K-1 Form 1065

[B. Jani]

I have client with two K1 (Form 1065). The account titled as "Name of client, IRA on Box 6" and box I-1 and I-2 says IRA/SEP/Keogh. So my understanding is that this is a retirement account and not to include on tax return until distribution happens.

The prior account who is now retired included this K1 on tax return for last 3 years. Is this correct? I am confused. Client says to include to avoid IRS letter and my understanding is growth/loss in IRA not needed to include until distribution from account happens and 1099R is issued.

Am I missing anything because of K1? Any thoughts.

TIA

[Abby Normal]

You get to be the hero by amending and removing those K1s from the return.

The only time a K1 can impact an IRA is when there's unrelated business income, and it has to exceed a certain amount before it creates taxable income.

It's usually recommended to NOT buy these K1 investments in an IRA.

https://www.fidelity.com/tax-information/tax-topics/ubti

[Abby Normal]

From the link:

Tax considerations

An IRA is an exempt entity separate from the beneficial owner of the IRA and can be subject to taxation on its own. UBTI is subject to taxation in all varieties of retirement accounts, such as IRAs, retirement plans like Keoghs, and health savings accounts (HSA). When total positive UBTI across all applicable investments held in a retirement account equals $1,000 or more, then Form 990-T must be filed.

Sounds like fun, right? Tell client to get rid of these investments in an IRA because they're not good for IRAs.

[jklcpa]

Thank you, Abby Normal. I've never heard that about the UBTI before, so learned something new today.

[scottmcfly]

I had a client who owned a bunch of publicly traded partnerships in his traditional IRA.  I tried to keep track of the UBTI and told him that we could run into trouble in the future as he kept buying more PTP shares in the IRA.  I even used to lay in bed thinking about it..........but then he died and my problems went away.

I know that sounds harsh.  But tax season makes me that way.

 

[TAXMAN]

So far the ones that I have seen like this the broker says they will prepare if needed. I personally do not like them inside a IRA.

[Sara EA]

Note what tax ID is on the K-1.  Likely it's not the taxpayer's and doesn't belong on the individual 1040.  If UBTI exceeds the limit, it's the custodian's responsibility to file the appropriate forms.

[B. Jani]

Thanks Sara EA for pointing out. Just noticed the following in K1

Part 1 Box A has partnership employer ID # start with 46-xxxxxxx

Part 2 Box says Partner's SSN or Tin and actually TIN start with 41-xxxxxxx is listed there instead of my client SS #

Asked client if TIN belongs to him and he said no.

What's your opinion?

[Abby Normal]

If it's not his Social Security number then it's not his K1. It could however be in the name of a revocable trust and therefore would go on his 1040.

[Slippery Pencil]

It says "IRA" and it has the IRA's TIN.  Do not include it on the return.  If past years are substantial, inform client how much he'd save by amending. 

[B. Jani]

Final Update:

The second TIN belongs to UBS brokerage where account is held. Did conference call with client to his broker and talk to Manager. He was knowledgeable. He said that Client should not get K1 in first place. It is UBS who need to file 990 when K1 received. So client happy and me too.

Thank you for all the input.