QSBS reported on K-1 line 11 code I

[Seltzer]

an investment club in start up companies,  reports on K-1,  sale of stock on line 11 with code i.   

. but what I really need is which option to choose on code I step by step instructions on turbotax and

How do I show the gain exclustion allowed under section 1202 

AND does the IRS get copies of our individual k-1s and why is there now a K-3? 

 (whew, a lot of questions all at once.

[DaveF1006 · Accepted solution]

This is a tricky situation because by reporting this in Box 11, this income is treated like ordinary income taxed at ordinary income rates. It should have been reported in Box 8 or 9A, as these entries reflect capital gain activity. However, if you report the gain in this manner, there is no way to exclude this sale under a 1202 exclusion. Here is the recommended path I suggest to take.

Have your CPA issue a corrected K1 to not report the sale of your stock in Box 11 or anywhere on the K1. instead report it in the recommended steps below, since K1's are reported to the IRS.

1. With your return open, search for 1099-B (upper- or lower case, with or without the dash) in your program's search box.
2. Click the Jump to 1099-B link in the search results.
3. On the Did you sell any investments? screen, answer Yes.
4. When it asks if you received a 1099 B, say no.
5. If you land on the Summary of All Accounts screen instead, click Edit 
6. Then record the information on your stock sale then continue until you reach the screen in step 7
7. Click My sale involves one of these uncommon situations. 
8. Here select the gain and loss from this sale is eligible for special treatment
9. Next screen is where you will indicate this is Qualified Small Business Stock eligible for 1202 exclusion.
10. Finish out the section.

Form K3 is a new form this year that reports income that has international tax relevance. If you have no foreign income activity reported in your K1, K3 does not apply to you. Hope this helps.

[Seltzer · Accepted solution]

oh-oh!  the advice given by the employee tax expert appears to go against what the instructions for section 1202 regarding K-1s. which states, (our investment club is a pass-through entity): 

• Schedule K-1: QSBS gains received through a pass-through entity will be reported on line 10 of the k-1 received through the 1120S (S Corporation) or line 11 of the k-1 received through a 1065 (Partnership) tax return. Attached to the k-1 will be a statement for each sale or exchange (a) the name of the corporation that issued the QSB stock, (b) the partner’s share of the partnership’s adjusted basis and sales price of the QSB stock, and (c) the dates the QSB stock was bought and sold.

[jrs1968]

So has anyone determined how to address section 1202 gains reported on a K-1 in TurboTax? How about more complex issues like a 1045 exchange/rollover of 1202 dollars reported on a K-1? 

[RobertB4444]

Here's how to enter a 1202 gain reported on a K-1 into TurboTax

The program doesn't support 1045 exchanges reported on a K-1.

[ericball]

So, if we show the gains subject to QSBS separately in the stock sales portion of turbotax, do we still include the K-1 entries for box 11i (other income-loss) and for box 19 (distributions? Or do we zero those out in the K-1 reporting?

[GeorgeM777]

Yes, enter your Schedule K-1 amounts, Box 11 and Box 19, into TurboTax in the relevant section, i.e., in S-corps, Partnership, and Trusts (TurboTax online) or Business Investment and Estate/Trust income (TurboTax CD/download).  Even though your entries relate to Qualified Small Business Stock, do not "zero them out" in the K-1 section of TurboTax despite the exceptions that relate to QSBS stock.  

Ordinarily Schedule K-1s of this type include a Statement on how certain items on the Schedule K-1 should be reported.  We are not sure whether you received such a Statement; however, reporting the amounts as is in the Schedule K-1 section is the preferred method.

The initial posts in this thread seemed to imply that the Schedule K-1 came from an investment club of some type.   If your situation involved an investment club whereby the investment club managed funds on behalf of the club members, then the foregoing analysis may not apply.  Thus, follow-up with us if you need to provide additional information.   

@ericball 

[Mahimboy]

This solution also works for QSBS reported on K-1 line 11 Code O. 

Code O is the correct code on a K-1 for QSBS. If line 11 Code O is entered as is on the K-1 information in TurboTax, it will compute the Fed exclusion and State Tax correctly but will not report the sale anywhere possibly not satisfying the reporting requirements. Leaving out the line 11 Code O information on the K-1 in TurboTax and using the 1099-B solution provided, will compute the Fed exclusion and the State tax correctly AND report the sale on a form 8949 with box F checked and code Q with zero gain which is the exclusion. 

Beware of doing both: 1) entering it in the K-1, line 11 Code O AND 2) the 1099-B like stock sale, as TurboTax will then double the amount of the sale for the State Tax and consequently incorrectly increase the State Tax computation. Hope this helps.