1099B Gains (short and long) for business that also issues K1

[TheresaHTX]

This year we sold via a brokerage house a business that also issues us a K1.  The sales had short term (4% of the total sale) and long term (96% of the total sale) gains.  I imported the short term and long term gains from the brokerage firm, but I am struggling with the K1 interview portion in TT. 

In addition, I am afraid I am being double taxed and / or taxed at the wrong rate as there are short term and long term gains when filling out the K1 portion of TT interview

1)  I received a 2021 Sales Schedule and a K1 from from the company.

2)  Part III of the K1 only shows an entry box 1 (loss) and box Box 20 (there is a section 751 gain, which is the same amount as the amount on the sales schedule under 'gain subject to recapture as ordinary income.  There is a positive amount for 'excess taxible income', and positives under 'gross receipts for 448(c) and Unrelated business Taxable income purposes)

3)  The sales schedule shows a cost basis (which they say should be included in form 8949 Column E), Gain subject to recapture as ordinary income (Form 4797 Part II Line 10, Form 8949 Column G).  I keep going back and forth between the TT interview and Form 8949 and I cannot seem to understand how to enter the numbers correctly.  In the Sales Information Interview of TT.

4)  How do I treat short term and long term gains for sales as it relates to a K1 company as most of my investment was long term

[nexchap]

This is a very confusing area given the structure of the TT software.  Basically, you want to think about the sale in 2 parts:

1. The gain subject to recapture as Ordinary Income
2. The capital gain/loss

You handle the Ordinary Income, and none of the Cap Gain/Loss, in the K-1 portion of the interview.  You handle the Cap Gain/Loss, and none of the Ord Income, in the 1099-B portion of the interview.

In the K-1 portion, enter the Ord Income, and then 0 for sales and the inverse of the Ord Income (so if Ord Income is 100, enter -100 for Basis).  If you have AMT adjustments, make them and do the same in the AMT column.  If done correctly, the next screen in the interview will show 0 cap gain/loss.

Then, in the 1099-B portion, you'd enter the correct selling price, but adjust the cost.  The correct cost basis is what you originally paid, plus the cum adjustment, plus the Ord Income.  So if you paid $500, and the Cum adjustment is -150, and the Ord Income is 100, your basis is 500-150+100=450.

Note that your K-1 will show the split between long term and short term, so you'd use that % to split the basis adjustments and Ord Income.

[TheresaHTX]

Thank you for your quick response!

I am still a bit confused as it relates to the K1 section of TT.  You state:  In the K-1 portion, enter the Ord Income, and then 0 for sales and the inverse of the Ord Income (so if Ord Income is 100, enter -100 for Basis).  I am guessing this is under "enter Sale Information".    The entries that I can enter for Regular Gain or Loss are:  Sales Price, Selling Expense, Partnership Basis, Ordinary Gain, and 1250 Gain.  Is it the Partnership Basis and Ordinary Gain, which you are speaking of where one say, 100 and the other is -100?

The K1 has the amount  under Part III, box 20AB (aka Section 751 gain / loss) as in 'Gain Subject to Recapture as Ordinary Income' (as seen on the 2021 sales statement)

So to adjust the cost for the purchase, I will need 'over-write' what was imported from my brokerage account?  

[nexchap]

Yes on the first part (100 for Ordinary Gain, -100 for Partnership Basis).

And what you imported from the brokerage should have been either code B or E -- revenue reported to the IRS, but cost NOT reported to the IRS.  It's coded that way because the brokerage can't track your "cost"/basis.  And they also don't know how much ordinary income you're going to get, so can't adjust for that either.  So when you go through the 1099-B interview, there will be a spot where you can check a box for "The cost reported on my 1099-B is wrong" (or words to that effect), and TT will prompt you to enter the correct cost.

Bottom line, this isn't as automatic as people would like.  To be really safe, you have to work out what the correct Cap Gain/Loss is, by hand, in advance.  Then when you're done with the entries, verify that that's what made it to your return.