Form 1065 expenses reported as business loss and self-employent earnings loss

[wpwiegand]

I am treasurer for a stock investment club (partnership). I have a problem with business expenses being reported as business loss and earnings loss from self-employment.  In the past we have used unique investment club accounting software to track transactions and file our 1065 partnership return and K-1s for members. This year we have a specific issue that cannot be handled by that software, so I am using Turbo Tax for Business. All of our income is from dividends, interest, and gain on stock sales. In 2023 we had $1209 of investment related expenses for tax software and membership in a national investment club. I input dividend and security transactions, and the expenses, in TTax, and the Schedule K includes $1209 as a business loss on line 1 and also as a net earnings loss from self-employment on line 14a. That has NEVER been reported that way in prior years. The Schedule K also reports that amount as an investment expense on line 20b, which is consistent with prior years. I reported all income as “investment income” and all expense deductions as “common business expenses.” How can I report those expenses so they don’t also appear as business loss or loss from self-employment?

[PatriciaV]

Please clarify if the issue is that (1) the expenses are creating a loss or that (2) you have a self-employment loss on Schedule K-1.

[wpwiegand]

I think both are an issue. The $1209 business expenses are reported as a business loss on kine 1 of the K-1 and as a self-employment earnings loss on line 14a. They are also reported as a deduction on line 20, which seems correct to me. I think they should not be reported on lines 1 and 14, but I don't know how to make them go away.

[PatriciaV]

Is there a reason why your investment expenses would not be included in partnership income?

Note also that Schedule K-1 codes were extensive revised for tax year 2023.

Schedule K-1 Line 1 is ordinary business income (loss), so if you had less income than expenses, you would see a negative number on this line.

Likewise, Line 14 reports self-employment earnings (loss). Again, this could be a negative number (and might be the same as Line 1 without any other reported income/expenses).

Line 20 is "Other Information" for the partner/member to report on an individual return. Generally, this information is either included in the income/loss amount or has no effect on the partnership return.

[wpwiegand]

Your message was delivered to my spam email, and I replied, so I don't know if you receive those. I copied the text here. Sorry if it is a duplicate: Thank you for the replies, although I am concerned that the reporting is different than it has been for many years. Our problem is that we will get a K-1 this year from a security that is a partnership, and our software does not accommodate that, so I am using TurboTax to be able to fill out forms and efile them. We are a club, not a business, and I don't consider us as self-employed, even though we don't have an employer. Turbo Tax requires a business code, and I input 523900. I am simply trying to duplicate the return generated by our club accounting software that comes from a national organization. We have $11 interest income, $3476 dividend income, -$7475 short term capital loss, $25,464 long term capital gain, and $1209 investment related expenses. It doesn;t seem like we should have a business loss, and certainly not self-employment earnings loss, but that is apparently how Turbo Tax reports it. I will probably need to wait for the K-1, add it to Turbo Tax, and submit it without understanding why it is different from the past. Thank you.

[DianeW777]

Yes, you definitely need to wait for the K1.  We would not be able to explain the self employment income if that's on the K1, however you can get help to prepare the return should you need it.

If you don't understand the K1 you should discuss with the person or organization that sends it to you. You can use TurboTax Live if you prefer to have an agent prepare the return for you.

@wpwiegand 

[Rick19744]

@wpwiegand 

A few comments:

• I am not in a Windows environment so don't have access to the software
• Having said that, the items reported on the K-1 you received need to pass through to the partners of your partnership with the same character; as you most likely understand.
• In order for an item to be reflected on the K-1 line 1(and also Sch K), is due to the fact that you input that amount as income / expense from the partnership trade or business.  It does not belong there.  You only have separately stated items to input.
• You need to reflect those expenses ($1,209) on Sch K line 20b only; and possibly Sch K line 13 Code AE.
• Review your methodology of input based on the above and you should resolve the issue.

[wpwiegand]

I agree with the comment from Rick19744, thank you, Rick, about 

• You need to reflect those expenses ($1,209) on Sch K line 20b only; and possibly Sch K line 13 Code AE.

That is the way the club accounting software has always reported it in the past. The question I have been trying to ask, perhaps not clearly, is how can I do that? Everythinrg I try to do to get those amounts reported on lines 13, code AE, and 20, code B of the K-1 results in a business loss (line 1) and self-employment earnings loss (or similar wording) on line 14.  I did put the correct numbers and codes on each individual K-1 using an override, and the tax return review feature said the return was correct, but when I tried to e-file it said they were in error. I don't remember the exact reason, so I put them back as investment expenses and K-1s are probably incorrect. I can't find a way to report them correctly. VERY FRUSTRATING!!

[PatriciaV]

Overriding formulas or calculated numbers in TurboTax not only invalidates the Accuracy Guarantee, in most cases it invalidates the return for e-filing (an IRS rule). Instead of manually entering numbers on Forms, you should follow the step-by-step interview so that your entries are properly reported on the forms in your return.

You are unlikely to reproduce the same entries that will be reported to you on Schedule K-1. Your best option is to wait, then enter the K-1 under Investment Income.

Finally, due to the unusual nature of your "partnership," you may consider upgrading to TurboTax Live. This online service provides step-by-step guidance from a tax expert whenever you need assistance, either over the phone or by screensharing.