Help with Schedule K-1. Only Box 19 is filled out but Tax Act skips this box. Where do I put it?
Question:
The only numbers on here are under Part II, box N, where it says Partner's capital account analysis: 5617; Withdrawals & distributions (4,614); Ending capital Account 1,003. And Tax Basis is checked.
Then under Part III there's nothing until Box 19: Distributions. It says A 4,614.
Also, would he be a material participant even though he was not employed by this company last year? He had no stocks or any share in the company either after September 2005.
What do we do with this info? We need to finish this up ASAP and I thought Tax Act would walk us through it, but no such luck.
Thanks!!
Answer:
Your husband should only have received a K-1 if he himself is a partner in the business, but you state that he has not owned any share of the company since September of 2005. If he neither owned any part of the business nor performed any work for the business in 2006, then that money is essentially a non-taxable gift from the company to him and the K-1 was issued erroneously.
You should contact the ex-employer and request that he file an amended Form 1065 (partnership return) and remove your husband as a partner; your husband should then receive an amended K-1 with all zeros, and you would report nothing.
That said, partnership distributions are only taxable if they exceed your basis in the partnership. The information you described says that the "distribution" of $4,614 only lowered the capital account from $5,617 to $1,003. If that were accurate, then you would still not report the amount because it would be considered a "return of capital."
If your husband was NOT an owner or employee in 2006, then I would suggest requesting that the Form 1065 be amended, and you can file your 1040 without reporting the K-1 (but keep the K-1 with your tax records). He also would definitely not be considered a material participant if the above statement is accurate, because he isn't a partner/owner anyway.
Yep, did one at the office yesterday afternoon. On the K-1 screen where it looks like you would enter the information, the line for the Box 19 amount isn't there in our software either.
If you look at the information that accompanied the K-1, you may see an explanation of the codes used. That "A" in Box 19 is a code, and there should be an explanation that will tell you what that code means. See, what you do with the amount in Box 19 depends on which way the distribution is coded.
My first inclination is to figure that he's received a portion of his capital investment back from them. That is considered a capital gain.
That amount would go on the Schedule D. You'll need to enter the date that he invested in the partnership, and the date of the distribution. Don't worry if it says date acquired and date sold. The acquisition date would correspond to the investment date, and the distribution date would correspond to the date sold.
In "accountant talk," the "basis" is either the cost of an investment or the amount the person initially invested. You'll want to examine the statement you have, to make sure exactly what amount applies to the little box marked "Tax Basis." If you aren't sure, it's okay to call the person or firm that prepared the K-1 and ask them. Because of the Privacy Act, your husband may have to be the one to call about it.
The amount of the distribution will be the "proceeds from sale" even though he didn't technically sell anything, and his cost or initial investment amount will be the "basis." If it's a capital gain, it will appear normal, on the form and on the screen. If it's a capital loss, it will appear in parentheses. This amount will automatically carry to the front of the Form 1040.
A person is said to have materially participated in an operation if they worked or helped manage it, without regard to whether he may have been working for this partnership. If he went by there on a regular basis to check on things, or to do a few odd things, then he materially participated. If the only connection he has to them is that he got a check and a tax form from them, it's a safe bet that he didn't materially participate.
I know this explanation is a little long-winded, but I wanted to not only give you accurate information, but also to help you understand more about what you're doing with these forms and software. If you need to email me, I won't mind a bit.
Hope this helps y'all.
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