Annualizing K-1s

[Jill Graff]

When annualizing for the underpayment penalty (Form 2210), can you put all of the income from K-1s in the 4th quarter? There is no way most taxpayer's can know what the K-1 figures will be before the K-1 is sent out.

Thanks in advance.

[Lion]

I'm just guessing here, but I think not. I think when you can't determine the dates, you have to divide evenly between the four quarters.

[Gary2]

I'm just guessing here, but I think not. I think when you can't determine the dates, you have to divide evenly between the four quarters.

Since the "quarters" aren't really 4 three-month quarters, wouldn't you divide based on the length of each period (3 mos, 2, 3, 4)?

[Gary2]

When annualizing for the underpayment penalty (Form 2210), can you put all of the income from K-1s in the 4th quarter? There is no way most taxpayer's can know what the K-1 figures will be before the K-1 is sent out.

I suppose that's true for a partnership or S-corp K-1, leading to the equal division discussed above. But if it's a trust paying out investment income as it's received, then couldn't you take the income as received, with items like the trust expenses divided evenly? I'm speculating - I don't know whether that's actually permitted, particularly since the decision to make distributions as the income is received might be at the trustee's discretion. But if allowed, it could be beneficial if the trust is invested in mutual funds that do large Dec. distributions.

[JoshinNC]

I have always included the K-1 income in Q4

Not yet had the IRS adjust those calculations.

[Lion]

If you know when your client received the income (as opposed to a partnership not distributing, for instance) then use those dates. I would then prorate the expenses in the same ratio as income to those dates, unless expense dates are known (the purchase of equipment, for instance).

I never tried annualizing except when the client had unusual income late in the year, sold a house or stocks or received a bonus or whatever. How can you do it if you don't know the dates? What if his bonus was received in January? Won't that hurt him instead of help?

[Lion]

Instructions for line 1 state: Include your share of partnership or S corporation income or loss items for the period.

Also, read Pub. 505, chapter 4, which includes a completed example.

Estates and trusts, see Notice 87-32.

When all else fails, read the instructions!

[DaveO]

If it's a publically traded company I look at when distributions were paid. If it's closely held I usually will spread it out by month unless I have documentation that the income was not earned uniformly.