On the Schedule (IT SBD), Part I, Section A, Line 1 requires a taxpayer to include not only guaranteed payments, but compensation received from a pass-through entity. If a shareholder receives compensation from the entity of which the shareholder owns more than 20%, and also ordinary income from the entity, are the W2 income and the ordinary income both included to compute the deduction?
- Generally, yes. Both the W2 income and ordinary income from the PTE would be included in computing the deduction.
Compensation paid to a 20% or more shareholder is to be considered a distributive share of income of the qualifying entity pursuant to R.C 5733.40 (A)(7). The amount should be treated as if it was income from the investors share in the entity and not as wages. If when characterized this way, the amount would be considered business income, it should be included for purposes of calculating the Small Business Investor Income deduction on line 1 of Schedule IT SBD.
The ordinary income the individual receives from the entity would also be included in the calculation of the Small Business Investor Income deduction included on line 3 of Schedule IT SBD.