Level 5

Question

Limited partner and self-employment tax

Forum|Forum|3 years ago
August 25, 2022
8 replies
30 views

The question is not whether a limited partner is subject to self-employment tax, but how to get self-employment tax to calculate in proseries for a limited partner that is active in the business. I do not want to change to general partner and do not want to have guaranteed payments. Any options or ideas?

ProSeries Professional

This topic has been closed for replies.

rbynaker

Level 13

Does an amount in K-1 Box 14 trigger SE tax?

K

KimmyjackAuthor

Level 5

There is a zero in that box on Schedule K because the K-1 worksheet shows him as a limited partner.

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TaxGuyBill

Level 15

@Kimmyjack wrote:

There is a zero in that box on Schedule K because the K-1 worksheet shows him as a limited partner.

I think your answer is to override that, and put the proper amount in Box 14.

Just-Lisa-Now-

Intuit Community Champion

I thought limited partners cant have an active role in the business.
Limited partners are not subject to SE taxes.

♪♫•*¨*•.¸¸♥Lisa♥¸¸.•*¨*•♫♪

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KimmyjackAuthor

Level 5

I would agree with you. I have a new client who is listed as a limited partner on the tax return and is in a limited partnership. He is 100% active in the business. So by definition, he is not a limited partner, but is shown as such in the legal documents. Based on research with court cases, the IRS has won where a person is involved in the business, but listed as a limited partner and not paying self-employment taxes. I have received K-1's on different clients where they are listed as limited partners, but still have self-employment taxes. Based on my research, I believe he should be paying self-employment taxes because of his involvement, but I do not want to change his status on the return as a limited partner. It doesn't appear that Proseries will allow you to do that unless you override or make him a general partner.

I was hoping to avoid explaining all that with my first comment......"I am not asking if a limited partner is subject to self-employment tax"., but rather if the system will allow you to do it in some way.

If you have research to the contrary of what I listed, please share.

sjrcpa

Level 15

Limited Partner or Limited Liability Company Member?

I haven't seen a limited partnership in years.

The more I know the more I don’t know.

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KimmyjackAuthor

Level 5

It is a limited partnership with an S-corp as the general partner. I didn't set it up. I just inherited it.

dascpa

Level 11

On a 1065 K-1 if the person is in an active business (as opposed to for example a rental real estate business) there should be both an entry for net earnings from self-employment and separately gross income. To fix your problem in the K-1 Worksheet on the 1065 you have to mark "General". That's the only way for SE to activate. It does not make them the General Partner, it just activates the SE.

BobKamman

Level 15

According to the instructions,

"whether a partner qualifies as a
limited partner for purposes of
self-employment tax depends upon whether
the partner meets the definition of a limited
partner under section 1402(a)(13)."

If your client calls himself a limited duck because he doesn't want to pay money to creditors, but he acts like a general duck, then I think the courts (and IRS) would see through his status in the pond, regardless of how he quacks.

BobKamman

Level 15

When some of the 87,000 IRS enforcers carrying AK-47s show up in jackboots at your client's door, they probably will have first reviewed this IRS training material:

https://www.irs.gov/pub/irs-utl/pst_c_366_01_01_01.pdf

and particularly the material on pages 14 et seq about the Renkemeyer decision from Tax Court. As far as whether tax software should require an override for application of this situation, it gets back to "don't charge me for the cost of developing your special features that few other people will use."

K

KimmyjackAuthor

Level 5

Thank you for your thoughts and comments. The question was not if he was subject to it. I agree with all of you that he is and he is ok with that. I just wanted to be able to get the program to calculate it without changing his status. I think that could open up a lawsuit possibly and if they want to determine he is a general partner in the courts, that is ok with me. I just don't want to open that up. Only one of you answered my question and the rest of you took the position that we were trying to get away with something that we were not. If you read my question, I was asking how to get the program to calculate it, not how to get out of paying it.

There was a comment about not asking the program to calculate something that only a few will use. I am surprised that more of you have not run into this situation. I have seen it calculated on some of the K-1's that I get from clients who are limited partners and I do not think this is an isolated incident.

dkh

Level 15

just wanted to be able to get the program to calculate it without changing his status.

Marking the K1 as General instead of Limited within the 1040 program K1 entry is NOT going to change his status with the IRS. Only the F1065 K1 filing would do that.

do like @dascpa suggested - change it to General so the program will calculate the SE tax - problem solved.

Accountant-Man

Level 13

To get SE tax calculated on income that is not automatically added, go to the Sch SE adjustments worksheet. Input on line 6, Other SE non-farm profit or loss.

I do this when I see a 1099-NEC but don't want to add a Schedule C. Some clients don't want a Sch C, but SE tax is required.

Some clients say that they don't have a business, so no Sch C.

** I'm still a champion... of the world! Even without The Lounge.

sjrcpa

Level 15

I think OP wants to know how to get it to show as SE income on the K-1; not how to subject it to SE tax on the 1040.

The more I know the more I don’t know.

BobKamman

Level 15

I think he's preparing a 1040, not a 1065.

And now that he has called attention to the problem, IRS will probably demand that before they approve software it has to include a box to check for "Is taxpayer not a limited partner for purposes of SE tax." After all, he says lots of K-1 recipients would be affected.

F

FinchCPA

Level 2

A little late to the party but I have the same issue and have a solution for it that worked, without changing the "Limited" partner box

Go to Schedule K, line 14A for Self Employment Earnings Double click the number that takes you through to the "Net Self-Employment Earnings Worksheet".

One line 4d, you can type in a Special allocation code and an amount. If you put that same Special Allocation code (like a "1") on the partner you want to have SE tax and a ratio %, it will allocate the amount you type on this form to his K1 as self-employment earnings. The amount is usually the same as the amount of ordinary income on line 1

BobKamman

Level 15

Double click on the right line? Why does this remind me of how to win at Super Mario?

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