754 Election Depreciation for just one partner

[user17692919984]

I have entered the 754 Election information and 743 step up in basis in the Business information section.  One partner passed away and left their portion of the LLC to their trust.  How do I do the depreciation for just the trust (partner) that got the step up in basis and not for the other partners?  It was a large step up so this will make a big difference in the depreciation.

[PatriciaV]

You will need to enter this using Forms Mode. The entry for Section 754 depreciation can be found on Form 1065 p5-6 under Line 13(e)(C). Use code ZZ from the drop-down menu. What you enter here will also appear at the bottom of Line 13 under Type. Section 743(b) adjustment should be automatically entered on Line 13(e)(G).

If you wish to specially allocate this amount, set up an allocation code on the Sch K-1 Worksheet, then enter that code in the box to the right of the amount on Line 13(e)(C). To confirm the allocations, open Statement A (Page 1) for each partner to see how Line 13 is being allocated.

Be sure to activate Special Allocations in step-by-step under Business Info tab >> About Your Business >> Makes special allocations. 

Learn more about Special Allocations: 

1. Go to Partner/Member Information and click Done at the bottom of the Member Summary page.
2. Continue to the page "How to Enter Special Allocations" and click "See Demo" at the bottom.
3. Follow the example for Special Allocation by Amount.
4. To confirm the allocations, open Statement A (Page 1) for each partner to see how your entry is being allocated.

[user17692919984]

Can you give more detail about setting up the allocation code on the schedule k1 worksheet. I'm not seeing how to do that and need more specific instructions. Thank you!

[PatriciaV]

You can use Special Allocations to report this flow-through expense on the individual Schedules K-1.

1. First, confirm that "Makes Special Allocations" is listed as Yes under Business Info >> About Your Business.
2. Go to Partner/Member Information and click Done at the bottom of the Member Summary page.
3. Click the Forms icon in the TurboTax header.
4. Find Sch K-1 Wks in the list of forms and click on the form name to open it in the large window.
5. Enter (1) the specific depreciation amounts on the Schedule K-1 worksheet for each partner under Special Allocations By Amount, Line A. You will need to calculate the allocations yourself. 
   (2) the total amount of depreciation to allocate and an "A" in the small box on Form 1065 p5 Line 13(e)(C) using Code ZZ.
6. The result is shown on each partner's Schedule K-1 Line 13 code ZZ.

[user17692919984]

So I am still experiencing  a major problem.  So I have entered the 743(b) step-up as a new asset and am getting a number for depreciation for that asset but there is nothing in the depreciation section that lets me allocate it to just the one partner. What seems to be happening is that Turbotax is simply adding this and the house depreciation together and using it as an expense for the whole business (among all three partners).  Even though I've gone into forms and put the depreciation number in manually into the special allocation box and used code A, the taxable income figure on the k-1 forms is clearly being calculated as if the depreciation counts for all partners instead of just the one who gets the step-up in basis.  I'm not sure how this is supposed to be handled?  It seems like there should be some way to indicated that the depreciation that is calculated on the depreciation page is just for one partner, but there isn't anything.  And doing the special allocation isn't removing it from applying to all partners.  Can you help me solve this? 

[PatriciaV]

It might be easier for you to share a copy of the TurboTax ".tax2025" file that is experiencing this issue. You can send us a “diagnostic” file that has your “numbers” but not your personal information. If you would like to do this, here are the instructions: 

1. Open your return and go to Online in the top menu, then choose "Send Tax File to Agent."
2. You will see a message explaining what the diagnostic copy is.  Click okay through this screen and then you will get a Token number. 
3. Reply to this thread with a screenshot of your Token number (this avoids Community filters for numbers with a dash) and tag (@) the Expert requesting the token from you.
4. Please include any States that are part of your return - this is VERY important.

We will attempt to determine the best option for you to resolve this experience and post a reply in this thread.

[user17692919984]

Will file Colorado as well.

@PatriciaV 

[PatriciaV · Accepted solution]

This is a complex and tedious process, and you may consider upgrading to TurboTax Expert Assist Business. This online service provides step-by-step guidance from a tax expert whenever you need assistance, either over the phone or by screensharing.

We reviewed the diagnostic copy of your return and recommend the following changes using Forms Mode:

1. On Schedule K-1 of the outgoing partner (#1), remove the overrides in Part III Line J End Bal. These percentages represent the values as of the day before the exchange was made.
2. On Sch K-1 Wks, add a Special Allocation by Ratio with 100% for the new partner (#3) and zero for the other two.
3. 8825 Wks: Override Line 14 and enter the actual depreciation without the amount specially allocated to Partner #3. You'll find this on the Depr Report (under 8825 Wks) as "Subtotal Prior Year" under the Current Depreciation column (not the grand total).
4. On Form 1065 p5-6:
   Sch M-1: Line E: check the box to enter Line E on Sch M-1 Line 1. This will allow Line 9 to equal the tax-basis net income with no difference between Sch M-1 and the Net Income Analysis.
   Sch M-2 Line 4: enter the amount of step-up basis as "Section 754 Basis Adjustment" using the allocation you set up above. This is the amount on the Depr Report "Subtotal Current Year" in the Cost column.
   On Line 7, enter whatever adjustment is needed to bring Line 9 to zero (same allocation code as above).

These changes should result in income allocations per the weighted averages shown on Addl K-1 Info. For Partner #3, this will be adjusted by the additional depreciation you specially allocated using Code A. If you wish to avoid reporting negative capital balances, you will need to enter the beginning capital/basis numbers on the Sch K-1 Wks, found in the left column for each partner.

We do encourage you to seek the assistance of our Tax Experts, who are familiar with the forms in TurboTax Business.

[user17692919984]

Thank you @PatriciaV 

I was successful with all of your directions. Thank you -- and I will look into Expert Assist Business.  I did have one question -- in the very first instruction you mention to remove overides as the values are from the day before the exchange was made (99.99).  That seems surprising to me -- why would that be?  It seems like it would make more sense for this to be the final value held at the end of the year (or after the election), which would be zero.  I just want to double check that.

[PatriciaV]

If you notice, there is an asterisk beside *Intl/Fnl % on Sch K-1 Wks. The footnote at the bottom of the form notes that these percentages are those that existed immediately before termination (outgoing partner). This is per IRS Instructions for Form 1065 Schedule K-1 Part II Line J.

[user17692919984]

I was told by another turbotax expert to use Code V instead of Code ZZ.  This also seems relevant to whether you put the depreciation figure on 1065 pg 5-6 schedule K in section e line C or line G.  Can you confirm which is correct?

[PatriciaV]

Form 1065 Schedule K Line 13(e) Code V is for Section 743(b) negative income adjustments. This basically duplicates the entry on Line 13(e)(G), which is dedicated to this deduction. 

Section 754 depreciation belongs on Line 13(e)(C) and the only code available is ZZ.

[user17692919984]

Hi @PatriciaV

So now I am experiencing some problems with the allocation on the Colorado state forms. The k1s have allocated income seemly correctly between three llc partners, and the 743b appears in line 12, federal deductions.  The problem is the entire rental income is being allocated to the trust who inherited the rental property on July 13, 2025 from my mom.  Federal k1 is allocating the income between the three partners but State is not.  Can you help me with this?

[PatriciaV · Accepted solution]

TurboTax Business for Colorado Partnerships includes the option to set up special allocation codes in the same way you did for the federal return.

1. Go to Forms and find Sch K-1 Wks under Colorado Partnership. 
2. For each partner, enter the same income allocation percentages you used on the federal return under By Ratio #1.
3. Open Sch K Equiv and enter the special allocation code in the "SA" column beside Net Rental Income.
4. If you need to specially allocate any other federal numbers, repeat this process for other ratios.
5. Open each Schedule K-1 (Colorado) to confirm the allocations are as you expected.

[user17692919984]

Hello again, @PatriciaV 

I appreciate all your help.  I've found you are more helpful than the Business Assist.  So now I am doing the return for the Trust which is getting the 743b depreciation.  It doesn't seem like Turbotax is accounting for it in the Trusts 1041.  No do I see that the interest is being accounted for.  There are two rental properties with Code N interest amounts.  I have entered all the lines from the Federal K-1s (743 b depreciation (k1 line 13) and Interest (k1 line 20), but these don't seem to affect the bottom line.  The 1041 shows the sum of the rental income and a small interest income on a bank account.  Then it is subtracting legal fees that were paid and giving a $100 exemption (line 21 of 1041) but nowhere is the 743b or the loan interest being subtracted?  How do I do that?  And Colorado form 105, p4-5; sch B has the amount of the distributions (which was much larger than taxable income) and the percent amount says 196.1968 percent which is obviously wrong.  Can you please advise on how to fix it?  Am I correct that form 1041 and the k1 for the trust beneficiary don't need to be filed until April 15?  Thank you so much for your help!