Partner is a Disregarded Entity - the Beneficial owner is a Partnership

[markkatzmann]

Hello,

Thank you for the help.

I am using Turbo Tax Business Desktop. 

I am working on a 1065.

The partnership has 2 partners. Partner 1 is an individual and Partner 2 is an LLC. Partner 2 is a single member LLC, making it a disregarded entity. Partner 2 is owned by an LLC -- "Parent LLC". Parent LLC is taxed as a partnership.

The Beneficial Owner's information (Parent LLC), should be displayed in Schedule K-1, Part II, E and F. (source: 1065 Instructions, page 33)

Further, the beneficial owner's entity type should be displayed on I1. (source: 1065 Instructions, page 33)

The outcomes I am looking for are:

1. Schedule K-1 Box E displays the Beneficial Owner's (Parent LLC) EIN as an EIN (xx-xxxxxxx), right now it is displaying Parent LLC's EIN as an SSN (xxx-xx-xxxx), and 

2. Line I1 "What type of entity is this partner?" should display "Partnership". Right now it displays Disregarded Entity.

Thank you for the help.

Mark

[ThomasM125]

You have to edit the partnership information and find the screen that says Partner Summary, and then edit the partner in question. On the screen that says Enter Partner Information, check the box that says This partner is not a person .. It is an LLC or other business entity. Choose the type of entity from the drop down menu.  Under the Social Security number option on that screen, enter the federal identification number for the entity.

[markkatzmann]

Hi @ThomasM125 ,

Thank you for the suggestion. Do you mean in Forms view or Step by Step? 

In Step by Step, following your instructions:

Cannot locate Partner Summary.

Instead: Business Info-->Partner/Member Information-->Edit Member

Check the box that says "This member is not a person. It is an LLC or other business entity."

Select the type of entity, "Partnership" is not available (and the 1065 instructions call for "P" for Partnership in my facts). I need P to show up on I1.

But LLC Partnership is the next closest thing, so I select that.

The challenge is, if you do not select Disregarded Entity, then Turbo Tax will not prompt you to complete the information about the beneficial owner.

So I am stuck getting to the outcome.

If I select LLC - Partnership as entity type, I cannot complete the information about the beneficial owner.

If I select Disregarded Entity as entity type, I can complete BO info, but "Disregarded Entity" populates in item I1.

Additionally, when you select DE as entity type, Turbo Tax seems to assume that the Beneficial Owner is an individual, but there has to be a way in Turbo Tax to account for the fact pattern where the legal partner in the partnership is an Disregarded Entity (Single Member LLC) but the single member is a partnership, not an individual.

Thank you for your consideration. Perhaps as a next step you could direct me to an editable portion of the forms. I want to avoid overriding the populated fields so I can still e-file. I would like to find the source where I can check the boxes I need to check and format the EIN as an EIN, not an SSN.

Thank you,

M

[ThomasM125]

I am in the step by step mode. You can't change the designation in the forms mode.

You have two partnership statuses that you can select "GP- general partnership" and LP - limited partnership." When I select LP "P" shows up on the K-1 schedule in line I1.

[markkatzmann]

Perfect - so that takes care of entity type in Item I1.

How are you entering the fields in Item H2? 

Thank you so much,

M

[RobertB4444]

It looks as though the TurboTax system automatically formats the TIN for the disregarded entity's owner as a SS# instead of an EIN.  The numbers will still be correct although the hyphens will be in the wrong place.

Also, if a disregarded entity's only owner is a partnership then it is technically not a disregarded entity for tax purposes and should file its own partnership return.  

Here is some IRS guidance on that.

[markkatzmann]

Hi,

Okay - so I won't be able to change the format of the EIN. It will look like an SSN.

Still an open item: how are you populating the fields in H2? Those fields should have the DE's (the entity that is the legal partner in the partnership) Name and EIN.

Lastly, I have a different interpretation of the filing requirement when an LLC is owned by a Partnership. I read this guidance single-member-limited-liability-companies to say that the subsidiary LLC should be reflected on the parent partnership's 1065. 

I read your guidance to say that a partnership has to file a 1065. Not that a Single Member LLC owned by a partnership has to file a 1065. Here is another portion of the guidance you provided. llc-filing-as-a-corporation-or-partnership

Do we still have a difference of opinion on the tax return requirements of a SMLLC where the single member is another LLC taxed as a partnership?

Thanks,

M

[RobertB4444]

A single member LLC whose only member is a partnership is no longer a disregarded entity.  Disregarded entities can file however best works for them.  If an LLC is owned by a partnership then that LLC needs to show the partner's share of income and expenses and whatnot.  

I don't see why that can't be shown on the parent partnership's tax return since the LLC is a subsidiary.  Just make certain that you indicate clearly where the income moving from the LLC is so that I could see it if I needed to.  That way you avoid unnecessary questions later.