Capitalized Guaranteed Payments

[vbwilks]

Thanks very much for y'all's help on this. @Rick19744 @tagteam 

I don't like doing overrides, but it does seem like this is something that just has to be accomplished manually.

[tagteam]

Look for the M-1 Worksheet.

[Rick19744]

I don't believe including an M-1 is an override.

[tagteam]

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@Rick19744 wrote:

I don't believe including an M-1 is an override.

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No, it is not. You are correct.

[vbwilks]

Y'all are, of course, correct that an M-1 entry wouldn't be an override. In my head, I think I was worried about doing the M-1 entries for some reason and was thinking an override would be simpler. And it may still have required an override if done that way because there is already a Guaranteed Payments entry on M-1.

Alas, I believe I have found an even more elegant solution, which I shall explain here for posterity:

1. On the Guaranteed Payments screen (under Federal Taxes: Deductions), I entered only the amount for business activity deductible GPs next to From Trade or Business Activities. I entered all rental activity GPs on the next line.
2. Under Allocate by Amount, I entered ALL GPs paid to each partner.
3. In Forms mode, I opened Form 1065 p4-5. On Schedule K line 4a, the number under "Direct Entry Deducted Elsewhere" for service GPs was red. That is because it was equal to the total GPs entered in step 1 above but inconsistent with the total GPs entered in my step 2.
4. I clicked on the red number then the + box to add supporting details. Under supporting details, I added 3 lines--one each for rental activity deductible GPs, rental activity capitalized GPs, and business activity capitalized GPs. Technically, this is an override, but it is one that makes everything line up correctly plus adds the detailed numbers. (Show your work!)

One important note: TurboTax backtracked and put my total from this box back into the Rental Activity GPs line on the Step-by-Step GPs screen, but this should not have any negative effect on your return as best I can tell. So, you could enter all GPs except deductible business activity GPs under rental activity on the step-by-step screen. But I think you would still want to add the supporting details on line 4a of the Schedule K form.

[Rick19744]

The guaranteed payment M-1 is not really an M-1.  It is there to get the return to balance correctly since the guaranteed payments are a separately stated item.

I can't comment on your methodology since I cannot see the return or the expected results.

In my mind, unless you have an M-1 as noted in my previous response, the return is most likely not correct.

Having a red box in TT as you mentioned tells me your methodology is not correct.

[vbwilks]

It is no longer red after my fix. And I think perhaps your method could get it there as well. But my solution has the benefit of making M-1 line 3 correct, whereas before it showed the sum of deductible business activity GPs plus rental activity GPs but excluded capitalized business GPs.

I am likely getting into areas of accounting that are (way) over my pay grade, but I felt like an M-1 adjustment should reflect a disparity between books and return, and there isn't really a disparity. But perhaps you are correct and the IRS would rather see all GPs not deducted somewhere in M-1 (for both business and rental activity).

[Mike9241]

line 10 on page 1 is supposed to exclude capitalized guaranteed payments. schedule k line 4, k-1 line 4 and m-1 line 3 are supposed to report total guaranteed payments.  so the only way to balance the m-1 is to use line 7 to report the capitalized guaranteed payments.

[vbwilks]

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@Mike9241 wrote:

line 10 on page 1 is supposed to exclude capitalized guaranteed payments. schedule k line 4, k-1 line 4 and m-1 line 3 are supposed to report total guaranteed payments. 

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That is all in line with my return.

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@Mike9241 wrote:

so the only way to balance the m-1 is to use line 7 to report the capitalized guaranteed payments.

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My M-1 line 7 contains nothing, which I believe is correct because my M-1 line 9 correctly matches Analysis of Net Income line 1.

Another note after researching this:

M-2 line 3 instructions call for it to match Analysis of Net Income line 1. However, mine matches M-1 line 1 (income per books). TurboTax notes: If the net income per tax return shown on Schedule M-1 or M-3 does not reflect the net income (loss) used in maintaining the partners' tax basis capital accounts, the amount on Schedule M-2 must be adjusted to reflect the amount for tax basis capital accounts. The program will make the adjustments from the Schedule M-2, Line 3 Smart Worksheet. The adjusted amount will be used for Schedule K-1, Section L. All amounts on Schedule K-1, Section L, must now be computed using tax basis capital accounts.

[Mike9241]

i'm not sure how that can be 

example page 1 sales                                          $100,000

line 10 guaranteed payments $30,000

line 10 less capitalized             $10,000                 20,000

line 22 ordinary business income                      $ 80,000

schedule K

line 1 from page 1 line 22                                  $ 80,000

line 4a GP for services (capitalized)                  $ 10,000

line 4b GP  for capital (expensed)                     $ 20,000

line 4c GP total                                                     $30,000

schedule m-1

line 1 net income per books    $80,000 since $10K of GP were capitalized (unless you expense all GPs for books and only capitalize them, when needed, for tax)

line 3 guaranteed payments     $30,000 total guaranteed payments are to be reported 

line 9   would be $110,000  unless as stated above you expense all GPs for books.

line 9 is supposed to agree with net income per return - which is usually schedule K the sum of lines 1 through 11 and less the sum of lines  12 and 13           

[Rick19744]

Line 4b on schedule K is for guaranteed payments made for the use of capital.  We don't have that in these facts. 

Using the M-1 to reduce the guaranteed payment reported on page 1 is the method that should be used.  If TT can offset the amount on line 10, perfect, if not, no big deal as at the end of the day as long as the M-1 reduces page 1 line 22 you get the correct result.

[vbwilks]

@Mike9241, everything about your example checks out with my return for p. 1 and sch. K. In fact, I think it just checks out. I'm not sure if you meant for your example to work or if it was supposed to be flawed, but I calculate it to be right. Line 9 would be $110,000, which includes $80,000 on line 22 (and K line 1) and $30,000 on line 4c. 

Perhaps it is informative that, for TT, M-1 line 1 does not flow from p. 1 line 22. TT actually calculates line 1, by backing into it. It starts by transferring Analysis of Income line 1 to M-1 line 9 and then adds and subtracts tax/book differences. So, the total I show on my M-1 line 1 actually only shows up on that line and M-2 line 3. It isn't anywhere else in the return.