K-1 and sales schedule question

[hybridtaxguy]

First, thank you so much for your help and reply!

I bought and sold IEP, I've entered my K-1 successfully.

It looks like I'm realizing more gains than I should be.  I made ~$445 from the buying and selling of IEP, and $1000 in a payout\dividend.  I'm a little confused why my cost adjustment basis (column 5) is -1207, id expect it to be -1000 for the distribution pay out.  My actual gains of buying\selling are captured from the sale proceeds and my purchase price (columns 3 and 4)

Column 7, I know how to enter this in turbo tax, but I can't understand why I'd need to capture this as a gain.

It says Column 7 is: Gain Subject to recapture as Ordinary Income.

Column 7: The Instructions to Form 8949 are unclear in the determination of capital gains where the total gain of the sale of units is partially ordinary gain. Reporting this amount as a negative adjustment in column G of 8949 should generally result in the correct capital gain or loss. The amount reported as ordinary gain is qualified PTP income for Section 199A and has not been included in the amount reported on Schedule K-1, Line 20z.

The value in column 7 is 182.

Should I be reported this as an adjustment of -182 or 182. The reason I think negative is my cost basis is seemingly too high. Eg, I made $445 from the trades in Etrade, and $1000 in distribution, but my net gain is $1814. The offset being negative would at least move it pretty close to what should be my actual gains.

[nexchap]

The reason your basis adjustment is -1207, rather than -1000, is that your basis is adjusted for distributions AND all the other income and deductions that show up on the K-1.  The extra -207 means that you must have reported that much in losses elsewhere, either this year or in the past.  Note that any losses reported on the K-1 will be released when you sell, and will show up on Sched E.

The gain subject to recapture (Ordinary Gain) is driven by the tax code.  In most holdings, your profit on a sale is all Cap Gain.  But with a partnership, that profit can be split, partially Cap Gain and partially Ord Gain (taxed at ordinary rates).  So the 182 is the amount of profit to be taxed at Ordinary rates.  The easiest way to reflect that in TT is to just increase your cost basis by 182, but you can also enter it as an adjustment if you prefer.

[hybridtaxguy]

I really appreciate your reply.

I guess what I'm most confused about is if from the trade and dividends I only netted 1445, why am I paying tax on a nearly additional 400 when I never saw that money?

The sales proceeds column captures my gains from the trade, and 1000 from the distribution\dividend.

Very confused on why I'm paying tax on 400 of income I never saw.

[hybridtaxguy]

When you say increase my cost basis.

My cost basis is -1207, do you mean  add 182, so -1025?

Or do you mean -1207 - 182 = -1389?

[nexchap]

@hybridtaxguy Cost basis adjustment would be -1025, shrinking your Cap Gain by $182

As for reconciling the basis adjustment, K-1s can affect your taxes on a bunch of different forms:

- Sched D:  The cap gain/loss you calculate

- Form 4797:  The Ord Income

- Sched E:  Any losses reported by the partnership show up here

- Sched B:  any dividends or interest reported show up here

- etc.... Depending on what the K-1 actually reported over the year.

Note that many of those entries will be for things where you never saw any cash, yet you had your taxes go up or down nonetheless.

To properly reconcile, you have to add these forms up over the years you owned the partnership.  But in the end, your premise is correct:  the difference between cash in vs cash out will match the sum of all the entries on all those forms.

[Mike9241]

say you sold for 4445 and bought for 4000 so you think your gain is only 445.

However, you already got 1000 in cash as a distribution that was not taxed at the time so now it reduces your tax basis and increases the gain by 1000. Other ways to look at it is as if you only paid 3000 and got 4445 in cash on sale or you got 5445 cash (sales price + the distribution) for what you only paid 4000. either way, can you see your gain is now 1445   -  the excess of cash received over cash out of pocket *************************************  

you also had losses of 207 during the period you held it. those losses were allowed at some point in time probably in the year of sale so you get an income tax deduction for that loss.  that deduction further reduces the tax basis in the partnership. Another way to look at this is you got an ordinary loss of 207 offset by an additional capital gain of 207 - net is zero.

******************************

so your revised total gain is

4445 - (4000-1207) = 4445 -2793 = 1652

now the tax laws say that this gain must be separated between the ordinary portion (751) and capital gain

751 is the ordinary gain so if it's 182 it reduces the capital gain' to 1470.

selling a partnership interest is taxed differently than selling a stock. for a publicly held stock, the gain/loss would normally be the sales price vs purchase price.   not so with a partnership. you are considered as selling your proportionate interest of each partnership asset at FMV which results in depreciation recapture (the 751 portion)

***********************************

in this example, you received 1445 more in cash than you were out of pocket. in addition, ordinary losses of 207 exceeded 751 ordinary income recapture of 182 by 25 so it's the 1445 + this 25 that equals your capital gain 

.

[hybridtaxguy]

I bought and sold IEP in the same year, a few weeks apart. (my entire position)

I'm fine with just adjusting the -1207 to -1025 and paying the tax on the 1025 of income.  (on my k-1 I have 20 in box 5 and in 6a I have 5, 20 in interest and 5 in div, so maybe that's where the 25 came from)

My last question, and thank you all for being very helpful - my box 16 is checked, it says schedule k-3 is attached if checked.  However, it's not attached and it says it may not be available until September of 2023.  From what I read, this only has to do with Foreign taxes paid or accrued, is this correct?  I read in another forum to just uncheck this and when I get the k-3 later, if I need to amend I can, but more than likely the k-3 will have no impact on my taxes since my box 21 is 0.

Any guidance there would be appreciated!

[AliciaP1]

There are other reasons the partnership may need to file the K-3.  I do not advise you to file the return without the K-3 information unless you are certain it will be blank.  The Foreign Taxes paid or accrued box being empty does not guarantee the K-3 will be blank.

If you have not filed the return and do not have key indicators to file your return without the K-3 I recommend filing for an extension and completing your return when you receive it.  If you have already filed, you should wait until you receive the K-3 and then amend your return. 

@hybridtaxguy 

[hybridtaxguy]

I will owe on taxes this year, the K-3 is said to not be available for another 6 months in September 2023.  I'll owe interest on this money that I owe too?

What other key indicators for needing the K-3 should I be looking for?  

Based on this advice, it suggests to file if you do not have any foreign income, which I do not - https://ttlc.intuit.com/community/after-you-file/discussion/k-3/00/2562868

[AliciaP1]

If you know the business doesn't have any foreign income for 2022 or that it has not had any in the past, you can file with reasonable assurance that you won't have to amend.  If you want to file for an extension and wait for the K-3 to arrive, you can always make a payment to the IRS based on what you know now and alter the amount when you file the return by listing the additional payment made by 4/18/23.  Making this tax payment would alleviate most if not all of any interest you would owe.

[Edited 3/31/23 | 7:11AM PDT]

@hybridtaxguy