Tax Return Tuesday #5 - Schedule E Part 2

Happy tax return Tuesday! Today's must know tax return tip for family lawyers is Schedule E Part 2.

Schedule E part 2 is helpful in identifying partnerships, S Corporations and multi-member LLCs owned by a party during a divorce. Since these companies are considered “pass-through” entities, income from owning these entities is reported on the individual tax return.

The tax preparer prepares this section of the return using Schedule K-1, which is a report of the proportionate share of the pass-through entities’ income. The K-1 also reports the ownership percentage, distributions among other information. Since K-1s are not typically attached to the 1040, they will need to be requested separately.

The income reported on Schedule E Part II is a net figure that doesn’t show the detail as to how it is calculated. As such, it will be crucial to request business tax returns, financial statements, agreements, as well as other relevant documentation for each entity reported on Schedule E Part 2.

From an income determination perspective, pass-through income in Part II of Schedule E will not necessarily reflect cash received, and rather reflects profits and losses allocated to them individually for tax purposes. Some refer to this as the “phantom income” since you are taxed on reported income regardless of cash received.

Make sure to always check Schedule E Part 2 to make sure no marital business interests slip through the cracks. Also be sure to request additional documents when necessary. What else you got? Let me know in the comments 👇