K-1 Box 13 deduction

[Cmbmichael]

I have a K-1 Box 13 "ZZ Other deduction" that is supposed to be deducted from my taxable K-1 income (it is a non-passive deduction), but the amount that I entered on Schedule K-1 Box 13 is not populating in the Schedule E Page 2 worksheet, so it is not being subtracted from the total income being reported on Schedule 1 Line 10. 

[JulieS · Accepted solution]

Yes, that is because box 13, code ZZ is for "Any other information the partners need to prepare their tax returns." - IRS instructions for Form 1065

In other words, the deduction can't be classified as any of the other deductions on line 13. The software doesn't carry this figure anywhere, because there isn't enough information to indicate where it goes. 

You can enter the amount directly on Schedule E if you know what the number represents. 

If you need help figuring out where this number goes, please respond back with details about this deduction and whether your are using TurboTax Online, or software installed on your computer. 

[Mike9241]

if box 20 doesn't describe it you need to go back to the preparer. certain amounts may not be deductible for individuals, others would be reported on schedule E and if it's an early withdrawal penalty it would flow to schedule 1.

[Cmbmichael]

How do I enter it manually on Schedule E?

[Cmbmichael]

I'm using Turbo Tax desktop.  The deduction is a SALT/PTET (State and Local Tax/Pass Through Entity).  The deduction came into existence through a new law passed in my state (Indiana) in the middle of 2023 that was retroactively applied to the entire 2023 tax year.  It is supposed to be deducted from my federal taxable income, added back as income for my state tax return, and counted as state tax withheld.  I think I could enter it as a Non-Passive K-1 loss on Schedule E, but it's not actually an expense but a deduction from my take-home pay.  At any rate, the software is not letting me enter it manually on Schedule E.   I can't see any other way to get it subtracted from the total Ordinary Business Income listed on Line 1.  

[RobertB4444 · Accepted solution]

If you are sure that this is a legitimate deduction then I would deduct it directly on the K1.  the IRS has received a copy of the K1 and should be aware of the deduction.  So deduct it from the amount that you are entering as the box 1 income and it will net out to the correct amount.  Be sure that this is a legitimate deduction and save copies of everything that justifies the new entry.

When you are doing the state return you will have to manually add the income back in as regular income.

@Cmbmichael 

[ww51]

The K1 deduction that I wish to make is for the depreciation of stepped up basis.  We inherited the partnership interest and the special depreciation for our basis is reported on the K1.  Last year there was a special code for that purpose.  Is there such a code for 2023 returns.

[CatinaT1]

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[Cmbmichael]

I ended up manually subtracting the deduction from the income reported on my K-1.  Turbo Tax had nowhere to input the deduction, even after I updated the software.  

[PatriciaV · Accepted solution]

A manual adjustment of income is the best option for handling deductions reported with code ZZ. As RobertB4444 mentioned, you may also need to make an adjustment on your state tax return to account for the taxes paid on your behalf.

@Cmbmichael 

[kamagoel]

I have an interest income listed on Box 5 of my K1, then i also have investment expense listed on Box 13 (Code ZZ). Can i simply adjust the Box 5 value by subtracting the Box 13 amount or is there another way to handle this?

[KristinaK]

No, that won't work because your investment interest expense may be limited or you don't itemize. The investment interest expense is reported on Form 4952, line 1. 

[kamagoel]

Thanks. How should i tackle this? If i plug in straight values, my capital gain tax on the investment income reported in Box 5 is higher than the actual distribution (received after deduction of management fees). Appreciate any other suggestion/s.