K1 income not being categorized as earned income

Forum|Forum|4 years ago
October 23, 2021
10 replies
80 views

Hi,

I’m trying some “what if” scenarios using TT2020 Premier. I’m a partner in an LLC. The LLC is in California and I am a resident of California. I am actively involved in the operation of the business. The LLC and dividend/interest are my only source of income.

For 2020, I received a K1 and claimed the 25k income (form 1065 submitted). I’m trying to see what would happen if I had contributed to my Roth IRA. (I’m 65+, so trying to contribute 7k). I must be checking the wrong boxes because TT keeps telling me that I have excess contributions because my income is zero. From what I’ve read, I need to have earned income to contribute to a Roth IRA. I would appreciate it if someone could tell me what I should be doing in TT so it would see my 25K as earned income.

I’ve read through the TT discussions and found one that may apply (Mike300, posted 6/30/20). But just want to be sure.

Thank you

GeorgeDenseff

Level 8

K1 is not normally considered earned income. You are not paying Social Security taxes on it and it is not eligible for retirement savings.

Mike9241

Level 15

if the income is earned income there will be an amount in box 14A of the k-1.

Arguably, LLC members who are active in management or perform substantial services related to the LLC’s business are subject to SE tax, while those who more closely resemble passive investors should be treated like limited partners. Unfortunately, guidance on this subject has been scarce. The IRS issued proposed regulations in 1997, but to this day hasn’t finalized them (although it follows them as a matter of internal policy).

Under the proposed regulations, an LLC member’s distributive share is exempt from SE tax unless the member:

Is personally liable for the LLC’s debts,
Has authority to contract for the LLC, or
Participates in the LLC’s business for more than 500 hours per year.

There’s a special rule, however, for “service partners” in service partnerships, such as law and accounting firms, medical practices, and architecture and engineering firms. Generally, they may not claim limited partner status regardless of their level of participation.

Some LLC members have argued that the IRS’s failure to finalize the regulations supports the claim that their distributive shares aren’t subject to SE tax. But the IRS routinely rejects this argument and, in recent years, has successfully litigated its position. The courts have imposed SE tax on LLC members unless, like traditional limited partners, they lack management authority and don’t provide significant services to the business. And some courts have ruled that mere management control, by itself, is enough to defeat limited partner status, regardless of whether that control is exercised.

based on your statement if box 14A is blank, the return preparers are taking what the IRS would reject, that you are not subject to SE tax.

Sine a Roth contribution is not deductible for Federal purposes the only possible Federal tax benefit would be the Savers Credit

https://turbotax.intuit.com/tax-tips/tax-deductions-and-credits/what-is-the-savers-credit/L3LyopRkK

Mike9241