Last year, I invested in an oil partnership (betting on rising prices, but that’s a different thread). I received a K-1 from the deal, and I can’t make heads or tails of it.
Box L says my year increase is $5,176, and the ending capital is $5,176. Box 1 says $5290, too, and Box 14 says “A 5,176.” That all suggests we made 5 Grand and they’re keeping it in some form (cash, equipment, whatever), payable if we liquidated. So far so good.
But Box 14 also has “C 8,512” and that’s where it loses me. I don’t see any accounting for that, and I certainly never got a check for $8 G’s. What in the world is that number coming from? Where is that money?
Also, it says Box J (Partner’s Share) is 50%, which is absurd. I definitely don’t own 50% of the partnership. What’s going on there?
It’s my first year with a K-1 from an entity of this type. Can you explain what all this means, “under the hood”?
I get one because of a futures account that I invested in, and I don’t think mine has even arrived yet, so at least you’re a little ahead of the game.
I am not an accountant, nor am I speaking as your lawyer, and you should not treat anything I say as reflecting any expertise.
First, RTFM. The instructions to form K-1 suggest that for Box 14, A is net income and C is gross (non-farm) income. Code B would be gross farm income, but I guess you didn’t have any of that. My guess would be that your share made $8,512 in gross income, but various business-related deductions reduced that to $5,176. The instructions also suggest that you may have to report this on Schedule SE. My tax software figures out he reporting for me.
I’m trying to wrap my head around it from the IRS’s perspective, too. So A goes into box 1 but C doesn’t? Are they different taxes or something? I see info about the SE tax, but can’t see how to apply it to myself…I don’t yet know why the numbers are what they are.
You dont have to get a check to have a taxable gain.
Honestly, when you are getting a K1 of this sort, you should have a tax professional, like a CPA or EA.
It sounds like you need to report that $8,512 on Sch C and also pay SE tax on that. That amount would be higher than paying a tax professional to do your taxes, since it also sounds to me like they* possibly* mis-prepared the K1.
Starting in 2013, we began receiving a K-1 in connection with the monthly stipend my husband gets from his late parents’ trust. The trust has some investment income and some rental income. We were as puzzled as you.
The first year, we went to H&R Block. I had to make sure we got an appointment with a tax preparer who was familiar with K-1’s (only two in that particular office). No problems.
The second year, we went back to using Turbo Tax. :smack: When we were done calculating our taxes, we had to write a check to the IRS. A couple of months later, the IRS sent us a refund check, with no explanation. Obviously we messed up somewhere.
From now on we are going to H&R Block or some other tax professional. (We’re still waiting for our K-1 form for 2015.)
Or at least use a level of tax software that handles them. During the recession I had a number of pipeline MLPs because they were one of the few income producing investments which were still doing reasonably well. One year I had 14 K-1s to deal with. I use H&R Block’s software. I had to buy the “premium” version, rather than the “deluxe” or “basic” to get K-1 interviews. I’ve now gone a few years without K-1s - good riddance. BTW, when you sell, remember to look in your K-1 packet that year for your adjusted basis.
The main thing you need to appreciate (in case you don’t already) is that you own a portion of the partnership, and you are allocated a portion of partnership earnings and losses. That means that there are going to be all sorts of obscure energy tax incomes, losses, depreciations etc. etc. that you never personally see, but are considered to have earned, since the partnership earned them and you are part of that partnership. This makes your taxes a lot more complicated than they otherwise would be, since most normal people never deal with these types of entries.
One other complication is that you’re a passive partner, and thus can’t write off passive losses, for the most part (they do offset income, however).
If you think it’s complicated now, just wait until you sell one. That makes it a lot more complicated, because you’re dealing with an adjusted cost basis, ordinary income derived from loss of tax deductions, offset by recognition of carried forward passive losses that can now be recognized. It’s a nightmare.
And what makes it an even bigger nightmare is that a lot of tax professionals don’t understand it either. My father is a former (corporate) tax accountant who always does his own taxes and he says he can’t fully figure it out. His approach is to do his best, and he figures if he ever gets audited by the IRS, well then he’ll let them figure it out. And this is pretty much the approach I myself take as well. I have a brother who is a professional tax preparer, but I’ve asked him some questions that he didn’t know the answer to either. So what I think happens when you go to professionals is that they’re doing the same thing - they do their best and rely on the fact that you the client have absolutely no clue, both of MLP taxation and of what they actually did. And I would guess they’re likely to be conservative, at your expense.
I have several MLPs, and I use TurboTax, for this reason. Thing about TurboTax is that it too is not perfect, and several times I’ve seen where it doesn’t do what I think it should be doing. So what you need to do is plug the numbers in, then review all the backup calcs that the program prints out, and if it’s not doing what you think it should be doing then figure out how you can make adjustments that will bring it into line. And even then it’s not perfect, but ISTM that this is the best you can do.
Box L relates to your “capital account”. This is roughly speaking, the amount of invested capital you have in the partnership. It increases by increased investment by you and partnership profits, and decreases by you withdrawing capital, either via sales or distributions, and also by partnership losses.
This generally does not impact your taxes in a given year. But it relates to your cost basis should you sell your shares. And it also relates to the taxability of any distributions you receive - these are considered return of capital and become taxable (as capital gains) if your cost basis goes to zero.
As above, this relates to money the partnership made, part of which is allocated to you as partner. It does not relate to money that you’ve received as a check. Any money that you receive from the partnership is not “income” for purposes of partnership accounting - it’s considered withdrawing money from the partnership.
I agree that this seems absurd. I would check to make sure it doesn’t really say something like 0.00050%.
Welcome to the club. It’s not fun.
Note that I am not an accountant or anything like one. Just a guy who has some experience with K-1s. The above should be generally accurate but could be off here and there.
ETA: **Fotheringay-Phipps **wasn’t there when I started, but I see I agree with his more complete post.
This^^ (ETA: ref yabob). I’ve dealt with them for years. Just buy the version of your chosen tax return software that handles K-1s & type the numbers in when the software asks for it. Or hire a (good) tax CPA to do your entire return.
K-1 is a sort-of catch-all form used for lots of different types of passive income. As such the names of the various boxes are misleading for most situations except the one they were designed fit into perfectly. Trying to understand this stuff as an amateur is a fool’s errand. For the typical PTP or REIT, most of the numbers on the K-1 aren’t actually income. But unless you’re an expert you’ll not get the rest of the tax filing process right.
That’s where you’re losing me. So we made a profit. Great. Where is that money? It has to either be in my share of the partnership’s bank account (Box L) or in my pocket. It doesn’t show in either. Is Box L not my piece of the “bank”? Is the $8 grand now in equipment or something? Where is it?
Box L is not your “piece of the “bank””. Box L is your capital account. This refers to your net contribution of capital to the partnership. It’s affected by purchases, sales, but also by various profits and losses.
If I had to guess I would venture that 14A and 14C are not additive and that A is a subset of C and the part that makes it’s way into the capital account. But ultimately I don’t know.
I’m curious if there’s an IRS form 1065 involved here, “Tax reporting of Partnerships”? Also, would the OP be getting the financial statements from the partnership, the income statement and balance sheet?
CPA … yup … just on the first page of the Instructions {PDF} for the Schedule K-1 to Form 1065 has directions to file the info on the K-1 the same as the original 1065 or you’ll need to file a Form 8082 … oh boy, I’m sure it gets more complicated on page 2 …
Update: I called the company and they did…something…to make it all go away. They told me to shred it. ::shrug:: Seems right to me.
How is that not a bank? If we make money, it either goes to me or my capital account, does it not? If I write a check to the partnership, that seems like it’d go on line 2 of Box L.
I can’t think of a way that my capital account would change unless I 1) deposited money, 2) withdrew money, 3) made money and they kept it, or 4) lost or borrowed money. Is there another way?
A better description is that they are used for pass-through entities, namely partnerships, S-Corporations, estates, and trusts. These are entities that pass their income through to their owners or beneficiaries and have it become taxable income on the latter person’s individual income tax return while not being taxed at the entity level. The main purpose of a K-1 is to tell you how much income you should be reporting from the entity. It has to give you absolutely every single piece of information that might possibly make a difference to you as an individual tax payer, which means that things have to get broken down into various categories. It will also tell you other information about your holdings in the entity for your records.
Does that mean that they will be issuing an amended K-1? A copy of the original would have been sent to the IRS. If the agency is expecting to see $5290 of income reported on your return, and it’s not there, you’re going to get a bill in the mail.
The instructions to form K-1 suggest that for Box 14, A is net income and C is gross (non-farm) income. Code B would be gross farm income, but I guess you didn’t have any of that. My guess would be that your share made $8,512 in gross income, but various business-related deductions reduced that to $5,176. The instructions also suggest that you may have to report this on Schedule SE. My tax software figures out he reporting for me.