Technical topics regarding tax preparation.
Line 16B of K-1 and Guaranteed Payments
If a partnership has $100,000 of gross income and a $50,000 deduction for guaranteed payments, my understanding is that the Schedule K-1 issued to that partner should show his share of the partnership's $100,000 gross income on Line 16B (and not include the guaranteed payment).
Let's assume the partner has a 75% ownership. His Line 16B should therefore show $75,000.
Now we're filling out his 1116, Line 3e, Gross Income from All Sources. He reports $75,000 of income on Line 1 from the partnership and $50,000 of guaranteed payments on his return, so his 'gross income' is $125,000. But if you look at the instructions to the 1116 you should use Line 16B of the Schedule K-1 to populate Line 3e of the 1116. If we do this then the partner's gross income from all sources only shows as $75,000.
What happens to the guaranteed payments, and/or what am I missing?
Consider guaranteed payment a method of allocating net income. They do not increase gross income of the partnership.
OP unclear on facts. Is 100k "gross income" before or after GP of 50k? For that matter, is it before or after business expenses other than GP? I assume that we have sales of A, GP of 50, other expenses of B, leaving line 22 of the 1065 with 100k. His distributive share of the partnership's income is 50k GP and 75k distributive share of line 22. His K-1 would have 75k on line 1 and 50k on line 4. Line 16b would be 125k. That is his gross income from all sources. So now I ask, what am I missing?
My intention was for the $100k to be gross income BEFORE guaranteed payments. So you're right I screwed up.
If we assume $100k is gross income BEFORE guaranteed payments and GP are $50k, then partnership's net income is $50k and partner's 75% share is $37,500. His K-1 will report $37,500 on Line 1 and GP of $50k on Line 4. So the partner's individual gross income is $87,500.
However, i'm confused as to 16B of the K-1. 16B is the partnership's gross income, not that specific partner's gross income. Guaranteed payments of the partnership are an expense of the partnership and not a component of income earned at the partnership level. Therefore I would think that this partner's gross income on Line 16B should be $75k, which is 75% of the partnership's $100,000 gross income.
16b of Schedule K of 1065 is partnership's gross income.
There is no 16b of K-1.
16 of K-1 is partner's gross income from all sources. That amount in your new facts is 87,500.
Here is 1116 explanation of line 3e.
Line 16, code B, or line 14, code B—Gross income from all sources. Combine your distributive share of “gross income from all sources” with all of your other gross income and enter the total on line 3e. “Gross income from all sources” is a constant amount (that is, you will enter the same amount on line 3e of all Forms 1116 that you file).
What am I missing? Guya can tell us.
The partner's allocable share of Line 16B of Schedule K flows to Line 16B of that partner's Schedule K-1. There's no denying that. On the instructions to Schedule K-1, Line 16B is 'gross income from all sources' and Line 16C is gross income sourced at partner level. Form 1116 Line 3e says to use the amount from Line 16B, but 16B is the partnership's gross income, which does not include guaranteed payments. This is the source of my confusion.
I have even tested this same set of facts in 3 different softwares and in each scenario Line 16B of the partner's K-1 is populating as $75,000, which is 75% (his allocable share) of the partnership's gross income, not including guaranteed payments. Software has been wrong before but it seems clear to me that 16B should not include guaranteed payments but the 1116 instructions reference Line 16B for populating Line 3e of the 1116.
All along I have assumed the GPs that you are dealing with are for services. If so, they are sourced at the place of performance, not at the partnership level.
Also, for simplicity let's assume there are no gross income items of the partnership that are required to be reported separately. Again, in your facts, the gross income of the partnership would be the 50k left after GP deduction, and his share would be 37,500, which is sourced at the partnership level.
So now, what goes on what line of what form?
Could this be your issue? Gross income of a partnership is not the top line (e.g., sales) but the bottom line (i.e., line 22 of page 1). See section 702(c) for definition of gross income of partner. Also see section 61(a)(13).
Nilodop wrote:Could this be your issue? Gross income of a partnership is not the top line (e.g., sales) but the bottom line (i.e., line 22 of page 1). See section 702(c) for definition of gross income of partner. Also see section 61(a)(13).
Both section 702(c) and section 61(a)(13)
(12) make reference to the "gross income" of a partnership. How are you concluding that "gross income of a partnership" means "net income of a partnership"?
And if the gross income from a partnership with respect to a partner can be found simply by adding up all of the income figures on the K-1, then what is the point of adding box 16 code B, "Gross income from all sources" to the K-1, and why is it always more than the sum of those income figures?
Example: https://ir.kkr.com/static-files/fe9dbc9 ... 610#page=5
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