1065 K1 Other Adjustments Notes Not Printing

[RJMaicki]

I have an LLC with 23 investors.  I have added adjustments to the Basis using the Other Adjustments field on the K1 Worksheet.   

When I print (or save to PDF) the K1 to PDF these adjustments are not printing on the K1 and the Notes are not printing as a separate page.   There is a check box to check for the Note NOT to Print, but I have not checked it.  

How do I get the adjustments and the notes to print both on the K1 Schedule L and as supplement notes?

[RJMaicki]

Here is the Notes screen

[PatriciaV]

To include Schedule L on the K-1's, check the "Yes" box on Form 1065 p1-3 under Line 4d "Completion of Schedules L, M-1, M-2..."

To add increases or decreases to partner capital accounts, go to Form 1065 p4-5 Schedule M-2 Line 4 (increases) and Line 7 (decreases). The amount you enter here will be allocated to Schedule K-1 according to the ownership percentages entered under Member Info. These adjustments will not appear on the TurboTax Sch K-1 Worksheet until next year.

In order to print an Additional Information sheet, enter the description and amount on each Schedule K-1 under Line 23 in the Supplemental Information Smart Worksheet.

The final result will be an adjustment on Schedule K-1 Part II L (Capital Account) and a separate statement of Additional Information as entered on the worksheet. The Smart Worksheet will also be included but can be deleted.

[RJMaicki]

Patricia V ... this is very helpful.  

The adjustment amount is not based on ownership, the adjustment is unique to investor ... I assuming it looks like I can use a Special allocation to spread the adjustment as appropriate to the investors.  It looks like this will work to make the adustment .... do you agree?

As  note: In essence, I am trying to correct for a the initial book basis to tax basis.  In the initial calculation I included the Guarranteed Payments as part of each investors basis calculations, the new calculation ties cost of GPs to only those who did not receive GPs.  I think that is the correct adjustment

[PatriciaV]

Yes, in this case use a special allocation for the amount entered on Schedule M-2. To achieve the correct capital balances, you would need to back out the guaranteed payments that were included in the initial calculations.

Remember that a partner's capital account and outside basis are not the same. The partner's capital account measures the partner's equity investment in the partnership. The outside basis measures the adjusted basis of the partner's partnership interest.

A partner who receives a guaranteed payment reports the amount as ordinary income on his or her tax return. Since guaranteed payments are not treated as distributions, there is no effect on the recipient partner's capital account or tax basis in the partnership interest.

[RJMaicki]

Patricia ... Thank you again for the clarification.   Is there any way I could speak directly to you, you sound very knowledgeable.

I believe I am following.  In fact the adjustment I am making is to correct for the initial treatment of Guaranteed Payments as impacting the recipients Capital Account and redistributing the cost of those GPs across the other investors.

I think I understand Inside Basis vs. Outside Basis, in general, but still get turned around.  A few questions:

1. Inside Basis and Partners Capital account are referring to the same thing, correct?

2. The K1 Capital account shows each partners' inside basis adjusted for ALLOCATED income/losses, distributions and contributions, correct?

2. Can a specific partners Inside Basis / Capital account be a negative?  I believe yes if a partner (e.g. the founder) owns a greater % of the company (say 50% units) than the capital contributed (10%)... and the company has accumulated losses ... thus the losses would be allocated to the founders account  driving it negative.  I would assume this case exists frequently.  (Note Founders Outside basis can not go below zero)  Is this correct?

[PatriciaV]

Guaranteed Payments are expenses to the partnership and should be allocated to all partners as a component of net income for the year. Schedule K-1 Box 14 reports guaranteed payments specifically to the affected partners so they can pay self-employment taxes on the "payment for services" they received.

1. Inside Basis is recorded by the Partnership as Partners Capital. Outside basis is calculated and held by the Partners as their basis in the investment. These two numbers are often the same. But if you report non-deductible items or excess distributions (for example), the two balances diverge. See also my answer for #3.

2. Allocation of income & loss is determined by the partnership agreement, which may or may not allow special allocations. Contributions and distributions are recorded as they occur. All these transactions affect both partners capital (inside basis) and outside basis.

3. In general, a partner's capital account cannot drop below zero. When this happens, a special allocation of partnership income is made to bring all limited partners to zero (if possible) and the off-setting entry (typically a loss) is allocated to the general partners.

When an investor receives a distribution, for example, that exceeds their investment basis, they must report taxable income for the amount over their basis. In other words, if the partner has a greater return from the investment than the amount they invested, the excess is taxable profit. It's important to manage distributions to avoid this situation as much as possible until all capital has been returned. At that point, all distributions are income, ie: profit.

You may benefit from the counsel of a local tax professional with partnership experience. Your partnership agreement may need review and/or amendments to address these issues. Having a local advisor can provide assurance that the partnership is being managed correctly, for both tax and legal purposes.