Partnership owned through a disregarded entity

[WBJH1]

I own an LLC which does nothing but own 50% of a partnership.  My partner and I agreed on our operating agreement that I would take all profits in year 1 as guaranteed distributions for running the day to day operations of the business. I have my K1 reflecting the guaranteed distributions but I do not know how to calculate the taxes I owe on them.  Also if I had expenses that I incurred can I create a Schedule C for my LLC which owns 50% of the partnership and claim them there?

[Critter]

What EIN is being used on the K-1 form ?   Does it belong to the Sch C on your personal return ?  Or is the LLC taxed as an S-Corp ?  

[Carl]

Understand that your partnership is not owned "through" a disregarded entity. Your partnership *is* a disregarded entity. Period.

I have my K1 reflecting the guaranteed distributions but I do not know how to calculate the taxes I owe on them.

You personally don't calculate anything. Just enter the K-1 into whatever version of TurboTax you are using for your 1040 personal tax return, and the program takes care of it for you.

Also if I had expenses that I incurred can I create a Schedule C for my LLC which owns 50% of the partnership and claim them there?

No. Under no circumstances and with no exceptions is partnership income or expenses reported on SCH C of any tax return. Not ever. All business expenses are paid for by the partnership and claimed/reported on the 1065 partnership return before any distributions are made to any of the partners.

If you have a home office that is specifically and explicitly 100% business use for the partnership, then you deal with that under the deductions & credits tab in the employment expenses section. There's a sub-section there for Job Related Expenses that you would just need to work through. It will help you determine if you even qualify to claim a home office.

[Anonymous_ · Accepted solution]

If the LLC is a single-member LLC that has not made an election to be treated as a corporation for federal income tax purposes, then the LLC is a disregarded entity (for federal income tax purposes).

The partnership, of which the LLC owns 50%, is NOT a disregarded entity for federal income tax purposes. Rather, it is an entity separate from its partners that is required to file its own federal income tax return (Form 1065) in most instances.

[WBJH1]

Thanks.

So I actually prepared the partnership 1065 as well and I was a bit thrown off by the K1 asking for my personal info.  I have never filed one myself, as we just started the business last year.  I was a commercial loan underwriter and eventually a commercial lender at a bank for several years, so I have seen many K1's (admittedly its been about 5 years) and I have seen plenty of partnership interests owned by another business entity and I don't remember the owner's personal info being on the K1 in those instances.  Perhaps this is something fairly new? Or perhaps its just been too long since I've seen one. 🙂 Anyway this is why I was confused about my pass through LLC that owns the partnership.

So on my personal return do I even need to include the LLC which owns the 50%? If so how?  They have seperate EIN's. 

In my initial question I asked about calculating taxes on the guaranteed payments, but I realized that the software did not calculate due to an omission on my part (I forget to change the drop down "Activity type" to Ordinary business), so that part is solved.

Thanks again

[RobertG · Accepted solution]

If you report the K-1 on your personal return, you don't need to include the LLC, it is a disregarded entity.

Generally, a partner may not deduct the expenses of the partnership on his or her individual income tax return, even if the expenses were incurred by the partner in furtherance of partnership business.

However, an exception applies when there is an agreement among partners, or a routine practice equal to an agreement, that requires a partner to use his or her own funds to pay a partnership expense. 

Here's how to report unreimbursed partnership expenses in TurboTax.

• When entering K-1 information, you will eventually come to a screen titled ‘describe your partnership’.
• Check the box that asks if you are 'required to pay supplemental business expenses'.
•  The next screen is 'Unreimbursed Partnership Expenses'. Check the 'Yes' box.
•  You can then enter your unreimbursed partnership expenses.

To deduct home office expenses as an unreimbursed partnership expense, see IRS Publication 587, Business Use of Your Home, Deducting unreimbursed partnership expenses.