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Enter K-1 on Form 1040


Lion EA

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I have a final K-1 from an S-corporation (that I did not prepare) to enter on a joint 1040. The corporation sold a commercial rental building and then dissolved.

The K-1 has its usual Box 2 Net rental real estate income and Box 4 Interest income. Then it has Box 9 Net section 1231 gain which flows to 4797 Part I as a gain, which I think is correct. Only that one number, the net gain on 4797, right?

The K-1 also has Box 8c Unrecaptured section 1250 gain. Isn't that the depreciation component of the gain that gets taxed as ordinary income at a maximum 25%? Where should that flow?

And, the fact that the company was dissolved: client received a distribution but still had a larger basis. I put the distribution on Form F as his Proceeds from his 200 shares in the company with a Date acquired in 2012 when he was gifted the shares and Date sold in 2018 when the company was dissolved. I put his final basis as the Cost. Is that correct?

Thank you for any direction you can give me.

 

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Yes, the 1231 gain from box 9 should appear on the 4797 in part 1

The amount in box 8c that is unrecaptured 1250 gain flows onto the worksheets for Sch D. It may or may not be a flat 25% tax on that number.  Because it is unrecaptured, meaning that the entity used a straight-line method of depreciation (no excess of accel deprec over SL that would be taxed as ord inc at a flat 25%), other items may come into play in that calculation to determine the tax on that, but basically, yes, it is separated out with the potential to be taxed at 25%   If you want to see more explanation, this page has a straightforward explanation with an example.   https://www.taxcpe.com/blogs/news/recaptured-and-unrecaptured-real-estate-rental-section-1250-gain

I'm confused about your statement about putting the stock redemption on Form F.  I would report the stock redemption on Sch 8949/D like the sale of any other stock investment. Was any other paperwork or calculations provided to the shareholder that detailed how much of the distribution pertains to liquidation of the stock?  Were there any earlier distributions during the year that weren't in liquidation or was it all distributed at the end, was it all in liquidation, none as a dividend?   Below is a link to another article, this one hits the highlights of this subject. Look under the heading "Determining Character of Gain or Loss" and you'll find an explanation in the last 2 paragraphs of that section of how distribution(s) that exceeds ending AAA will be a dividend if the S corp had AE&P: https://www.thetaxadviser.com/issues/2008/apr/understandingthetaxconsequencesofliquidationtoansshareholder.html

One last point is about the basis of the shares to use, specifically because they were acquired by gift and may result in a loss.   Someone more knowledgeable than me will have to answer this because I don't know off the top of my head.  Do the normal rules for basis in gifted property apply here when the gifted property has declined in value and that results in a loss so that the basis you start with may not be donor's cost but fair value instead?  And then run through the basis adjustments that flow from the S corp activity over the years?    Sorry, I do not know the answer, and maybe I'm not on the right track with this part of the answer.

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Well, THAT was a typo I missed. Yes, Sch 8979/D was where I showed his 2018 distributions (no detail on if it was all in September with the company dissolved) and his basis in his 200 shares. It ends up a loss, which is a help. (The spouse thought the company's CPA told her that the company paid ES payments to both CT and the IRS, so the clients would owe nothing on the building sale passed through on the K-1. What he probably said was that the company paid ES to CT only because it is required for PEs as of 2018.)

Thank you for the explanations and the links.

I'm not sure I have all the details that would help me report this correctly. The CPA prepared the 2018 final return on 2017 forms due to it being a short year. He gave no 199A information for the business. CT did NOT accept the company return on prior year forms, but CPA would not redo. (CT actually assigned a person to walk the spouse through writing the company return on 2018 forms, including the CT-K1.)

My taxpayer/shareholder has early-onset Alzheimer's and his father who gifted him the shares in 2012 and ran the company and dealt with that CPA has since passed away. The CPA went to Bermuda during tax season, but really can't talk to the spouse/non-shareholder, I guess. Spouse worked with her mother-in-law to get me what she could, redo CT, etc. There are two other sibling shareholders, but spouse is not comfortable asking them questions and has not given me permission to talk to anyone except the CPA who does not respond to me. (Nor, to her, apparently.)

I don't think the spouse has access to the S-corporation federal return. CT sent her (her husband, actually) the CT return when they rejected it because their address still was listed as the location of the books. I think the CPA was in Bermuda at that time, and no one in his company could talk to spouse/non-shareholder instead of taxpayer/shareholder whose communication skills were lacking by this spring.

The K-1s have never included basis, capital account, etc. But the company always had positive rental income, so I postponed tracking basis. This couple became my clients in 2014, so I had the information since then. Spouse worked with MIL to find the gift tax return from 2012 when father gifted 200 shares to son with about a $50,000 basis and $150,000 FMV. Spouse found hubby's K-1s for 2012 and 2013. With only that, I filled out outside basis worksheets starting with 2012 with the ~$50,000 basis and adding rental income and interest and net 1231 gain (please tell me I CAN add that to his basis) and subtracting annual distributions to arrive at a basis about $350,000. 2018 Distribution was about $300,000. He must've had over $300,000 in basis to get a distribution of over $300,000, right?

But, I need to deal with the about $50,000 unrecaptured 1250 gain. (I hate following the flow of anything through the new forms, and the IRS is changing them again for next season.) I entered in on the K-1 entry screen. Where would it go next. Schedule D worksheets, right? If I can get this piece to look reasonable, I'll let it go. I think "reasonable" is the best I can do with the information I have.

Thank you, Judy.

 

 

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Yes, the the 1231 gain is an addition to basis.

Re: the unrecaptured 1250 gain -  there is a worksheet for line 19 of Sch D, and the number from the K-1 should appear on line 5 of that worksheet.

Does the wife have a POA that includes tax matters?  If so and with that, why can't she contact the CPA firm on husband's behalf and ask for copies of the K-1s or S corp returns that you are missing for 2012 and 2013? 

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Thank you! You are my new best friend. Your detailed and thorough explanations are a big help, as are you links. (Actually most of my best friends are on this site, including some no longer posting.)

The wife does have a great POA in place that specifically discusses tax matters and signing returns and other good stuff and used to have a comfortable relationship with the CPA firm. And, luckily, she did have the K-1s from before my time. Now, the CPA firm seems to be ignoring her questions, requests for copies of the S-corp returns, etc. MIL seems to be having similar problems now that her husband passed away.

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UPDATE. I think I have it all in place, now. I'll sleep on it and proofread tomorrow. I did have the 1250 gain flowing correctly. It flowed from the K-1 to a "statement" that is numbered sequentially depending on what's on each return, but is clearly labeled as Schedule D Unrecaptured Section 1250 Gain. The number I was afraid I was missing is indeed on Line 5. It gets reduced by a small loss, so by the time it shows up on Schedule D Line 19, it's a lower number than I was looking for. And, I was shaky enough on the flow to really doubt myself, so I really benefited from the detailed explanations you provided. I know I'd probably make some refinements if I had the corporate tax returns, but I think the wife won't deal with that firm any more. (I did find a revision on the redone CT corporate return that changed the taxpayer's PE payment for their joint CT return from what the CPA had on the original CT-K1.) I did track ALL the K-1s from the father's gift/father's basis to the dissolution of the company. Thank you, thank you, thank you. 

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  • 2 months later...

So lets say that the K1 shows capital gains of $3,000,000 (box 10) and there is an unrecaptured Section 1250 gain (box 9) of $1,000,000 the total capital gain reported is $3M? is that correct? and box 9 is only for information purposes as it has no real effect on taxes?

 

 

Edited by jklcpa
removed exact text that was duplicated a 2nd time
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4 hours ago, Oh Baby! said:

So lets say that the K1 shows capital gains of $3,000,000 (box 10) and there is an unrecaptured Section 1250 gain (box 9) of $1,000,000 the total capital gain reported is $3M? is that correct? and box 9 is only for information purposes as it has no real effect on taxes?

 

 

No, the amount in box 9 is more than informational. It indicates the amount of depreciation taken but is unrecaptured because depreciation on the asset sold wasn't using accelerated depreciation, however that amount has the potential to be taxed at a maximum rate of 25% but could be less depending on the other income on the return.  That box 9 amount will be incorporated in the Sch D worksheet.

This link that I included above has a more detailed explanation:

https://www.taxcpe.com/blogs/news/recaptured-and-unrecaptured-real-estate-rental-section-1250-gain

 

 

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6 hours ago, Oh Baby! said:

So lets say that the K1 shows capital gains of $3,000,000 (box 10) and there is an unrecaptured Section 1250 gain (box 9) of $1,000,000 the total capital gain reported is $3M?

To clarify, the total capital gain is $3m, and of that $1m is unrecaptured section 1250 gain.

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On 9/5/2019 at 8:28 AM, jklcpa said:

Do the normal rules for basis in gifted property apply here when the gifted property has declined in value and that results in a loss so that the basis you start with may not be donor's cost but fair value instead?

That is correct Judy.  Section 1015 applies so basis for gain and basis for loss must be tracked separately.  That task can be made simple with a spreadsheet.  

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And, Judy's and Dan's great explanations will help you track that $1M from a worksheet (and any other items on that worksheet, if any) to Sch D Line 19.

You're not increasing the income, but you are breaking out part of the income for potentially different tax treatment.

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