How to enter K-1 (Form 1065) from non-publicly-traded limited partnership with dozens of distributions

[skywire]

On 2020-12-15, I, an individual filer, contributed capital of 25K to a new limited partnership designed to earn income only in the form of interest. The partnership provided a K-1 form 1065 (hereafter K-1) for 2020 that showed only that initial contribution, with no other activity, and thus an ending capital balance of 25K. I did not include that K-1 in my 2020 return (eFiled via Turbotax) since there was no income. Okay, okay -- I actually overlooked the availability of a K-1 ;).

Over the course of 2021, I have received numerous monetary payments from the partnership, some labeled as Principal and some as Interest. They provided a spreadsheet detailing those payments. The ones labeled "Interest" total to 1757. The sum of that and the total of "Principal" payments is 13198.

In early 2022, the partnership provided a 2021 K-1 that shows in the Capital Account Analysis a beginning value of 25K, net income of 1757 (all being net interest equal to Box 5 less Box 13H), and withdrawals and distributions of 13198, leaving an ending Capital Account value of 13559. As you can see, this matches up nicely with the Payments spreadsheet. It appears to me that what they characterize in that spreadsheet as "Interest" payments are really just distributions that, presented in this way, make it easy for investors to see how they are profiting (from Interest earned by the partnership).

The only K-1s I have ever received prior to 2021 have been from PTPs. They always append a Sales Schedule. I copy the Sales Proceeds of each sale from the 1099 into column 3 of the corresponding row, and then enter the total of column 3 and the total of column 6 into Turbotax, which it apparently inserts into a row in Form 8949 columns D and E, (or, where appropriate, into the accumulated Section 1256 gains summed in Line 1C on Form 6781).

My problem is this: I don't know how to deal with the K-1 from a private limited partnership. It has no accompanying Sales Schedule, probably because it would be meaningless, or possibly because the General Partner is lazy. I'm guessing that one of these is the case:

• I have no sales and thus no tax implications other than my immediately taxable share of the partnership's interest income, so I should just enter zeroes in the Enter Sale Information screen
• I can easily answer the questions on the Enter Sales Data screen from the info in the Capital Account Analysis, but I just don't understand how that info fits into the screen (possibly because the Turbotax UI and its wording are designed only for the typical investor case (PTP)
• I've got to create a spreadsheet that calculates, for each distribution, its adjusted basis (since an amount distributed to me would seem to have a basis that depends on precisely what my capital at the time was worth)

I've scoured the interwebs with Google, and found various opinions offered by non-experts. Would someone expert in this (please, no amateur guessers) please help me out here?

Thanks.

[Anonymous_]

@Mike9241

[Anonymous_]

@nexchap 

[Mike9241 · Accepted solution]

the k-1 is entered as is in your 1040 though most items are not used. for Part III the only numbers that need to be entered would be lines 5  and 13H (assuming all other lines are blank or 0 except for line 19). The interest income on line 5 is taxable and increases your tax basis in that partnership. 13H is investment interest expense which will only benefit you if you itemize your deductions for tax purposes. regardless it reduces your tax basis. your tax basis is further reduced by the distributions on line 19.  while you can enter that line in Turbotax it is not used. distributions are not a sale. so you do not report them as a sale. the only time distributions would have a tax impact other than reducing basis is if they should exceed your tax basis. in which case your ending capital account will be negative.  currently, I believe that the ending capital account in part L is required to be reported on the tax basis. 

as for parts I and II on the k-1 only the following need to be entered. the rest is for your information or amusement.

A, the Partner Is Box (fills in E, F, and H1), G, I, and answer the at-risk question which should be checked all on your K-1.

a PTP is like owning stock. you can buy and sell as often as you like through a brokerage. you get a sales schedule because you actually sold some or all of the units. a sales schedule is not produced for the distributions it makes. Like with a private partnership they are not sales but reduce your basis. that's why the 1099-B for the sales does not reflect the proper tax basis. you must use the sales schedule to determine that. 

[skywire]

Thanks, Mike!