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Self-Employment Taxes - Multiple Sources


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What is the amount subject to self-employment tax (before the 93.25%) for the following situation??

Taxpayer has:

**A proprietorship which made $12,000.

**A partnership with $120,000 in guaranteed payments

**A loss from the same partnership of $150,000, but taxpayer has insufficient basis to deduct ANY of this loss for AGI purposes.

**The K-1 from the partnership shows Self-employment income of -$30.000.

Thank you in advance for your response.

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You received this response on The Tax Book forum several hours ago:
 

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The instructions for Box 14 Schedule K-1(Form 1065) state the following for Code A (which I assume is what is shown).

"If the amount on this line is a loss, enter only the deductible amount on Schedule SE (Form 1040 or 1040-SR). See Limitations on Losses, Deductions, and Credits, earlier."

So I don't think you can use the negative $30K SE income on the Schedule SE. Therefore, my educated guess is $132K subject to SE tax, but I've never dealt with this situation and welcome any opportunity to get further educated.
 


This point was argued by the IRS last year, and there is a Chief Counsel memorandum that addresses its finding. This is from the last item from The Tax Advisor.

Quote

Chief Counsel addresses application of loss limitation rules to partner’s self-employment tax

The Office of Chief Counsel advised that, unless a specific exclusion applies, the basis loss limitation under Sec. 704(d) and the at-risk loss limitation under Sec. 465 apply when determining a general partner’s net earnings from self-employment under Sec. 1402 for Self-Employment Contributions Act (SECA) tax purposes. Thus, if an individual share of loss from a partnership is disallowed to a partner under Sec. 704(d) or Sec. 465 for the tax year, the loss is also not taken into account in computing the partner’s net earnings from self-employment for that tax year for SECA tax purposes, assuming no SECA provision or regulation provides otherwise. CCA 202009024 (2/28/20).

Link to the actual memorandum that also has an example of partners with loss limitations because of basis and at-risk rules as it impacts SE tax: https://www.irs.gov/pub/irs-wd/202009024.pdf

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I suppose I should point out that the CCA isn't authoritative and shouldn't be cited as precedent but serves as internal guidance. I posted it because it does have the code and reg sections cited, and also notates a rev ruling that's been erroneously used to justify allowing the loss in the calculation of net earnings from self-employment.

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2 hours ago, jklcpa said:

I am curious about how your software is handling it. Is the disallowed loss of $30K also flowing to Sch SE, or is the program using the $132K and prompted your question?

Thanks for this, and for visiting the other board, where I asked the same question.  The software I use is Drake, and the numbers in my example are fictitious.  I will need to present the real numbers to track what Drake is doing.  There are four potential sources:

  1. From a proprietorship, Sch C -   Profit of $5114
  2. From a first partnership, general partner, Ordinary Income of $11,355
  3. From a second partnership, also general partner, Guaranteed Payments of $120,000.
  4. From the second partnership, Ordinary loss of ($180,778).  There is insufficient basis to deduct the loss for AGI purposes.  I don't know how Drake is aware that he cannot deduct the loss - I have not restrained the data entry.  But Drake is not allowing the loss.

From all this, Drake is populating his Sch SE with only $5114, and $4723 after applying the .9235 factor.  I have an uneasy feeling that something is simply not right - which is why I am asking for help.  Your answer seems to be the most authoritative, but it leads me to believe the total subject to SE should be $136,469, or $5114 + $11355 + $120000.

I don't know that Drake can get to the bottom of this.  No one encounters this kind of thing every day.

Thank you - Ron J.

 

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Is the ordinary income of $11,355 from the first partnership also self-employment income?  What does that K-1 show in box 14?

 

7 minutes ago, Corduroy Frog said:

I don't know how Drake is aware that he cannot deduct the loss - I have not restrained the data entry.

That is a calculation based on the basis and at-risk figures entered in the program, and Drake is populating the Sch SE based on what is on the K-1s in box 14 and taking into consideration the basis limitations. The K-1 entries span 2 input screens, and then there is a separate tab on the Sch E input for basis entries.

And I'll agree with Abby Normal that not all K-1s are prepared correctly.

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12 minutes ago, Corduroy Frog said:

but it leads me to believe the total subject to SE should be $136,469,

Why would you subject your client to $120,000 SE income from the partnership regardless of the CCA? 

Do you understand the basic concept of SE income from a partnership?

The fact that the partner was allocated a $150,000 loss and a $120,000 GP indicate the partnership correctly allocated -$30,000.

If you were to follow the  CCA the negative $30,000 SE income would be suspended.

 

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The saga continues with more reflection.  To Judy's question, the answer is a resounding "no" - there was nothing in Box 14, and there should have been, as the owner is a general partner, and the creator of the 1065 himself.  Like Abby said - Not all K-1s are prepared correctly.  I inserted $11,355 in Box 14, and the SE amount increased accordingly.

I suppose the honest answer to Dan's question about basic understanding is a perplexing "no" or I wouldn't be asking all these questions.  Thanks Dan for responding.

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23 minutes ago, Corduroy Frog said:

there was nothing in Box 14,

If box 14 was blank how did you arrive at -$30,000?

edited: didn't realize you were talking about the other partnership.

7 hours ago, Corduroy Frog said:

**The K-1 from the partnership shows Self-employment income of -$30.000.

 

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Ron, not all ordinary income on a k-1 is s.e. income.  What is the nature of the operations and this client's involvement in the first partnership?

To clarify, the second partnership's $30K loss that is comprised of the $120K income and the $150K loss is disallowed, and is entirely disregarded in computing SE tax.  The income from the Sch C of $5,114 appears to be flowing correctly. Now the question is about the first partnership income of $11,355 and whether or not that is truly s.e. income.

ETA - From what you say the K-1s report, it appears that Drake's program is handling this correctly. So you need to find out about that first partnership.

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36 minutes ago, Corduroy Frog said:

I suppose the honest answer to

And to be honest with you, my concern is that you might be practicing in an area beyond your qualifications if you are preparing K-1's.

In the AICPA that is an ethics question.

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11 minutes ago, DANRVAN said:

And to be honest with you, my concern is that you might be practicing in an area beyond your qualifications if you are preparing K-1's.

In the AICPA that is an ethics question.

Dan, I didn't prepare any of the K-1s in question.

Judy, I have enough personal hometown knowledge of the first partnership to confirm this was SE income.  And I agree that Drake is handling correctly, after reading all the posts.  First I've ever heard of a suspended loss for SE purposes - they generally try to protect Social Security from prior events - witness the recent exemption of Unemployment.

 

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