Partnership 1065 and K-1 Questions

[jillsy]

I am a general partner in a partnership in New York State. The business was started in Oct., 2004 and we showed a loss last year. This year, the business shows income, but there doesn't seem to be any way for each partner to subtract what he/she contributed during the year from the income. So we are being forced to claim our share of the business income even though we did't receive it, and we're not getting credit for what we put in. Is this right? This doesn't seem fair.

We are using TaxCut to calculate our taxes, and I already found one minor bug. I read that if we enter our contributions into our capital accounts, then our income share should only be shown as income if it exceeds what we put into our capital accounts. However, I put in the capital account info on 1065 Schedule L and K-1 section N, but it still shows the full ordinary income on lines 1 and 14 of K-1. We have to claim this on schedule E, 1040, and schedule SE. How can we factor in what we put into the business so we get credit for it taxwise? Could it be that TaxCut isn't calculating things properly, or do we have to use some other allocation method?

I'd appreciate any help. We are trying to do this ourselves because we are a small business trying to make a go of it. So we try to save what we can by taking care of things ourselves.

[JoshinNC]

questions

are you including the capital contributions in the gross income amounts reported on the 1065? any amounts put into the parntership by the partners are not reported as income on the 1065, but are reported in section N for the capital accounts.

while it sounds like a good idea to "take care of things ourselves", you may be actually costing yourselves quite a bit of money by not allowing a tax professional to at least review the return prior to submission to the IRS and NY Dept of Taxation. a reputable professional would charge you an hourly rate to review the return and could then advise you as to what it would cost to have him/her prepare the return if he/she noticed any changes that needed to be made.

Bob W. is a regular member of this forum and is located on Long Island. He may be able to assist you if you are in his general area. I also repesent several LLC's/partnerships located in NY and would be more than willing to assist you.

[Bird Legs]

Ptrship Income

The Net Profit of the partnership is reported on the K-1s in the respective % of ownership of each partner. Disregard the capital contributions of the partners. These contributions have nothing to do with the profit or loss of the partnership.
The individual partners will report and pay tax on their respective share of the profits.
This is whether the profits have been distributed or not. This does not matter.

[Armando Beaujolais]

How can we factor in what we put into the business so we get credit for it taxwise?

Please don't take these comments as antagonistic. They're meant to try to help and give honest advice.

The difference between capital contributions and income/loss of a business entity is first-day entry level accounting class stuff. You don't understand the difference, and that's not meant as a slam. Most people don't. I'll bet I'm not the only one who's cringing at the thought of the mess you're getting yourself into by trying to do the tax reporting on your own. The biggest problem is that everything builds on what came before it. If you study and work hard and do you best to figure it out, by the time you realize what's going on you'll have an unholy mess in front of you that you have to try to sort out going back to day one. You're playing with fire.

Toward the top of the list of tax professionals' aggravations is "consumer" tax preparation and accounting products that claim to assist in tax preparation or accounting. "Just answer a few easy questions and let the such-and-such program figure it out." It doesn't work. As we speak I have a terrible mess of a return sitting on my desk that consists of fixing a big problem created when my client filed their own return with using consumer software.

Think of your own field of expertise. Are there folks who don't know the business who would try to do it on their own to save some money? What advice would you give them?

[jillsy]

Answers to JoshinNC's Questions, Etc.

Thanks to all for your replies.

On form 1065, we put only our gross receipts and sales as income. We put the capital account info in section N of each partner's K-1. Also, the total capitals accounts for all partners goes into schedule L of 1065.

I understand what Bird Legs said about having to claim the business profit whether it was distributed or not. I just don't understand why the IRS seems to want you to claim that as income, but doesn't allow you to claim the amount of capital you invested. It just seems odd and downright crooked to make someone pay tax when they actually lost money. Each partner's share of the business income is less than the expenses each partner incurred during the year. So each partner actually took a loss.

For instance, when we used our vehicle for business purposes, we paid for all the gas, maintenance, etc. out of our own personal funds and did not reimburse ourselves from the business. I don't mind claiming a profit for the business itself on form 1065, but it seems like there should be a place on the 1040, schedule E, or schedule SE to show the money put into the business and be able to subtract it from the business income for each partner.

As far as professional services, we have considered going to have someone look at our forms to at least tell us if we've done everything properly. However, I don't want to get into a long, drawn-out affair that ends up costing a ton of money. I'm doubtful that a reputable accountant would be willing to give us their time for such purposes, especially at this time of year. If we continue to grow, we may hire an accountant at some point in the future, but for now we put everything back into the business to fund further growth. The company we both work at is closing and one of us has already lost his job, so we are hopeful that this will grow enough for us to actually make a living at it.

[JoshinNC]

I'm sorry you feel that way

A "reputable accountant" would be willing to perform a service for you to the utmost of his/her ability and provide you with concrete, substantiated answers to your questions so you and your partner would not be left walking around in the dark searching for parsed answers. You require tax preparation services and this is the major time of the year in which those services are performed. I don't think a "reputable accountant" would turn you away.

your net income is your total income minus your eligible expenses. You don't pay tax on the total income, just the net income. I really think that you should consider seeking competent advice, at least to review the return, so that you don't end up with new issues in the future.

Please don't think that those of us on the board are putting you down, but you are in business to do what you do and we are in business to do taxes/accounting. Hire someone who knows what they're doing. Legal and tax advice are extremely important to a small business and should not be shirked off as something that you can learn yourself as you go.

[Lion]

Do It Yourself Software

Have you made use of all the tutorials within TaxCut? Called their help line? TaxCut has a range of products available from strictly do-it-yourself to get one question answered to chat with a tax preparer all the way up to doing the data input but having a preparer complete the return, sign it, and send it to you for filing. But, your questions seem to be less about tax preparation and more about the underlying bookkeeping of a partnership. Perhaps, you should file extensions for both the partnership and the personal returns of the various partners. Then you could make sure the partnership books really reflect what happened and take the time to study how to report book accounting on a tax return. (They are two separate methods of accounting.) Does the partnership agreement require the partners to use their own transportation, for instance? If so, the partners (not the partnership) will have Unreimbursed Partnership Expenses on Schedule E page 2 as a negative number, in effect offsetting some of the income from the partnership on that page. Or, does the partnership reimburse partners under an accountable plan? Then, the partnership has a deduction from income, lowering what's passed through on each K-1 to the partners. If you choose to keep the money in the company, it is your choice, not the IRS's choice, so, yes, you will pay tax on the profits you choose to leave in the company. The IRS does not allow you to choose not to pay taxes on your profits. As a taxpayer who would have to make up your slack, I think that is very fair. File extensions, study, hire a professional, do it right the first time, or pay even more to have it redone later. Good luck.

[Chief]

Tax and Accounting Advice

"Tax software is no substitute for Tax knowledge."

[BOB W]

Wow...........

... you guys are really being soft on this poster and that is commendable. But when all is said and done, this poster would rather be penny wise and pound foolish. We have all seen this time and time again. The poster is correct that no one has time to review his/her work at this late date, but that is what extensions are for.

Even if they submit this tax return now, it will have to be amended in the future, this year or next, when it finally gets in the hands of a professional. They will still pay for the 2005 partnership return down the road. A partnership return can be the most complex type of return to complete and some tax professional without an accounting backgroud may find it overwelming.

Congratulations to the NICE guys, but I think you are beating a dead horse who can't hear you.....

[BOB W]

Overpay..............

........... taxes is what this t/p seems to be saying. ( I can't deduct certain expense paid out of pocket). We all know it is a simple entry and we would use std mileage.

Gotta go Client just come in.............

[taxmandan]

I agree with Bob W. this poster needs to pay for the professional advice they seek, not come here and try to get it free. She/he already made phone calls asking for free advice and got the proper response, "no freebies" why should they get it here on-line? Would any of you tax professionals answer this person on the phone for free? Not me.

[jillsy]

Response to Bob W's Rude Comments

Well, Bob W, JoshinNC recommended you to me if I happened to be in the LI area. I'm not, but I wouldn't take advantage of your services if I was. I am an intelligent, educated person; I don't appreciate your arrogant attitude. I came here for some helpful advice because that's what this forum claims to offer. Some have been helpful, but you are apparently just looking to make people feel stupid.

If I choose to go and seek an accountant's advice, that is my business. I don't think I did anything wrong in seeking some quick advice here and admitting that we are trying to make a small business grow and would like to save money whenever possible. Besides, I've heard plenty of horror stories of accountants running off with people's money or screwing up their tax returns. So I don't necessarily want to give a total stranger complete access to all my personal and business records, especially if that person is as much of a jerk as you obviously are.

Now I see what this site is really for. It's mainly a forum for accountants like you to come and try to scare people by telling them they're too stupid to do anything on their own and they absolutely MUST turn everything over to an accountant and blindly do what they say.

Thanks again to all who were nice and helpful without treating me like I'm a complete moron. I really do appreciate it and I will take your advice into consideration.

[Bill Tubbs]

Upe

For instance, when we used our vehicle for business purposes, we paid for all the gas, maintenance, etc. out of our own personal funds and did not reimburse ourselves from the business. I don't mind claiming a profit for the business itself on form 1065, but it seems like there should be a place on the 1040, schedule E, or schedule SE to show the money put into the business and be able to subtract it from the business income for each partner.

Jilsy,

First, I do agree with most of the responses in this thread that suggest you consult with a tax preparer as there are lots of issues here. This board is primarily a board for tax preparers to bounce things off each other.

Anyhow... out-of-pocket, non-reimbursed expenses can be included on Sch E pg 2 -- look in the instructions for UPE (Unreimbursed Partnership Expenses) and for the caveat that the partnership agreement must specify it in a certain way. If you partnership agreement does not conform, I suggest that you submit those expenses to the partnership for reimbursement so that they can be written off on the 1065 (that, of course, would be a 2006 transaction, but at least you could write it off then next year instead of not at all).

Bill

[Matt Sova]

Hardly rude

Well, Bob W, JoshinNC recommended you to me if I happened to be in the LI area. I'm not, but I wouldn't take advantage of your services if I was. I am an intelligent, educated person; I don't appreciate your arrogant attitude. I came here for some helpful advice because that's what this forum claims to offer. Some have been helpful, but you are apparently just looking to make people feel stupid.

Let's see you are either a doctor, a lawyer or an engineer. That "I am an intelligent educated person" line is usually the line I hear from people in those professions. Yes, you may be intelligent and educated, but what Bob W was saying is you are NOT intelligent enough to prepare this complex of a return because you are NOT educated in the tax law.

Ignorance of the law is not a defense if the IRS comes down on you. I feel he is trying to point you in the right direction and if you blindly disregard that intelligent and educated advice you do so at your own risk. You should seek out competent help in completing this from someone who IS educated in the tax law.

My 2 cents worth, you can pick it up or ignore it. I really do not care.

Matt

[BOB W]

Putdown????????

I'm sorry that you feel that I was calling you a moron, I wasn't. I was only trying to point out that partnership returns are very complex and that even "some" tax preparers on this board would have a difficult time completing one, because they focus only on 1040 tax returns. Further more, you have to understand there is a multitude of tax laws that are part of any business return. A partnership return uses those tax laws and you may have to allocate certain items to each partner on the K-1 forms. Partnership returns usually require a full Balance Sheet reporting, Page 4 of 1065.

In no way was I demeaning you but only trying to truely help you before you cause an audit by the IRS of your business. As far a I can see by your questions, you will be a ripe candidate for an IRS audit. IRS looks for unrepresented tax filers.

I don't know what else to tell, but you are correct, this board is usually for tax pro to tax pro. We do get someone like yourself occasionally and always refer the to a local tax pro. If you choose to keep your personal & business issues private, thats fine. It will be between you and the IRS.



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