Net Investment Income Form 1065

[Sabre]

I have a real estate partnership with many members who are not active. It shows a profit from rentals and some interest income. At the wed. Edward Jones seminar they referred to line 20c on the K-1 and a code Y. This apparently subjects the income reported on this line to the net investment tax. Creative Solutions tax is not figuring this automatically so I am hesitant to do manual input. What if anything should be on this line from my specific situation?

[DaveinTexas]

Hmmm

I didn't even know this code exisited but I really don't like it. If the preparer of the 1065 places that code in the K-1, that may automatically characterize the income as passive (subject to the NII Tax).

It sounds like your software is a bit more intuitive and is letting you make the determination of whether or not this income really is subject to the NII Tax. I don't think this is a design flaw, rather it is may be setup with the intent of allowing the tax professional make the final decision.

Your software probably (I don't know about CS, I use Drake) is waiting for a prompt from you to allocate the income correctly. Of course, this means you must know what type of income is derived from this partnership and your client's level of participation in the activity. Sounds like you already nailed down the income source as Rents and Interest income, which sounds like NII to me unless the client is a RE Professional or the rents are part of a Section 162 trade or business and the client materially participates.

[mastertaxguy]

When is a NIIT not a NIIT....

Not sure that Code Y in box 20 is dispositve of the NIIT issue: it may be, it may not be.

If the taxpayer is liable for NIIT, what is in Box 20 of the 1065 K-1, code Y, will be part of the computation. However, other things on the K-1 may be NIIT.

The "official not substantial authority" IRS instructions for 1065 K-1, box 20, code Y, provide

Code Y. Net investment income. The partnership may use this code Y to report information you may need to determine your net investment income tax under section 1411, including information regarding income from controlled foreign corporations (CFCs) and passive foreign investment companies (PFICs) the stock of which is owned by the partnership. Any information that is not provided elsewhere on Schedule K-1 (or an attachment to Schedule K-1) is provided using code Y. For CFCs and PFICs that you treat as qualified electing funds (QEFs), the information that is relevant to you will depend on whether you, the partnership, or a lower-tier entity has made an election under Regulations section 1.1411-10(g) with respect to the CFC or QEF. For example, if the partnership made an election under Regulations section 1.1411–10(g) for a CFC the stock of which is owned by the partnership, and the relevant income and deduction items derived from that CFC are reported elsewhere on the Schedule K-1, then you will not need the information provided in code Y to complete your Form 8960.

This may be a bookkeeping/accounting issue for us/you as the preparer of the 1065. See TTB 6-6. I do not see the issue your raise, that being by you entering code Y you are making everying passive or subjecting the partner(s) to NIIT if not otherwise applicable.