Tax Planning

Tax planning for Appendix E of Kind 1040 for 2021

The IRS’s first draft of the 2021 Appendix E components are often key elements of the tax liability or savings and are often the most complex details of the declaration.

The parts consist of rental property and royalties, income from partnerships and suburban corporations, then income from trusts and estates, followed by a section on REMICs (Real Estate Mortgage Investment Conduits). The fifth and final section summarizes these parts and also adds a “one-liner” (line 40) for the net rental income from Form 4835.

These are summed up and transferred to another part of the return. This is followed by two sections of reconciliation, one dealing with agriculture and fisheries and the other dealing with real estate professionals. There is also the possibility of later drafts.

IRS policy is that the last of the drafts reflects the final shape. Some IRS forms have important explanatory instructions after the text of the form, but Form E does not. All of Appendix E will be incorporated into Form 2021 Form 1040 Appendix 1 (draft July 21, 2021). The text is under https. to be found: //–dft.pdf).

Schedule E for 2020 contained 12 pages with separate instructions. These are not available for the 2021 form, as we write at the end of July. For example, the 2020 instructions direct the beneficiary of an estate or trust to file Form 8082 if they are reporting differently than the trust or estate statement. The same form may need to be submitted if there is a similar inequality in company return and the flow-through income reported by the shareholders or S-shareholders.

Rental property income or loss may be returned through the section of Part I dealing with rental property. It can also start with Form 8825, which is required for partnerships and S companies, and then go to Form 1040 via Part II of Appendix E.

There are two versions of the K-1, one for partnerships and another for S companies. The drafts of these plans for 2021 have not yet been published (K-1, Form 1120S and K-1, Form 1065). See “About Plan K-1 (Form 1120S), Shareholders’ Proportion of Income, Deductions, Credits, etc.” 1120-s and “About Schedule K-1 (Form 1065), Partner’s Income Share, Deductions, Credits, etc.”, 1065).

There is an IRS website focused on Appendix E which, while little commentary, provides a list of related forms and IRS sites or publications. This “roadmap” of possible areas of meaning can be very helpful (“About Schedule E (Form 1040), Supplemental Income or Loss”, -1040) .

Our remaining discussion will focus on some of the more important details of the tax rules affecting the form, with some indications of possible legislative changes. New real estate acquisitions pose problems, including analyzing closing statements to clarify what capital is in nature.

The total basis includes, for example, title closing costs and brokerage commissions, which then pay attention to the division between depreciable buildings and land. Studies can also break down construction costs into components with shorter depreciable lifetimes.

The cost distribution is based on the relative values ​​of the building and the property. This determination is usually resolved by relative values ​​in the tax assessment. When it comes to scheduling, much of this work can be done before the tax professional has the year-end numbers.

It is possible that the level of services provided in connection with rentals, such as B. Housekeeping, moving rentals from Appendix E to Appendix C, the business schedule. There are circumstances in which real estate rental may be subject to self-employment tax, which may be costly but ultimately generate higher social security benefits.

There are also circumstances in which real estate rentals may be subject to 20 percent business income deduction under Section 199A (see Notice 2019-07; IRS Pub. 527, “Residential Properties (Including Vacation Rentals”). For use in preparation of 2020 annual returns see pp. 12-14, “Rental Real Estate and the Qualified Operating Income Deduction”, Breedlove, The Tax Institute,, 09.09.19).

Higher income taxpayers can be subject to 3.8 percent net capital gains tax (Section 1411). Rental income, rental property gains and other types of Schedule E income may be subject to this tax and may affect year-end planning (see Form 8960). The 2021 draft version of the 8960 form is not yet available at this point in time.

The Loyalty Credit benefit can come with some complex disregard issues related to wages and payroll taxes. These can affect the results of Appendix E. The employee retention credit is easily overlooked, but it can be important for year-end planning for 2021.

It can also affect such decisions, such as: B. Whether other tax deductions should be maximized. The subject is influenced by three laws, only the last of which was actually incorporated into the Internal Revenue Code as Section 3134, which only applies for a specific period of time, which is not even a full year.

As such, the tax professional may have to grapple with the CARES Act, Taxpayer Certainty and Disaster Relief Act, and the American Rescue Plan Act to resolve issues that are important to Schedule E.

There are IRS pronouncements, but no regulations, not even proposed regulations, on employee loyalty credits (see “COVID-19-related employee loyalty credits: Special Issues for Employers FAQs”, # 85 on wage cuts; https: //www.irs .gov / newsroom / covid-19-related-employee-retention-credits …. The latest announcements on this topic include IRS notices 2021-20, 2021-23, 2021-24).

There is a proposal from President Biden (or Biden-Lager) aimed at certain partners and S-Shareholders who do not pay either the self-employment tax or the 3.8 percent section 1411 tax. The Proposal’s Effective Date is tax years beginning after December 31, 2021, so these provisions in their current form may not affect our current year 2021.

Any legislative changes here may not affect Appendix E, even if they focus primarily on those that deal primarily with Appendix E. Such provisions, when incorporated into law, may include details such as reporting self-employment income on Form 1065 K-1 and Form 1040, Appendix SE.

Final exam

As you review Appendix E matters, keep in mind that important elements of partnerships and S companies may be incorporated into Appendix SE and Form 8960 (see “Proposed Changes to Self-Employed Tax Regulations,” Pusey,, 6/14). 21, https: // -… also “Self-Employment Tax Planning for2021”, Pusey,, 23.10.20, https : // …).

In general, some of the more important questions to discuss with the client arise from the physician’s review of the details of Appendix E.

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