Once two or more scenarios have been modeled for a client's business income, users can utilize our Comparison Tool to compare the tax implications of one business incorporation option vs. another.

Keep in mind that the employee-side cost of payroll taxes is a consideration when evaluating the decision to elect an S-Corp status. Holistiplan can reflect these additional costs on the 'Tax Plus FICA' line in Scenario Analysis as described in our FICA in Holistiplan article, if the Wages Worksheet has been entered appropriately.

Other non-tax considerations when determining which business entity form is appropriate for your client that cannot be modeled in Holistiplan involve added administrative and tax preparation costs. Although those cannot be modeled, those considerations may factor into your decision as well.