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LLC interest income for installment sale showing as self-employment earning on K-1

My husband and I have an LLC that had rental properties and we sold our last property in 2022 as an installment sale. I used turbo tax to do the tax return for the LLC and the K-1 shows the interest income as ordinary business income, which I believe is correct. However, it also shows it as self-employment earnings which is causing us to pay self-employment tax. My understanding is that interest income is not subject to self-employment tax. (I found this in my search - You also don't pay self-employment tax on income from capital gains, interest, dividends, and other income that is not considered “earned” income.). Is there a way I can go back and alter my K-1 so the interest is not shown as self-employment earnings? Thanks in advance for helping!

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5 Replies
Vanessa A
Employee Tax Expert

LLC interest income for installment sale showing as self-employment earning on K-1

You are correct.  Your installment sale should not be counted as self-employment income.  So something on your K-1 entry is telling it that it is self-employment income.

 

Which box of your K-1 is the installment sale reported?

Is this income reported in box 1 or 2 of your K-1?  

Box 1 is business Income

Box 2 is Rental Income

 

Do you have checkmarks in any other box?  If you have a checkmark in box 14 and code a and c this will tell TurboTax it is self-employment income and it will be taxed as such.  If this box is checked, then you would need to get another K-1 (if you did it yourself using TurboTax Business, you can go back through and change how the income is reported in TurboTax Business.  You would need to walk back through and check your answers paying attention to the questions regarding activity and materially participating and how the income is reported and look at box 14 to be sure you are not reporting it as self-employment income on the K-1.  If you had an accountant do your business return, you will just need to contact them to get that changed. 

 

If this is not the case, please respond with more information on what boxes you have amounts reported on your k-1.

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LLC interest income for installment sale showing as self-employment earning on K-1

Thank you Vanessa for your help! Yes, box 14 has both a and c values. I found this on another thread and was wondering if it would be the way I would fix my issue as well. (I did the taxes for the LLC myself using turbo tax):

 

  1. Open your return and click the Forms icon in the TurboTax header.
  2. In the forms list on the left, find Sch K Reconcile.
  3. Click the form name to open it in the large window.
  4. Click the Print button at the bottom of the form to print this, as you'll need the numbers in the third column (14A Net SE Earn/Loss) for the next step.
  5. Find Sch K-1 Wks and click to open. Note that this form has an embedded slide bar on the right side. Use this to move from one partner to another.
  6. In the right column, for Special Allocations >> By Amount >> Box A, enter the amount for this partner from Sch K Reconcile with the opposite number sign (enter a negative number if Sch K Reconcile is positive and vice versa).
  7. Repeat for all partners. Total entries for Box A should match the total for column 14A on Sch K Reconcile.
  8. Look for SE Earnings Wks and click to open.
  9. On Line 4d, enter the letter A in the small box, then enter in Column A the total from Sch K Reconcile with the opposite number sign (this is the offset to Line 3c).
  10. Confirm that the number in Column B Line 5 is zero.
  11. Go back to Sch K-1 Reconcile and confirm that the 14a column is all zeroes. If not, you need to go back to Sch K-1 Wks and correct your entries for the special allocation amounts.
  12. If you wish, you can review each Schedule K-1 to confirm that no self-employment earnings appear in Box 14 A.
  13. When finished, click Step-by-Step to return to the main screens.

When I did this, I still have a value for 14 c, but it doesn't seem to force me to pay self-employment tax when I enter a 0 for 14 a and the value for 14 c on my personal return. Is this the right way to fix it? Thank you!

 

Vanessa A
Employee Tax Expert

LLC interest income for installment sale showing as self-employment earning on K-1

Yes, you will need to do that in TurboTax Business.  If you make box c $0, it will have the same affect as removing the entire thing.

 

However, when you go to enter it into your individual return, do not enter C at all or the 0.  If you do, you will get an error.

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LLC interest income for installment sale showing as self-employment earning on K-1

So even though there is still a value in 14c and nothing in 14a, it's ok on the business side?  And so I make sure I understand clearly, for the personal return I act as if there aren't any values at all in box 14? Thanks again! 

RobertB4444
Employee Tax Expert

LLC interest income for installment sale showing as self-employment earning on K-1

That is correct.

 

@JFenzau 

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