Page 72 - 2020 Publication 17

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of the lump-sum payment that’s more than your received from a governmental section 401(a) her share of the S corporation's income, losses,
cost. plan attributable to the officer’s service. See credits, and deductions.
section 101(h). Keep Schedule K-1 (Form 1120-S) for
Accelerated Death and totally disabled or killed in the line of duty your records. Don’t attach it to your
A public safety officer who’s permanently
Form 1040 or 1040-SR, unless you’re
Benefits and a surviving spouse or child can exclude specifically required to do so.
RECORDS
from income death or disability benefits re-
Certain amounts paid as accelerated death ceived from the federal Bureau of Justice Assis-
benefits under a life insurance contract or viati- tance or death benefits paid by a state program. For more information on S corporations and
cal settlement before the insured's death are See section 104(a)(6). their shareholders, see the Instructions for Form
excluded from income if the insured is termi- For this purpose, the term “public safety offi- 1120-S.
nally or chronically ill. cer” includes law enforcement officers, firefight-
ers, chaplains, and rescue squad and ambu- Recoveries
Viatical settlement. This is the sale or assign- lance crew members. For more information, see
ment of any part of the death benefit under a life
insurance contract to a viatical settlement pro- Pub. 559, Survivors, Executors, and Adminis- A recovery is a return of an amount you deduc-
trators.
vider. A viatical settlement provider is a person ted or took a credit for in an earlier year. The
who regularly engages in the business of buy- most common recoveries are refunds, reim-
ing or taking assignment of life insurance con- Partnership Income bursements, and rebates of deductions item-
tracts on the lives of insured individuals who are ized on Schedule A (Form 1040). You may also
terminally or chronically ill and who meets the A partnership generally isn’t a taxable entity. have recoveries of nonitemized deductions
requirements of section 101(g)(2)(B) of the In- The income, gains, losses, deductions, and (such as payments on previously deducted bad
ternal Revenue Code. credits of a partnership are passed through to debts) and recoveries of items for which you
previously claimed a tax credit.
Exclusion for terminal illness. Accelerated the partners based on each partner's distribu-
tive share of these items.
death benefits are fully excludable if the insured Tax benefit rule. You must include a recovery
is a terminally ill individual. This is a person who Schedule K-1 (Form 1065). Although a part- in your income in the year you receive it up to
has been certified by a physician as having an nership generally pays no tax, it must file an in- the amount by which the deduction or credit you
illness or physical condition that can reasonably formation return on Form 1065, U.S. Return of took for the recovered amount reduced your tax
be expected to result in death within 24 months Partnership Income, and send Schedule K-1 in the earlier year. For this purpose, any in-
from the date of the certification. (Form 1065) to each partner. In addition, the crease to an amount carried over to the current
year that resulted from the deduction or credit is
Exclusion for chronic illness. If the insured partnership will send each partner a copy of the considered to have reduced your tax in the ear-
Partner's Instructions for Schedule K-1 (Form
is a chronically ill individual who’s not terminally 1065) to help each partner report his or her lier year. For more information, see Pub. 525.
ill, accelerated death benefits paid on the basis share of the partnership's income, deductions,
of costs incurred for qualified long-term care credits, and tax preference items. Federal income tax refund. Refunds of fed-
services are fully excludable. Accelerated death eral income taxes aren’t included in your in-
benefits paid on a per diem or other periodic Keep Schedule K-1 (Form 1065) for come because they’re never allowed as a de-
basis are excludable up to a limit. For 2020, this your records. Don’t attach it to your duction from income.
limit is $380. It applies to the total of the accel- RECORDS Form 1040 or 1040-SR, unless you’re State tax refund. If you received a state or lo-
erated death benefits and any periodic pay- specifically required to do so. cal income tax refund (or credit or offset) in
ments received from long-term care insurance 2020, you must generally include it in income if
contracts. For information on the limit and the For more information on partnerships, see you deducted the tax in an earlier year. The
definitions of chronically ill individual, qualified Pub. 541, Partnerships. payer should send Form 1099-G, Certain Gov-
long-term care services, and long-term care in- ernment Payments, to you by February 1, 2021.
surance contracts, see Long-Term Care Insur- Qualified joint venture. If you and your The IRS will also receive a copy of the Form
ance Contracts under Sickness and Injury Ben- spouse each materially participate as the only 1099-G. If you file Form 1040 or 1040-SR, use
efits in Pub. 525. members of a jointly owned and operated busi- the State and Local Income Tax Refund Work-
ness, and you file a joint return for the tax year,
Exception. The exclusion doesn’t apply to any you can make a joint election to be treated as a sheet in the 2020 Instructions for Schedule 1
amount paid to a person (other than the in- qualified joint venture instead of a partnership. (Form 1040) to figure the amount (if any) to in-
sured) who has an insurable interest in the life To make this election, you must divide all items clude in your income. See Pub. 525 for when
of the insured because the insured: of income, gain, loss, deduction, and credit at- you must use another worksheet.
If you could choose to deduct for a tax year
• Is a director, officer, or employee of the tributable to the business between you and your either:
person; or spouse in accordance with your respective in-
• Has a financial interest in the person's terests in the venture. For further information on • State and local income taxes, or
how to make the election and which sched-
business. ule(s) to file, see the instructions for your indi- • State and local general sales taxes, then
Form 8853. To claim an exclusion for acceler- vidual tax return. the maximum refund that you may have to in-
ated death benefits made on a per diem or clude in income is limited to the excess of the
other periodic basis, you must file Form 8853, S Corporation Income tax you chose to deduct for that year over the
Archer MSAs and Long-Term Care Insurance tax you didn’t choose to deduct for that year.
Contracts, with your return. You don’t have to In most cases, an S corporation doesn’t pay tax For examples, see Pub. 525.
file Form 8853 to exclude accelerated death on its income. Instead, the income, losses, de- Mortgage interest refund. If you received a
benefits paid on the basis of actual expenses ductions, and credits of the corporation are refund or credit in 2020 of mortgage interest
incurred. passed through to the shareholders based on paid in an earlier year, the amount should be
each shareholder's pro rata share. shown in box 4 of your Form 1098, Mortgage In-
Public Safety Officer Killed Schedule K-1 (Form 1120-S). An S corpora- terest Statement. Don’t subtract the refund
amount from the interest you paid in 2020. You
or Injured in the Line of tion must file a return on Form 1120-S, U.S. In- may have to include it in your income under the
Duty come Tax Return for an S Corporation, and rules explained in the following discussions.
send Schedule K-1 (Form 1120-S) to each
shareholder. In addition, the S corporation will Interest on recovery. Interest on any of the
A spouse, former spouse, and child of a public send each shareholder a copy of the Share- amounts you recover must be reported as inter-
safety officer killed in the line of duty can ex- holder's Instructions for Schedule K-1 (Form est income in the year received. For example,
clude from gross income survivor benefits 1120-S) to help each shareholder report his or report any interest you received on state or
Page 68 Chapter 8 Other Income