I found the solution. First of all it was totally wrong and misleading error message. It had nothing to do with the itemization which existed. Instead there was no income reported for that expense (you cannot have an expense unless you have an income). I did enter the expense, but the TurboTax didn't reported it at the correct place. Once I entered manually the total income above the "problem" expense column everything was corrected.
The TurboTax definitely needs to improve handling of the Sch K-1 forms and to eliminate misleading error messages.
