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EfromNewHampshire
Returning Member

Schedule K-1 (form 1065) Tax impact

I owned Management Incentive Units (similar to stock) for a company that was sold in 2018.  Shareholders were paid out 2/3 of the monies in 2018 and the remaining 1/3 in 2020.  Not being a tax guy, I had someone do my taxes in 2018 due to the Schedule K-1 (form 1065). 

2018 Taxes:
They listed the monies received as long term capital gains from Schedule K-1 (line 9a) onto schedule D (line 12), although my actual distributions from line 19 were less than the total.   So I was taxed on the larger amount for capital gains than the smaller amount I received.  The schedule K-1 showed an ending capital account (section L) that was the difference between the "current year increase" and the distributions.  Sounds good to me so far.  2018 tax impact: Paid capital gains on the larger amount.

2019 Taxes:

Received a new Schedule K-1 (form 1065) the reflected the beginning capital amount (section L) from the 2018 schedule K-1 and also showed a current year net income.  The ending capital account (section L) is the amount that I should be paid in 2020.  2019 tax impact: None?  I did my taxes online with turbo tax and entered all of the details for schedule K-1.  I guess this is expected since I did not receive cash in 2019.  I looked at TurboTax forms and don't see a mention of this "capital gain" on Schedule D.

 

2020 Taxes

Received a 2020 Schedule K-1 and a check.  Section L shows a beginning balance that was a carryover from 2019 and an ending balance of 0 due to the distributions.  There were no "increase" in 2020.  The distributions (section 19) reflect my pay out.  Tax impact:  None?!??!?  I entered Schedule K-1 in TurboTax and don't see any impact, no entries in Schedule D?

What am I doing wrong?  I think I need to amend my 2019 return to edit Schedule D and show the capital gains listed on the Schedule K-1 (section L)?  There were no capital gains in 2020 on Schedule K-1

 

 

2 Replies
Mike9241
Level 15

Schedule K-1 (form 1065) Tax impact

Sorry, but without knowing what the purchase agreement provided, I don't think anyone can say for sure what occurred was reported properly. Further, there was no stock sale, you had an interest in a partnership (form 1065) so what occurred was either a purchase of the partnership assets (most likely since you continued to receive a k-1 in the ensuing years)  or purchase of the partners' interests. 

 

with a sale of the partnership assets, the entire reporting should have been done through the k-1. the partnership would receive all the money and would distribute some or all to the partners. this seems consistent with what was reported in 2018.

in 2019 all that was required of you was to report on your 1040 the k-1 activity based on what was on the various lines in PART III

in 2020 apparently the only thing that occurred was the partnership received the balance of the cash for the sale of its assets and made a distribution to you of your share of the cash. assuming that schedule L on the k-1 was always on the tax basis, then there is nothing to report on Schedule D in 2020

 

any entries you made in the Turbotax k-1 schedule L go nowhere. there not used by Turbotax or for that matter any other tax software of which I'm aware. 

Rick19744
Level 11

Schedule K-1 (form 1065) Tax impact

Below are my comments based on your facts:

  1. You don't indicate how long you had your interest in the partnership, but you should have been maintaining a tax basis schedule of your interest in this partnership.
  2. You don't mention how section L was presented on your K-1; what box was marked on your 2018 K-1?
  3. Since the sale was on the installment method, you should have completed a form 6252 in 2018.
  4. The information on form 6252 would then be used in 2020 to complete the gain recognized and to be reported on Schedule D.  The form 6252 would have been included in your 2019 return, but there would have been no impact since no distributions were received.
  5. Doesn't appear that you need to amend 2019 since you did not receive any distributions.  Your section L is not really the full story.  The key in all of this is understanding your tax basis, which may or may not be presented on that basis in section L.
  6. If you received a distribution in 2020, you most likely have capital gain.  However, based on the limited facts and not knowing your tax basis it is hard to provide much more guidance than what is provided above.
*A reminder that posts in a forum such as this do not constitute tax advice.*
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