This is a tricky situation because by reporting this in Box 11, this income is treated like ordinary income taxed at ordinary income rates. It should have been reported in Box 8 or 9A, as these entries reflect capital gain activity. However, if you report the gain in this manner, there is no way to exclude this sale under a 1202 exclusion. Here is the recommended path I suggest to take.
Have your CPA issue a corrected K1 to not report the sale of your stock in Box 11 or anywhere on the K1. instead report it in the recommended steps below, since K1's are reported to the IRS.
- With your return open, search for 1099-B (upper- or lower case, with or without the dash) in your program's search box.
- Click the Jump to 1099-B link in the search results.
- On the Did you sell any investments? screen, answer Yes.
- When it asks if you received a 1099 B, say no.
- If you land on the Summary of All Accounts screen instead, click Edit
- Then record the information on your stock sale then continue until you reach the screen in step 7
- Click My sale involves one of these uncommon situations.
- Here select the gain and loss from this sale is eligible for special treatment
- Next screen is where you will indicate this is Qualified Small Business Stock eligible for 1202 exclusion.
- Finish out the section.
Form K3 is a new form this year that reports income that has international tax relevance. If you have no foreign income activity reported in your K1, K3 does not apply to you. Hope this helps.
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