TurboTax Business - Schedule K-1 Item I2

[aliu1992]

I’m preparing my business return and have noticed an issue on Schedule K-1, Item I2.

The entity involved is a disregarded entity that is wholly owned by an individual. The form is currently showing the beneficial owner’s entity type as “Disregarded Entity” on Schedule K-1, Item I2, when it should instead reflect the beneficial owner’s entity type - Individual.

This appears to be a software issue and is resulting in incorrect reporting. Please let me know whether this is a known issue and when it is expected to be fixed, or if there is an available workaround.

[ThomasM125]

I think you are referring to item I1. on schedule K-1 for a partnership "What type of entity is this partner?". The instructions to Form 1065 for that line read as follows: "State whether the partner is an individual, a corporation, an estate, a trust, a partnership, a DE, etc..." The abbreviation "DE" stands for disregarded entity. So, it seems TurboTax is entering the correct description as you stated the shareholder was a disregarded entity.

[aliu1992]

Yes, I meant Item I1, not I2. Apologies for the typo. I work for a public accounting firm, and in GoSystem Tax, Item I1 is correctly completed using the beneficial owner’s entity type.

The instructions for Item I1 on Form 1065 state: "State whether the partner is an individual, a corporation, an estate, a trust, a partnership, a DE, an exempt organization, a foreign government, or a nominee (custodian). If the partner is an LLC and has elected to be treated as other than a DE under Regulations section 301.7701-3 for federal income tax purposes, the partnership must enter the LLC’s classification for federal income tax purposes (that is, a corporation or partnership). If any legal owner of the partnership is a DE for federal income tax purposes, report the beneficial owner’s entity type in item I1. 

Based on this, the beneficial owner in my case should be reported as an individual. However, the TurboTax business software does not allow me to select “Individual,” and it will not allow me to complete Item H2 unless I select “Disregarded Entity.”

[ThomasM125]

In TurboTax, the entry type is taken from the type of entity you state when you enter the partner information. I assume the programmers reasoned that since the partner is a disregarded entity, then that would be the appropriate response when asked for the type of entity the partner is. I see where you have taken a literal interpretation of the regulations which may be correct. However, it is always true to the best of my knowledge that the owner of a disregarded entity is an individual, so I suspect the use of term will not be misleading. In any event, it cannot be changed in the program the way it is now, unless you changed the owner to an individual.