Private equity LLC owns the company I work for - how to answer K-1 Qs?

[strawberrypizza]

I work full-time for an assisted living company which is owned by a private equity company. I have invested money in that private equity company. I'm having trouble figuring out how some of the K-1 questions apply to me.

The investment is structured like this: "Main LLC" invests in a bunch of smaller LLC's. Each smaller LLC is for a different commercial real estate investment. "LLC #2" is one of those investments. LLC #2 is a part-owner of the assisted living company where I work.  (There is also a general partner investor.) LLC #2 is reported as a passthrough company on Main LLC's K-1.

Three questions:

1) When I enter the K-1 information from the LLC on TurboTax, do I mark that I "materially participated" in the business? I didn't do any work for LLC #2 or Main LLC, but I did work for a company the LLCs purchased.

2) TurboTax asks if the LLCs received income from "specified services," including health. Main LLC doesn't do any health care, and LLC #2 doesn't either, but they do invest in companies which are involved in health care. Would you say the LLCs "receive income from health care"? 

3) Under "Describe the partnership" TurboTax asks me to mark any items "that apply to your investment," including whether I personally paid health insurance for myself or my family.  I did pay a portion of our family's health insurance premiums - but that was as an employee of the assisted living company which is owned by LLC #2 (and Main LLC). I don't know if those health insurance premiums "applied to my investment" in the private equity LLCs. 

[tagteam]

I'm going to page Champs @Mike9241 and @Rick19744 

[Rick19744]

Responses and comments to your questions:

• You, as an individual, own an interest in a private equity (PE) investment; investor.
• PE's are funded and then the $$ are invested in various portfolio companies in line with the focus of that particular PE.
• It just so happens that the PE made an investment in the company where you work as an employee.
• For question #1 - TT is asking if you materially participate in the PE.  The answer is most likely "no".  I am assuming that since you don't work for the PE you are not involved in the details on what portfolio companies are being purchased, etc. 
• For question #2 - the answer is once again "no".  The "specified services" question is geared toward the qualified business income deduction.  This should have been addressed at the PE level and would be taken into account in the QBI information on the K-1.
  • This issue would only apply if your income is over approx $170,000 if filing single or approx $340,000 if married filing joint.
• For question #3 - ignore (do not check the box) the health insurance question is not applicable for your investment in the PE.

[strawberrypizza]

Thank you so much! I do have one clarification question - 

For question #1, material participation - you said "I am assuming that since you don't work for the PE you are not involved in the details on what portfolio companies are being purchased, etc."

• Actually, my paycheck does come from the PE/commercial real estate company, even though my job title says I work for the senior living company. There are 4 layers of organizations in view: (1) the PE/commercial real estate company, (2) "Main LLC" which the PE company formed as a fund for individuals to invest in, (3) "LLC #2" which is one of the investments Main LLC purchased, and (4) the senior living company, which is owned in part by LLC #2.
• I am a high enough ranking officer in the senior living company that I am asked to give input to the PE company about other senior living companies they are considering purchasing.  I don't make final purchase decisions, though. I don't work for Main LLC or LLC #2. (I'm not sure anyone works directly for them? They don't really have employees since they are just investment structures.)

I really appreciate your help.

[Rick19744 · Accepted solution]

Your response appears to confuse the picture when looking at the original question facts. 

• Based on your response, the top level entity is really the PE/commercial real estate company.
• What type of structure is the PE/commercial real estate company? 
  • I'm assuming a C corporation?
  • When you say paycheck, I'm assuming you receive a W-2? (versus a guaranteed payment).
  • Does the PE/commercial real estate company pay for your health insurance?
• Then the PE/commercial real estate company formed a Fund LLC (which you are calling the Main LLC).
• Now you are invested in the Fund LLC (main LLC) which owns an interest in a senior living center
• I am assuming the K-1 you received on line G, there is an "X" for other LLC member?
• I am also assuming that there is nothing on your K-1 Part III line 14?
• If those two assumptions (bullets 5 and 6) are accurate, then I would say you don't materially participate.  
• Additionally, the specified services for health is defined as providing medical services by medical professionals directly to a patient by "physicians, pharmacists, nurses, dentists, veterinarians, physical therapists, psychologists, and other similar healthcare professionals".
• While the facts are still muddy for me, I don't believe my original reply changes unless bullets 5 and 6 are not accurate.
• Honestly, in my mind, since you are employed by the PE/commercial real estate company, the CFO of that company should be able to provide you with some direction; since you most likely are not the only employee invested in the Fund LLC.  Having said that, sometimes structures happen, CFO may not be technically strong in tax, and may not be helpful.  But I would ask the question since that individual has a much better understanding than trying to glean some facts in a forum.

[strawberrypizza]

Wise advice! Thank you! Yes, reaching out to the CFO makes a lot more sense... but after reading your input I will at least sound a little more like I know what I'm talking about when I ask the questions, haha!

I appreciate your time and help!

[Rick19744]

Welcome.