Partner K-1 box 16

[BHoffman]

I would rather not screw this up

Partner K-1 box 16 has codes and amounts (see below), and I'm lost as to where on form 1116 to enter them.  The foreign tax paid is only $61 (box 16 code L).  Can someone guide me?  The client will be getting this K-1 every year.  I'm not understanding the form 1116 instructions for this.   

Code A - OC  (Other Country OK)

Code B - $21,958  Gross income from all sources. (line 1a?)

Code E - $10,550  Gross income sourced at partner level.  (or is this on line 1a?)

Code G - $163  Interest Expense (?)

Code I - $38  Passive Category (?)

Code J - $9,127  General Category (?)

Code L - $61  (Part 2 OK)

Thanks for any advice!

[BHoffman]

Never mind.....

 

[SaraEA]

Those little booklets written in tiny print that come with the PTP K-1s come in handy sometimes, eh?  If I find one with diagrams and readable print, I always put it aside to use with all my clients who have these darned investments.  Lucky you get to do two 1116s because you have both passive and general category income.

[BHoffman]

Can I put the $61 on Sch A and be done with it?  I'm going to charge a lot more than the $61 credit to prepare the 1116 forms....

[jklcpa]

Yes, you can put the foreign taxes from the K-1 on the sch A instead.

However, if you still want to use the 1116, you don't have to break out between passive and general income categories if this client is a limited partner with less than 10% in the ptnship and does not activity participate. That is stated in the form 1116 instructions starting at the very bottom left of page 5 of the instructions. In this instance, the form's instructions references the reg sec 1.904-5(h)(2) where this is stated. 

As a matter of fact, I think that this same rule should also allow you to bypass the 1116 altogether and enter directly on the 1040 since it is only $61. The rule for reporting directly on the 1040 is if it's under the dollar thresholds, is all in the passive category, and is reported on a 1099DIV, 1099INT, or a K-1.  It seems like it meets all the criteria to me.

Edited September 8, 2016 by jklcpa
add comment about the reg ref in instructions

[Abby Normal]

8 hours ago, BHoffman said:

Can I put the $61 on Sch A and be done with it?  I'm going to charge a lot more than the $61 credit to prepare the 1116 forms....

The 1116 is really automatic. You just need to learn what boxes have to be entered on the K1 input.

BUT if you have less than $300 single/$600 married in foreign tax, you can delete the 1116 and the tax will automatically show up on the 1040. Boom!

[BHoffman]

Abby,. I'm a Drake user.  There are no input boxes for 16 on a K1.  Jklcpa, this does meet that criteria and I'll take another look at 1116 instructions with a little more confidence.  Thanks!

 

[Catherine]

12 minutes ago, BHoffman said:

There are no input boxes for 16 on a K1.  

I am a Drake user as well.  Put it on a dividend screen and check the box that says no 1116 is required.  Make sure you put foreign income in the div/qualdiv boxes up top or it won't flow through.

[Lion EA]

Call Drake.  Ask them where to input.  Let the software "flow" the amounts for you.  And, charge the client even if you use a short cut.  Let them see on your invoice your price for K-1s.  They pay plenty for those investments, especially if they purchased via a broker who told them it's just like owning stock!  So, let them pay you for the tax reporting consequences of their decisions.  Some of them have multiple activities that must be reported separately.  And, wait until they make partial sales of their shares and you have to work with basis adjustments and ordinary income.  Explain to them that it's not stock or a mutual fund; it's a company and they are a partner.  Charge them now and explain to them why, so when you need to charge them even more for partial sales, for instance, you've prepared them.

[jklcpa]

No need to call Drake. It happens when there are foreign amounts on a 1099-INT. It should be entered on the 1099-DIV screen and it won't be a problem since the worksheets aren't transmitted to the IRS. Just don't print the worksheet for the client if it will be questioned why it is on a DIV worksheet.

[Abby Normal]

Drake sounds lame.

[jklcpa]

The thing is about bypassing the 1116 altogether and putting it all on the 1040 directly, we are still supposed to calculate the FTC with any limitations that might apply that would reduce it.  Does anyone actually do that?  Rhetorical, don't answer.

For $61, I'd force the flow of it to page 2 of the 1040 and move on.

[jklcpa]

11 minutes ago, Abby Normal said:

Drake sounds lame.

back at ya. Works well for me.   So there!

[Lion EA]

OP didn't mention if her client has other foreign taxes paid.  My clients with a K-1 often have more K-1s plus lots of other investments with total foreign taxes running more like $800 and requiring the full Form 1116.  Or, are children with no tax liability so we want the 1116 carry forward to use in a later year.  Or, had foreign earned income in the mix.  There are options with foreign taxes and foreign income, just like with education credits/adjustments/deductions.  Knowing how to input in your software for ALL the options makes it easier to calculate the best option for a given client in a given year, while you save time by putting your software to work for you.  (That's why this is a great forum with users of different software to chime in!)

[Catherine]

53 minutes ago, Lion EA said:

Knowing how to input in your software for ALL the options makes it easier to calculate the best option for a given client in a given year, while you save time by putting your software to work for you.

Well, yes.  But what I frequently do is make a note of what needs investigation, to be done in a non-time-crunched period.  To get to that spot, though, sometimes I just need something that *works* for when I know what the result should be and just can't get it there.

 

 

[BHoffman]

Yep.  Especially when the K1 got here yesterday and the client needs the tax return for a refi the day before that.  Thanks everyone for saving me a lot of time

[SaraEA]

There's a little confusion going on here.  JKLCPA notes that the 1116 instructions say it's okay to put the foreign taxes paid on Sch A if the requirements are met.  That is not the same as putting it on page 2 of the 1040 as a credit against tax liability.  I think that only foreign taxes reported by Regulated Investment Companies (e.g., mutual funds and brokerages) can skip the 1116 and go directly to Line 48 of the 1040 (could be wrong).  PTPs are not regulated investment cos.  And even if the 1116 is not required, your client may benefit more from a $61 credit than a Sch A deduction (they might be subject to AMT or not even itemize so lose the whole thing).  And like Lion, I notice that clients who have one of these PTPs have others, and you never know when you start out if they will meet the threshold for skipping the 1116.

Mod edit -  the following portion of this post is going off topic, yet it warrants further discussion so I have copied and posted it in its entirety into a topic of its own pertaining to various software vendors and program robustness:

UltraTax also does not have an entry for Box 16 of the K1 either but supplies a link to the 1116, another thing that makes me think it's required.

Lion notes that sales of these investments require hand calculations of adjusted basis and ordinary income.  The broker statements where these are held list the sale under "basis not reported" but usually give some number, which is wrong.  Also note that the rules are different if you sell the entire PTP holding as opposed to selling some of it.  If you sell it all, you just follow the formula and adjust for ordinary income and calculate gain/loss.  If you only sell some of it, it is not treated like sales of stock where you can do FIFO.  Instead the entire investment is treated as one unit, even if different blocks of shares were purchased at different times.  Then you have to do something like average cost basis (like with mutual funds) then calculate gain/loss and take the ordinary income portion out of there (and yes, even if you have a loss on the sale you still have ordinary income, which ends up increasing your basis and your loss).

Last week I did one of these partial sales out by hand so I would know what the result was supposed to be.  I fully expected to spend the next hour or two coaxing the software into putting the right numbers in the right places.  Well, UltraTax just did it!  No coaxing required.  Add this to our list of second thoughts about quitting UT and staying only with ATX.  Maybe I'll put this return and some other doozies into ATX and see what it can and can't do.  We'll definitely keep ATX for payroll and 1099s--can't beat the ease of use or the price.  For tax, though, we really need a strong program.  We would love to save the $15-18k price of UT, and geez I did the partial sale out by hand anyway, but ......

And thanks Lion for the motivational comment:  "So, let them pay you for the tax reporting consequences of their decisions."  My client with five K1s from PTPs and the partial sale is going to pay $500 extra.

[jklcpa]

2 hours ago, SaraEA said:

JKLCPA notes that the 1116 instructions say it's okay to put the foreign taxes paid on Sch A if the requirements are met.  That is not the same as putting it on page 2 of the 1040 as a credit against tax liability.  I think that only foreign taxes reported by Regulated Investment Companies (e.g., mutual funds and brokerages) can skip the 1116 and go directly to Line 48 of the 1040 (could be wrong).  PTPs are not regulated investment cos.  And even if the 1116 is not required, your client may benefit more from a $61 credit than a Sch A deduction (they might be subject to AMT or not even itemize so lose the whole thing).  And like Lion, I notice that clients who have one of these PTPs have others, and you never know when you start out if they will meet the threshold for skipping the 1116.

Whoa there, that is NOT what I wrote or said.  My first post had 3 distinctly separate paragraphs, the first of which was about putting the foreign taxes on Sch A and does NOT say anything about "requirements".  If you look at the OP's question immediately preceding, my one line answer was in the context of her asking about taking a deduction on Sch A instead because (she implied) her expending the additional time to prepare the 1116 would result in her charging a higher fee that would negate the added benefits of taking a credit vs the Sch A deduction.  I didn't think it necessary to explain that it would be a deduction and not a credit.  I think BHoffman is a CPA and hopefully she and everyone else here does know the different between the two.  I certainly did not say anything to indicate that a deduction is the same as a credit.

The next paragraph I said that IF the OP WANTS to use the 1116, IF the OP's client met the criteria listed on page 5 of the 1116 instructions with ownership interest of less than 10% and not an active participant, then there aren't two classes of income to be reported on the 1116.  I also reference the reg sec listed in the instructions so that the OP could read that and find out if it pertained to her client's situation.

In the final paragraph of that first post I said I *think* that same criteria on page 5 of the instructions would allow the OP to bypass the 1116 and report the $61 CREDIT directly on page 2 of the 1040.

Then, in my third post in this thread I reminded people that while it is possible to bypass the 1116 if the rules are met as stated in the instructions (under the $300/$600 limit and reported on a 1099div, 1099int, or the K-1s as listed, that we are still required to take into account any limitations that may exist as if we'd filled out the 1116.

Here are my posts:

Quote

Yes, you can put the foreign taxes from the K-1 on the sch A instead.

However, if you still want to use the 1116, you don't have to break out between passive and general income categories if this client is a limited partner with less than 10% in the ptnship and does not activity participate. That is stated in the form 1116 instructions starting at the very bottom left of page 5 of the instructions. In this instance, the form's instructions references the reg sec 1.904-5(h)(2) where this is stated. 

As a matter of fact, I think that this same rule should also allow you to bypass the 1116 altogether and enter directly on the 1040 since it is only $61. The rule for reporting directly on the 1040 is if it's under the dollar thresholds, is all in the passive category, and is reported on a 1099DIV, 1099INT, or a K-1.  It seems like it meets all the criteria to me.

 

Quote

The thing is about bypassing the 1116 altogether and putting it all on the 1040 directly, we are still supposed to calculate the FTC with any limitations that might apply that would reduce it. 

 

Lion made a good point with her statement about additional K-1s and reminding us that the $300/$600 limits are in the aggregate. That IS one part of the requirements listed in the 1116 instructions as an exception to needing to include the form 1116.

Some other points being brought up now though (investments, basis, sales, software and its strengths or robustness) have resulted in taking a topic off on a tangent, so hopefully the OP has her answers.

[BHoffman]

OP is happy as a clam

[RitaB]

10 hours ago, BHoffman said:

OP is happy as a clam

I think a lot of times the original poster gets the answer or affirmation pretty quickly.  She finishes the return, client picks up and pays, she takes a nap, goes to dinner, and enjoys a movie while the rest of us try to think of every possible outcome to every possible scenario.  This is why we are great.   And also why they make jokes about us. 

[Catherine]

11 hours ago, BHoffman said:

 

OP is happy as a clam

 

So my husband often says that this would be a GREAT science fair project;  Just HOW happy ARE clams?  And how can one tell?

They make jokes about engineers, too.  ;-)

 

[jklcpa]

8 minutes ago, Catherine said:

Just HOW happy ARE clams?  And how can one tell?

[Catherine]

@jklcpa  I will tell my husband this evening!