Form 1065 K-3 schedule saga

[kobasha]

Good day,
I've been using TurboTax Business & TurboTax Home & Business for decades.  Yet, this season it has been a major challenge.  Here's my story / situation:

I run a Limited Partnership (LP) with 3 partners.  One (1) is general, two (2) are limited.  General has 1% interest, 2nd partner is limited has 1%, and 3rd is limited with a 98% interest.  It is a family partnership.  All partners are family members, all domestic, not foreign.  Last year the LP invested into shares of AllianceBernstein (AB) which issued a K-1 schedule back in March 15, with K-3 checkbox (#16 on K-1) is checked.  Instead of filing, we filed for extension, which is due on September 15, 2022.  Which is next Thursday from today's date. 

The AB partnership promised to send out a K3 by August 31, 2022.

Sometime over the weekend, before the 6th of September, the AB partnership finally issued a K-3, a 20-pages long document.  Before we go further, on a K1 -- #21 "foreign taxes paid or accrued" is zero (0).   The partnership also has held shares of some foreign Swiss pharma company which paid dividends (Switzerland also withheld taxes).  The amount is like less than $50.  But because of this, I don't believe the exemption not to file for K-3,  and just ignore for this tax season is applicable in this situation.  Of course, correct me if I'm wrong.

My TurboTax Business for Windows is up to date.  I regularly check for updates & install them.  I entered the K-1 received from that AB partnership into my own partnership return in the "step-by-step" regular mode.  There was no option to activate/mark the K-3 checkbox,  #16, so I had to go in and manually check that while I switched to the "Forms" mode.  I couldn't find how to enter the K-3 in the "step-by-step" mode.

Then I thought, what if I go and simply re-create Schedule K-3 received manually under the "Forms" mode, all those 20 pages in and under my own LP, under my own EIN in hopes the TurboTax Business would flow that information back to partners.  I did it under the 98% partner.  Well, after few hours spent retyping, trying to put everything into the correct cells, we've discovered that even after the form's been manually entered it does NOT flow back to the partner through K-1.  [Not even sure if it should flow through K-1 or through some other forms.]

Furthermore, if I go into the software and do the File -> Print, "All official forms require for filing", the K-3 Schedule, which was manually entered, is nowhere to be found.   When I go and Print "Forms to review or keep for your records", "Tax return, all calculation worksheets", the K-1 from the AB partnership with K-3 marked is there, the K-3 information I entered manually under my own LP is also there.

As far as TurboTax Home and Business goes.   I ran a hypothetical of how would I enter the information IF I were to receive the K-3 under my own Tax ID (SSN) and not through the LP.   I do see in the "Forms" mode, the Schedule K-3, A through Z, then AA through AI, but to somehow migrate the information from the K-3 received from the AB partnership, I'd have to run around trying to enter various figures into the "correct cells" and hope that I didn't miss anything, or confuse one cell/field with another.  I don't see how one would not be making mistakes here.  It's just not clean or intuitive in anyway.

Before you send me to read the forums -- I followed and read all of them over the summer, there are 4-5 different threads .  I also tried to reach out to the IRS Business Division by dialing [phone number removed].  Unfortunately, their automated system told me that they can't answer and I have to go call them back later.

Stumbled  and confused.  What do I do next?   How do I avoid penalties ($10k+) and do the very "best effort" in filing my LP return?  My options are as follows:

1. Do I uncheck box #16  (not that it matters in anyway), print all the forms required for filing and HOPE that Intuit fixes its products AND later amend what I filed.  Hope that the IRS's computer system wouldn't discover the missing information *before* we have a chance to amend, before they send an automated letter demanding that LP pays the penalties, OR

2. Do I send IRS more than what is required to file: (a) include the K-3 manually entered, (b) box 16 checked for the K-1 of that Partnership,  the K-1 from the AB partnership, which I would include manually from the "all key calculations" print options.  Perhaps include a letter on behalf of LP explaining the situation, asking them permission "to leave and  amend" the filing before the next tax season, OR

3. I could also try to locate a CPA firm, if I can find one on a *such short notice* and ask them to file it.  Pay anywhere from $350-600 to review or/and re-enter everything through their own software, but then I might not be able to "migrate" their work back into the TurboTax next season.  Thus, we'd have to continue paying them year after year.

Any thoughts on what to do here?  Looking for sound advice.   Thank you for your time. 
-B

[tagteam]

@Mike9241 

[Mike9241]

@tagteam i have never used nor am I familiar with Turbotax business so I can't say why the op is having trouble entering the k-3 info in the passthrough k-1.  the only info about box 21 on the k-1 comes from the forms instruction's: 

Box 21. Foreign Taxes Paid or Accrued
Foreign taxes paid or accrued reduce a partner's basis and are limited to basis. Do not use this amount to complete your Form 1116 or 1118. See Schedule K-3 to complete your Form 1116 or 1118.

I am also confused by the op saying the k-3 reported Swiss Div with tax withheld. the FTC should show up in Part III section 4 column d

it seems to me to be inconsistent since FTC reduces basis it should also appear in box 21 of the k1 

personally, if the amount is small I wouldn't file the 1116 form for AB and of course uncheck box 16. 

[tagteam]

---

@Mike9241 wrote:

personally, if the amount is small I wouldn't file the 1116 form for AB and of course uncheck box 16.

---

Yes, I absolutely concur with your procedure, if the amount is not substantial (as you indicated).

[kobasha]

@Mike9241, @tagteam. First of all, thanks for responding!

To clarify a minor issue:

The Swiss Dividend has absolutely nothing to do with the K-3 of that "AB" shareholding I mentioned earlier.   These dividends came from another holding and because of this "foreign activity" (other than the activity on the K1 & K3), it is my understanding that my partnership does not qualify for an additional transition relief

"The IRS intends to provide certain additional transition relief for this year from the Schedule K-2 and K-3 reporting for certain domestic partnerships and S corporations with ***no foreign activities***, foreign partners, or shareholders, and without knowledge of partner or shareholder need for information on items of international relevance. For 2021, these qualifying domestic partnerships and S corporations will not have to file the new schedules."

It is my understanding that my domestic partnership with domestic partners would NOT qualify, given that on top of that K3, the partnership also received other foreign income in the form of dividend from that Swiss company.

Now back to the K-3 Schedule.  From what I understood, the K-3 information flows into Form 1116 or 1118. Furthermore, I do see that data from Part IV of K-3 flows onto Form 8993, am I missing any other Forms that K-3 may flow to?

"personally, if the amount is small I wouldn't file the 1116 form for AB and of course uncheck box 16."

Dividends received from that AB holdings that provided K-1 and K-3 were:
$16, interest $1, net short-term cap gains: -$2 ; Ordinary business income: $100.  The amounts are miniscule. 

But when we go to K-3 form, under the Section:
OTHER INFORMATION TO BE REPORTED ON THE SCHEDULE K-3

2021 SUPPLEMENTAL SCHEDULE

Name of country or U.S. possession VARIOUS
Gross income from all sources $234
Gross income sourced at partner level $238
FGI Section 951A Category $0
FGI Passive Category $0
FGI General Category $0
Partner Deductions: Interest Expense $5
Partner Deductions: Other $0
Deductions: Passive Category $0
Deductions: General Category $0
Gross receipts per Regulations 1.59A-7(e)(2) - current year $8

--

Would you still uncheck box 16 and file with just K-1, given that foreign dividends from another holdings were received by the filing entity?

Thank you,
-B

[Mike9241]

Gross receipts per Regulations 1.59A-7(e)(2) - current year $8

is reported on form 8991 if you are required to file. 

here's the filing instructions from form 8991

Who Must File
Any corporation, other than a RIC, a REIT,
or an S corporation, that has aggregate
gross receipts of at least $500 million in 1
or more of the 3 preceding tax years
ending with the preceding tax year must
file Form 8991.
See Form 8991, Part I, lines 1a through
1g, and Specific Instructions, later, to
determine whether the corporation has
gross receipts of at least $500 million in 1
or more of the 3 preceding tax years.
See also questions/items and related
instructions in the following forms.
• Question 22, Schedule K, Form 1120.
• Item DD, Form 1120-F.
• Question 14, Schedule M, Form
1120-L.
• Question 15, Schedule I, Form
1120-PC.
• Question 16, Schedule K, Form
1120-C

since you are not a corporation the line is n/a to your filing. 

since there is no FTC reported on the K-3 and if there is no net foreign source income at the partner level there will be no effect on the allowed FTC from other sources  so in MY OPINION your wasting your time entering the k-3 info

the basic FTC computation is net foreign source income / taxable income X the taxes on 1040 line 16 + schedule 2 line 2 limited to the  Foreign Taxes available. this limitation must be figured for each category. 

[kobasha]

@Mike9241 

Thanks again for responding.  

"since there is no FTC reported on the K-3 and if there is no net foreign source income at the partner level there will be no effect on the allowed FTC from other sources  so in MY OPINION your wasting your time entering the k-3 info"

Before we even get to the K-1 & K-3 from that AB investment, the partner that has 98% interest of my Partnership does receive $48 (received as foreign dividends) from that Swiss company I mentioned earlier.  These $48 are present on the Partner's K-1, at #21, "foreign taxes paid or accrued". 

Perhaps I don't understand something.  My thoughts are:  because these $48 -- clearly a foreign source of income, the K-3 that was received from another investment will have to be somehow entered and should not be ignored.

Wouldn't this, in your opinion, be the "net foreign source income at the partner level" ? 

[Mike9241 · Accepted solution]

i don't know what your partnership is invested in. it could get the foreign tax credit from another partnership investment or form a brokerage account. obviously, it's something you entered.  it doesn't matter. The AB k-3 will have no effect on the results because there is no foreign income or foreign tax credit.

as explained earlier box 21 on the partner's k-1 is only to be used by the partner for computing tax basis in the partnership. so your partnership should still be generating form k-3 for the Swiss dividends and related FTC and each partner will probably end up receiving the k-3 even though i suspect only the 98% partner will have any numbers on the k-3

i can't tell you whether the $48 is net or not because you haven't told me the source.  if it is a brokerage account that would likely be both the gross and net FSI. 

evidently, Turbotax has not created the ability to enter the k-3's received from sub-partnerships and then accumulate the data for preparation of your partnership's k-3 but I have never worked with Turbotax business.

your option is to ignore the k-3's from sources that have no effect on the FTC at your partners level or create your own spreadsheet to accumulate the 20 pages of k-3 data from each source and brokerage account. then you would enter that in your partnership's k-3. that is if my understanding is right that Turbotax does not accommodate k-3's at the sub-partnership level.     

[kobasha]

@Mike9241  Thanks again for responding!

To clarify,  my partnership uses a brokerage house and typically gets forms like Consolidated Forms 1099, within Form 1099-INT, Form 1099-DIV, Form 1099-B, Form 8949.

So the Dividend from that Swiss company is on the form and taxed paid and to what foreign country are clearly indicated.

Before we get to that K-1 and K-3 schedules received.  The TurboTax Business does not generate any K-3s to Partners, only K-1.  The amount of $48 in foreign taxes paid is clearly visible in the box #21, on the K-1.  Given what you wrote, that "Turbotax has not created the ability to enter the k-3's received from sub-partnerships and then accumulate the data for preparation of your partnership's k-3" -- I think I'm going to stop and work with a professional with access to more sophisticated up-to-date software.  

I don't believe I will be able to correctly generate these K-3s by hand  (and later add another K-3 from that "AB" holding, again through the same brokerage house, (the K1 for AB was added fine)). 

The penalties are just too steep for the LP itself and that one 98% interest partner, it could up north $20k -- it is a significant chunk of money, we'll probably get it back, with interest, but after 20-30hours & multiple letters send and received and interactions with the IRS over mail and phone.  And I'm not going to hold my breath for another 6 months in hopes that Intuit does things properly and implement the ability to enter K-3 received from publicly traded partnership investments, flow down relevant information from foreign dividends and such, and generate K-3 for partners.  It is a shame and very painful because we kept paying & have been using the software for two decades.

I tried to reach out to IRS biz/partnership dept this early morning at 7AM, yet again to speak with a rep, but their automated system drops me as the queue is full/busy/whatever.  

Sigh.   Nonetheless, thank you for trying.
-B

[Canonical]

Hello.

I received my K3 for a MLP stock in Sep 2022. In K1 I have a 0 foreign tax in row 21.

In K3 - Part 1 - I have 2 boxes checked - 5.High Tax income and 8. Form 5471 information.

Sales

A. CJ ((a)US Source = -447) -> (g) Total = -447

Gross rental real estate income

A. CJ ((a)US Source = 1) -> (g) Total = 1

Interest income

A. CJ ((a)US Source = 24) -> (g) Total = 24

Qualified Dividends:

A. CJ ((a)US Source = 15) -> (g) Total = 15

---------------- Few other items populated (Line item 24, 25, 27, 28, 49 and 54)

---------------

Line item 55: Net Income (loss): (a)US Source = -452) and (f) Sourced by partner = -262 -> (g) Total = -713

Section 4 : Foreign taxes is blank.

Please let me know. Thanks.

[Mike9241]

quite a saga with no definitive info

first Turbotax does not do form 5471

second I have provided a link to that form's instructions. there are multiple categories of who must file but 

look at your ownership % on the k-1. then read about the categories of those that need to file in the instructions carefully. you'll probably realize that all categories require a 10% or more ownership in the foreign corp before there is a filing requirement.  if you don't own 10% or more in the MLP its impossible for you to own 10% in the foreign corp. thus there is no 5471 filing requirement. 

as to High-taxed income that's irrelevant in your situation.

HTI also referred to as HTKO only requires that if you paid foreign taxes on such income (you say the form shows none) then the income and foreign taxes are reported in the general category on form 1116, not the passive category

see this link for more info

https://www.irsstreamlinedprocedures.com/htko-high-tax-kickout/#:~:text=%E2%80%9CHigh-taxed%20income... 

k-3 is about 20 pages. based on what you provided and assuming you don't own 10% there's nothing to report in your return.      this is the same for the millions of taxpayers who invest in MLPs. That's a lot of trees that were killed for nothing.  

[HioSilver]

I share your frustration with TurboTax Business.  I'm using the 2022 software to file a Partnership return that has foreign dividend income and foreign tax withheld - that needs to be reported on Sch K-2 and Sch K-3.  After hours spent searching for these forms and calling TurboTax customer service, I have found the forms to enter the information directly to - but as of today February 9, 2023 the Final Forms are not available on TurboTax and I have no way of knowing if they ever will be available.  This will prevent me from e-filing my return and possibly from preparing it myself!! Does anyone else know about this? Does TurboTax plan to catch u" would be appreciated.

Thanks

[RobertB4444]

The K-3 shows as available on February 10th, which is today!  Unfortunately, today runs until 11:59 PM PST so I recommend coming back and finishing tomorrow.

In the event that the programmers miss their deadline and require more time the new date will be updated here.

@HioSilver 

[tagteam]

@HioSilver 

An update for TurboTax Business was released just recently. Update your software.

[alaniboris]

Would a  paid foreign tax of $164 be deemed material to hit the "exception" radar if K-3 is missed in the return?