Taxpayer #1 is an S corporation in an Enterprize Zone. Taxpayer #1 previously flowed through EZ credits to 50% S corporation Shareholder – taxpayer #2. Taxpayer #3 is a partnership that owns real estate which is rented to taxpayer #1. Taxpayer #2 owns 50% of Taxpayer #3. Question – when figuring the amount of income reported in the current year for purposes of determining how much income is considered EZ income, should the net rental income from taxpayer #3 be included?
FYI, taxpayer #3 is subject to the recharacterization rules for federal purposes whereby the net rental income is NOT subject to the net investment income tax.