The weather has turned, birds are chirping, and MLB’s opening day has come and gone. For most people this means Spring is here! For myself and all of the tax preparers out there it means the “home-stretch” of tax season is upon us. I am definitely looking forward to April 18th (we get three extra days this year!) to started living a “normal life” again.
Once again, as promised, here is part 3 of the Understanding of the K-1 – deductions, credits, and footnotes. Disclaimer – I am writing the below from the perspective of an individual recipient.
The amount reported in this box is for the Section 179 Deduction. In general, this will reduce any ordinary income from the partnership that is reported on Schedule E. If the income is considered passive, the deduction (along with the ordinary income) will be put through the tests of Form 8582.
Box 13, Other Deductions, contains many different types of deductions so I am only going to cover a portion of these.
Boxes 13A through F are reserved for cash and non-cash charitable contributions. In most these amounts are reported as an itemized deduction on your Schedule A. However, if a non-cash contribution is reported that exceeds $5,000, the partnership is required to provide you a copy of Form 8283 to attach to your tax return.
Box 13H is for investment interest expense. The deductibility of investment expense must pass the tests of Form 4952 to be deductible. If they are passed and you are considered active (usually this occurs if you are a trader in securities), then this will generally reduce ordinary income. If you are passive, it is an itemized deduction reported on Schedule A.
Box 13K and 13L both report portfolio deductions. There is a huge difference between the two boxes, however. Box 13K amounts are subject to the 2% floor test. Here is an example, say your AGI is $50,000 and your Box 13K amount is $1,500. Your “floor” is $1,000 ($50,000 x 2%). So, the net deductible amount is $500 ($1,500 – $1,000). Box 13L is reported as an itemized deduction that isn’t subject to this amount.
If you have any specific questions about the other codes for box 13, please let me know.
As I have stated before, the determination if you are active or passive has major tax consequences. If you are considered active, then in most cases you’re subject to self-employment taxes. Box 14A reports the amount of net income or loss that is subject to this tax.
Box 14B is used if you are a farmer or a fisher. Box 14C is used only if you calculate self-employment taxes under the nonfarm optional method.
These boxes are for all the various tax credits the IRS offers. There are too many here to discuss so I will go over the generalities. If you are passive, then you have to get past the tests of Form 8582-CR. If you are active, you generally will have to pass the specific tests of each credit to determine if you can apply them against your taxes. Again, if you have any specific questions about any of the tax credits, please let me know.
The amounts reported in this section are used to assist you in filing Form 1116. Form 1116 is used to determine if you are eligible for the foreign tax credit against your tax liability. If you are not eligible to take a credit, you may be able to report the taxes as an itemized deduction instead.
Boxes 16B and C report your gross foreign income and 16D through F report the tax character of the income (passive or non-passive). Boxes 16G and H report your deductions against the foreign income and 16I – K report the tax character of the deductions (passive or non-passive).
Boxes 16L and M report the total amount of foreign taxes paid or accrued.
The amounts reported in these boxes are generally adjustments to your AMT tax reported on Form 6251 and do not count against your ordinary income or deductions.
Boxes 18A and B report tax-exempt income received, such as municipal bond interest. Although this is not Federally taxable, it may have tax implications on your state taxes. If you have amounts reported in this box, the partnership should report a breakdown of the state taxability in the Schedule K-1 footnotes.
Box 18C includes non-deductible expenses such as penalties, the 50% portion of non-deductible meals and entertainment, country club dues, etc. These do not adjust your taxes but reduce your tax basis.
These boxes report the amount of cash and property distributions you took during the tax year. Generally, this should match the withdrawals and distributions in Item L of your K-1.
This box is reserved for other information such as the amount of investment income (Box 20A) and investment expenses (Box 20B). There are many Box 20 codes, so again, please feel free to contact me with questions.
Schedule K-1 Footnotes:
Be sure to read through these in detail as they may provide additional reconciliation and/or “clues” on the treatment of items reported on your K-1. Most of the time, there are only a page or two of them. However, I have worked on several large hedge fund tax returns where there were up to 50 pages of footnotes! By reading through the entire set of footnotes, I was able to find many favorable adjustments that benefitted my clients.
I know I have provided a ton of information the past three weeks so if you have any questions please feel free to contact me directly!