In the past I have taken money from a partnership and treated it as income. I have K1 income that was used to repay these loans - where do I report this?

[TomYoung]

You have been way too vague here and provided virtually no details in describing your situation. 

"In the past I have taken money from a partnership and treated it as income."

How and why have you "taken money" from the partnership, why did you treat it as income and in what fashion did you report it?  Does "in the past" mean "in prior years?"  How was this accounted for on the books of the partnership?  In the context of what you've posted it sounds like you are a partner in the partnership and took out loans from the partnership so reporting these amounts as some sort of income appears to be just flat out wrong.   

My guess is that you borrowed from the partnership with the understanding that your share of future income would not be distributed to you but instead would be used to pay off the loan.  If that's the case and if "in the past" does refer to prior years then I'd suggest taking all your information to a local tax expert and get help fixing what you've done and getting the current year properly reported.

[kitrdavis]

I'm pretty sure the amount goes in misc deductions under Claim of right repayment over $3,000

[kitrdavis]

Sorry - It does seem that my question was vague - As part of an LLC - I received a salary which the accountant at the time treated as distributions from my capital account.   I treated these payments as regular income and paid tax each year.   These amounts exceeded the amount in my capital account by several thousand dollars.  This year the company made a profit and my share of the profit was returned to the capital account to "repay" the distribution.   Since I had already paid taxes on the distribution, I believe that the amount returned to the capital account should be deducted from my current year income.    Does that clarify the question?

[Anonymous]

Sorry - It does seem that my question was vague - As part of an LLC - I received a salary which the accountant at the time treated as distributions from my capital account. I treated these payments as regular income and paid tax each year.

a partnership/llc  does not pay salary to its partners, guaranteed payments are possible but they are reported on line 4 (2019).   distributions are not taxable income unless they reduce tax basis below 0.  income that you need to report is usually on lines 1 to 3 of Part 3 . other lines in Part 3 can have tax significance. you likely have totally messed up your tax reporting for as long as you have had the LLC.  you need to consult with a tax pro to see what can be corrected.   and you should use a tax pro in the future to make sure you're reporting the activity correctly.  misreport and there could be substantial tax penalties. 

[Critter-3]

I agree ... seek local professional assistance to get educated on what you can and cannot do ... the partnership issues a K-1 to report the net income from the partnership after expenses which do not include partner draws and loans.   What you may have taken is guaranteed payments and those are also reported on the K-1.  You may have also taken loans from the business and added more capital to the company.  What you have indicated is not at all clear so if the accountant who keeps the books and/or prepares the return cannot explain it to you well then seek outside council. 

[TomYoung]

You say "salary" but partnerships don't pay salaries to partners, they make "Guaranteed Payments" which are ordinary income to you and generally subject to Self Employment taxes.  However, payments to you that affect only your capital account with the partnership are typically treated as "draws" - a "return of capital" concept - and would not be taxable until your basis is zeroed out.  Partnership law being what it is the reality is that the above two sentences are gross generalizations that aren't always true.  And, I can't see anyway the claim of rights angle comes into play here.

If the payments made to you were legally guaranteed payments for services performed, (I think that has to be part of the partnership agreement to stand up). then your past reporting makes sense, but the partnership's reporting doesn't.  This could be a situation where the partnership has to amend its prior income tax returns, (if "in the past" does refer to prior years), meaning all the partners would also need to amend.

Find some competent local help.

[kitrdavis]

Thanks for all of the replies and good advice - if only it was that easy.   Unfortunately I am a minority partner living in a foreign country where Turbo Tax knows more about the US tax system then any accountant for 200 miles.   This situation developed over a 20 year period and multiple accountants.   While I was an active member of the company, the accountants prepared both the partnership and personal returns, delivered everything at the eleventh hour with just enough time to sign and put them in the mail and no real opportunity or incentive to ask any questions.  (My roles were technical - others acted as CFO etc)   As you correctly pointed out the payments I received for participation were treated as draws, resulting in my capital account being a couple hundred thousand dollars in the red.   The company was originally  small, bleeding money and the accountant was all we could afford.  It is obvious that mistakes were made, but no one taken the time to go back and correct them (I suspect this would open a can of worms - since there were probably other mistakes made).  Over the years, I left the company, retained a small amount of ownership but the  amount of profit or loss generated was practically immaterial.   Now the company has grown to many millions in revenue and the amounts being reported are no longer small.  The one thing that hasn't changed is the delivery by the accountants - My K1 was emailed to me at 4PM yesterday - so I had just 2 or 3 hours to decide how to account for everything.   The K1 attributed way more profit to me than I made from all other sources (I'm retired) and all of it was used to offset some of my negative capital account balance.   Since the capital account is negative because I received draws and paid tax on them as regular income - my contention (most likely wrong) is the amounts should not be taxable.  I realize that when it is safe to travel again, I will need to return to the US and find some expert to consult.  In the interim I was looking to come up with a semi-reasonable approach that was also financially workable.  (If I treated the amount as taxable income the tax would be more then I will receive in 2021 from all sources)   Thanks again.

[Critter]

The only point of advice I can give you going forward in the future is to file your return on time without the k1 that shows up in the 11th hour and then take the time to correctly amend the return so you're not rushed. You can still amend the return if you filed one last night and you believe it to be incorrect. You have three years to amend the return so please take some time to figure out exactly what your situation is and to seek out professional guidance even if it's not local. As a partner you have a right to question the partnership return and your k1. Now that the business is throwing off some profits this is a good time for you to insist that they get their books in order.