I sold all interest in PTP in 2022 and received a Sales Schedule. I also received a 1099-B from my Broker for the same sale. To avoid duplicate entries, I used two methods: (Method 1) adjusted the K-1 to have $0 in the Sales Price, Basis, and Ordinary Gain, and modified the 1099-B to include from the Sales Schedule, the correct Cost Basis and Ordinary Income in the "Adjustments"; and (Method 2) included the sales in the K-1, and modified the 1099-B Cost Basis to be the same as the Proceeds for a Gain of $0. The taxes due are different between the methods, with a $32 dollar difference out of approximately $2400. Why might that be, and is either method acceptable to the IRS?
maybe for the k-1 sales info there MAY be a column on the sales schedule that says any of the following (the amount would also likely be included in box 20AB of the k-1):
"Gain subject to recapture as ordinary income" or
"Section 751 gain (ordinary income)"
other wording is possible
at the bottom of the column, it might say any of the following:
"form 4797 part II line 10"
"form 4797 part II line 10 form 8949 column G"
"form 4797 form 8949"
this is ordinary income resulting from the disposition of the partnership it is not included on any line of the k-1 other than possibly line 20.
so to get it to flow to the 4797 part II line 10 you have to in the k-1 sales section yo have to indicate this as the sales price and also on the ordinary income line
for the 8949 you have two options
1) from the sales schedule add the total adjusted cost basis and the amount reported as ordinary income and enter it as your tax/cost basis to arrive at the proper capital gain/(loss) amount
2) from the sales schedule enter the total adjusted cost basis in the cost basis column in the adjustment column enter this ordinary gain as a negative amount and use code B
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your broker DOES NOT report the correct tax basis on the 1099-B. the only number it has is what you paid when you bought it. (that's why the type is either B or E - tax basis not reported to IRS). It does not adjust this amount for the partnership activity which must be done otherwise the gain/loss you report will be wrong.
Ordinary Income must be entered into the K-1 interview: its the only way to see it moved to form 4797 and reported properly. But to avoid having the K-1 calculate a Cap Gain, you enter $0 for sales and the inverse of the Ord Income as basis (e.g. if Ord Income is 32, enter -32 as basis). You'd do the same on the AMT column.
On the 1099-B, your basis is whatever is reported on the Sales Schedule PLUS the Ord Income.
maybe for the k-1 sales info there MAY be a column on the sales schedule that says any of the following (the amount would also likely be included in box 20AB of the k-1):
"Gain subject to recapture as ordinary income" or
"Section 751 gain (ordinary income)"
other wording is possible
at the bottom of the column, it might say any of the following:
"form 4797 part II line 10"
"form 4797 part II line 10 form 8949 column G"
"form 4797 form 8949"
this is ordinary income resulting from the disposition of the partnership it is not included on any line of the k-1 other than possibly line 20.
so to get it to flow to the 4797 part II line 10 you have to in the k-1 sales section yo have to indicate this as the sales price and also on the ordinary income line
for the 8949 you have two options
1) from the sales schedule add the total adjusted cost basis and the amount reported as ordinary income and enter it as your tax/cost basis to arrive at the proper capital gain/(loss) amount
2) from the sales schedule enter the total adjusted cost basis in the cost basis column in the adjustment column enter this ordinary gain as a negative amount and use code B
****************
your broker DOES NOT report the correct tax basis on the 1099-B. the only number it has is what you paid when you bought it. (that's why the type is either B or E - tax basis not reported to IRS). It does not adjust this amount for the partnership activity which must be done otherwise the gain/loss you report will be wrong.
Thanks for your reply. Just so I understand it correctly, from the Sales Schedule, I have a Cost basis of $3916, Gain Subject to Recapture as Ordinary Income of $472, and AMT Gain/Loss Adjustments of -$120. On the K-1 for the sale I would have a Sale Price of $0, Partnership Basis (Regular) of $-472 and (AMT) of $-352, and include the 1250 Gain from the Sales Schedule for Unrecaptured Section 1250 Gain column. On the 1099-B, I would have a Total Cost Basis of $4388 ($3916 plus $472) no other entries in the Total Adjustments to Gain box.
Follow-up question, which method to submit taxes to the IRS is best: complete the K-1 sales section to generate the appropriate capital gain on Form 8949 (Box F checked) and ord gain on Form 4797, and adjust the Brokerage 1099-B (Box E checked) cost basis that results in a 0 capital gain; or use the Brokerage 1099-b (Box E checked) adjusted with the 'Cost Basis' and 'Gain Subject to Recapture as Ordinary Income' from the Sales Schedule to show the capital gain, and then then adjust the K-1 sales section to generate the ordinary gain on Form 4797? Basically, will the IRS want to see the Brokerage 1099-B with a gain of 0, and a K-1 generated 8949 and 4797; or a Brokerage 1099-B with the capital gain of 1200, and a K-1 generated 4797. There is a defference in federal taxes of $6 between the two.
@BobC01 There should be no difference in tax between the two. If there is, its either an error you're making in the way you're entering data, or a known bug in TT related to letting the K-1 generate a 1099-B (if this is a partial sale, its most likely the bug). Given TT's bugs, there's no reason to let the K-1 generate a 1099-B.
Is one or the other method more likely to trigger an audit, and do i need to explain the method i used in the tax return?
@BobC01 Both returns would contain a 1099-B entry where the revenue matches what the broker supplied, so that's good. The only difference between the 2 returns would be
I have no idea if either of those would trigger anything, but the 2nd seems unnecessarily complex. Besides, if you're ever asked how you calculated the Cap Gain, you'll have all the records necessary.