Form 1065 and K1 - SEP Reporting in TurboTax for Business - 2023

[hereinhelena]

My wife and I are partners in an LLC (Engineering) Partnership that contributes to an SEP-IRA for each of us.  We have no employees & there are no complications with the business (just income, expenses, and SEP-IRA Contributions).  It is my understanding that this should not be booked as an expense for the company (we book it as an equity draw) & report the income on our personal tax return.  As such, the Business Net Taxable Income is Gross Earnings less Expenses (not including SEP contributions).  The net earnings are reported on Schedule K-1, Line-1, and the SEP Contribution is Line 13 (Other Deductions) with Code R.   TurboTax Business 2023 is filling out Box-1 and Box-13 correctly, but it is deducting the SEP contributions from the Current Year Income in Part-II, Line L (Partner's Capital Account Analysis).  This makes the Ending Capital Account Value too low by the amount of the SEP Contribution.  TurboTax Business 2023 also includes the SEP contribution on Form 1065, Schedule K, Line 13e.  This behavior is different than previous versions of TurboTax Business (which did not report the SEP contributions anywhere on Form 1065, except Schedules K-1).  I also note that the "Schedule K , Reconciliation Worksheet" in Form 1065 now includes a column for "Other Deductions", which is new for 2023.  I am not sure if I erred in prior years, or if there is something incorrect for 2023.  My questions may be summarized as follows:

1.  Should non-employee (e.g. Partner) SEP contributions be listed on Schedule K, line 13e - or is this only for SEP contributions to employees?

2.  Should Schedule K-1, Part-II, Line L "Current Year Net Income" be reduced by the non-employee (partner) SEP contributions as an expense?

I believe the tax implications do not change between the two options - the tangible differences seem to be limited to the Turbotax "Balance Sheet", and reporting on Form 1065 Line 13e.

I am not sure which is correct - the way I did it before, or the way that Turbotax Business - 2023 seems to want to steer me now.  Any help is appreciated.

[PatriciaV]

Yes, TurboTax Business will handle your SEP entries correctly if you entered the amount under Deductions >> Member Retirement Contributions and provided the specific allocations to the partners.

1. Yes, Schedule K Line 13E reports pension payments for the partners. Employee pension costs are reported on Form 1065 Line 18.

2. Yes, the net income for the year allocated to the partners is reduced by the SEP contributions. This total appears at the bottom of Schedule K under Analysis of Net Income (Loss) per Return.

[hereinhelena]

PatriciaV:

I don't believe the Partner SEP-IRA payments should be reported on Form 1065-Line 18 as a deduction.  The IRS Form 1065 instructions for Line-18 state:  "Don't deduct payments for partners to retirement ... plans including ... simplified employee pension (SEP)  ... on this line.  These amounts are reported in box 13 of Schedule K-1, using code R, and are deducted by the partners on their own returns."

I can get Turbotax-Business to leave Form 1065, Line-18 blank by leaving (Forms View) Form 1065 p5-6; Schedule-k; Line-13e(E) blank.  If I then fill in Line-13e(O) with the information it will replicate on Schedule K-1 Line-13 as it should, but Schedule K-1 still reduces the "Current year net income" in the "Partner's Capita Account Analysis by the SEP-IRA amount (which I believe may be incorrect).

Since the SEP contribution is not (I believe) considered a deduction for the business, it doesn't seem it should be deducted from the partner's net income in Schedule M-1, nor subsequently in the Partner's Capital Account Analysis" on Schedule K-1 (but I am not sure).

I also note that on Form 1065, Schedule K, "Analyses of Net Income (Loss) per Return", the (incorrectly??) reduced amount is listed in the "b Limited partners" row, rather than the "a General Partners" row.  Schedule K-1; Part-II; Line-G lists both of us as "General Partner".  It seems this information should be in the "General Partner" row.

In summary:

1.  I Believe your response regarding listing SEP-IRA contributions to the partners to be incorrect, as summarized above.  Please clarify if I am mistaken.

2.  I am still unclear whether (or not) the SEP distributions should be deducted from Net Earnings in the "Partner's Capital Account Analysis" on Schedule K-1.  I cannot find clear IRS guidance on this.

3.  Why is Turbotax-Business placing all income in the "Limited Partners" row at the bottom of Schedule-K, even though we are "General Partners"?  Note that Schedule K-1 lists us as "General Partners".

[PatriciaV · Accepted solution]

In #1 above, it says, "Employee pension costs are reported on Form 1065 Line 18." Partners are not employees unless they receive a W-2. This was meant as a comparison of how pension costs are reported. If you have an amount on Line 18 and don't have employees, then you have entered the SEP contributions in the wrong place.

Yes, SEP contributions reduce the income reported to the partners (total of Schedule K). But they are not included in business expenses on page 1 of Form 1065. Be sure you have used Code R on Line 13(e)(E). The amount for Code R is repeated under Line 13(e)(O) as further information.

Per the Instructions for Form 1065, Analysis of Net Income (Loss) per Return: "Report all amounts for LLC members on the line for limited partners."

[hereinhelena]

PatriciaV:

Thank you for the clarifications and your timely, informed answers.  I believe I have things entered correctly now.