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islndbreze
Returning Member

Inherited book royalties being received through an LLC

When my father passed away an LLC was set up to receive and distribute his book royalties. I received my first distribution in April of this year, which was from royalties received in 2021. The K1 for 2021 was not prepared/sent until June of 2022 and so I filed for an extension back in April paying tax on the money I knew I received ($1661) The K-1 is odd though. It has amounts in  box 7 ($3152); box 13 (code I, $1306); and box 20 (A: $3152; B: $1306; Z: STMT) The STMT just says "Book Royalties" and then restates $3152 Royalties and $1306 Other Deductions. To further complicate matters I received a form 106 showing Colorado based income of $1846 (I live in NY but the LLC is based in CO) 

 

My cut is 6.25% as the royalties, per my father's will, were to be split between 4 siblings (together to receive 25%) and our stepmother (to receive 75%) $3152 represents 6.25% of the royalties. $1661 represents 6.25% of what was left after a deduction to the total was made to cover reimbursement of probate; this is the amount I actually received.  I don't understand any of the other numbers though. I also don't understand why the $3152 would be listed as "royalties" on line 7 and again as Investment income on line 20. How is this investment income? Also, how is the $1306 deduction figured? 

 

I'm super confused. 

 

Another $30K in royalties were received about a month ago but the manager of the LLC said no distributions from that can be made until all of the year's expenses are paid. 

2 Replies
Mike9241
Level 15

Inherited book royalties being received through an LLC

what are confused about?  

 

box 7 and 13 flow to schedule E page 1 they net to $1846 (box 7 royalties as you would expect and box 13 royalty expenses - don't ask why the IRS wants it this way) 

since the LLC is based in Co you have Co source income and will need to file a non-resident return,

you then take credit on your NY return for taxes paid to other states

you must do Co first for the proper tax credit to be calculated for new york

the cash you receive may not match the net income.  there is no tax law that would require it to match. you could have that income and not receive any distributions.  distributions do have an effect on tax basis but are not taxable as long as you have a positive tax basis.

assuming this is the first year line 7 less line 13 increases your tax basis in the LLC and the distribution reduces it. if schedule L is completed that should match

line 20 will have no effect on your return.  I don't think Turbotax uses this instead it uses the amounts (in your case on lines 7 and 13)

Any royalties you receive will be treated as investment income unless your primary business involves this type of activity.

the $1306 is likely 6.25% of the LLC's total expenses. you would have to check with them for confirmation 

islndbreze
Returning Member

Inherited book royalties being received through an LLC

I filed for an extension in NY with no knowledge that this was considered CO income;  I only got the k-1 at the end of June and it is my first k1. Does the extension I filed for extend to Colorado since it was also an extension on my federal taxes?

 

Sorry for the extra question but I don't know who else to ask. 

 

Thank you for all of this information!

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