In TurboTax Home & Business: K-1 line 12 (Section 179 deduction) transferring to Schedule SE Part II line 2

[hgieben]

I'm using TurboTax 2020 Home & Business to do my taxes.  I think there is a problem with the Schedule SE Adjustments Worksheet at Part II, line 2.  It is supposed to add the amount from Box 14 of Schedule K-1 for non-farm partnerships, which is the box for reporting earned income on the K-1, but instead (or in addition) it is transferring the Section 179 deduction from Box 12 of the K-1. 

Section 179 deductions are not earned income (or losses) and should not be included as such on Schedule SE.  If I try to override the line in the Worksheet, it keeps telling me there's an error I need to fix before I can file the return.

Am I incorrect in my assumption that Section 179 deductions passed through from a K-1 are not earned income?  The IRS Schedule SE only mentions Box 14 from the K-1, not Box 12.

Is this a bug?

Thanks,

Helmut  

[M-MTax]

The Sec. 179 deduction is limited to a taxpayer's income that is derived from a trade or business and that includes w-2 income. There's a revenue procedure on this.........https://www.irs.gov/pub/irs-drop/rp-19-08.pdf

[hgieben]

Thank you for your reply and the link to the information.

Unfortunately, it doesn't say whether Section 179 deductions passed through from a K-1 can be applied to (i.e., subtracted from) earned income as calculated on 1040 Schedule SE.  TurboTax adds Box 12 and Box 14 from the K-1 to Schedule SE, even though the IRS instructions for Schedule SE specifically list Box 14 (which on the K-1 is used to report earned income), but not Box 12 (where Section 179 deductions are reported).

Thus, what TurboTax is doing on Schedule SE with respect to pass-through items from K-1s seems contrary to the IRS instructions.

I remain concerned.

Thanks,

Helmut 

[TheTwentyFour]

You are totally correct. Turbotax misses this major deduction, and has since at least 2017.

See this post in Intuit's "Professional" tax software Lacerte, which also doesn't automatically reduce the Section 179 deduction from Schedule SE Line2. You have to manually go in there and change it:

https://proconnect.intuit.com/support/en-us/help-article/partnership/schedule-k-line-14a-self-employ...

I was able to enter it as a "loss" on line 7 by going to Forms > Open Form > Schedule SE Adjustments Worksheet > Lin 7 "Less other SE exempt nonfarm profit or (loss)"