How to correctly report Form 1065 Line 14c gross nonfarm income for limited partners

Thanks for the explanation. I'm using ProSeries for our partnership return and can't find where to override this. Does anyone know specifically where in ProSeries I can adjust this? Our partnership has 3 general and 2 limited partners.

In ProSeries, you'll need to go to each individual partner's K-1 and look for the "Self-Employment" section or tab. There should be a way to indicate whether each partner is a general or limited partner, which controls how the software handles self-employment income items. Once you've properly classified your partners, check each K-1 again. If the amounts are still flowing incorrectly, you might need to use the override function. Look for a button or right-click option that says "Override" when you're on the specific line item in the K-1. If you still can't find it, sometimes there's a separate allocation worksheet for items that need special allocation. Check under the partnership menu for special allocations or income allocations.

Does taxr.ai work with all tax software? I'm using Drake and having similar issues with other allocations, not just the nonfarm income thing.

I'm a bit skeptical about these AI tax tools. How accurate is it really? The IRS instructions are complicated and I'd worry about getting bad advice.

It works with any tax software because it's more about understanding the rules correctly than integrating with specific software. I've used it with both UltraTax and Lacerte. The interface lets you ask follow-up questions about how to implement the correct treatment in your specific software. As for accuracy, I was skeptical too initially. What impressed me is that taxr.ai directly references the relevant IRS publications and Form 1065 instructions. It's not giving its own interpretation - it's showing you exactly what the official guidance says and then helping you apply it correctly. I've had my work reviewed by our firm's partnership specialist, and he confirmed everything was done correctly.

Wait, how does this actually work? The IRS phone lines are notoriously impossible to get through. Are they somehow holding your place in line?

Sounds fishy. Why would the IRS allow a third party to bypass their phone queue? I've had to wait hours or sometimes days to speak with someone.

They use an automated system that waits on hold for you. When an IRS agent picks up, their system calls you and connects you directly to the agent. You don't have to wait on hold yourself - their system does the waiting for you. It's not bypassing the queue - you're still in the same line as everyone else. The difference is you don't have to waste your time listening to the hold music for hours. You go about your day, and when an agent is available, you get a call. It's completely legitimate and doesn't involve any special access or relationship with the IRS.

Thank you for mentioning this! I just checked and realized I had accidentally coded one of our limited partners as "GP" instead of "LP" in Box I. When I fixed this, the software automatically stopped flowing the gross nonfarm income to that partner's K-1. So it seems like the partner code is what controls this in my software. Would there be any other boxes besides 14c that are affected by the partner designation? I want to make sure I'm getting everything right.

Glad that fixed the issue! Yes, there are several other items that are affected by the partner designation. The main ones are: Box 14A (Net earnings from self-employment) and Box 14B (Gross farming or fishing income) are also typically not reported for limited partners, as these items relate to self-employment tax which limited partners are generally exempt from. Also check Box 14E (Health insurance premiums) and Box 13W (Section 179 deduction) which sometimes require special handling for limited partners. Limited partners might have different rules for suspended losses and at-risk limitations too. I'd recommend reviewing all these sections on your limited partners' K-1s now that you've fixed the designation code.

The partnership agreement doesn't override tax law on this issue. Whether someone is subject to self-employment tax is determined by the tax code, not the partnership agreement. Limited partners are generally exempt from self-employment tax on their distributive share of income under IRC Section 1402(a)(13), regardless of what the partnership agreement says. However, guaranteed payments to limited partners for services are still subject to SE tax. If your client wants all partners to be subject to SE tax, they might need to restructure so that everyone is a general partner, or consider a different entity type altogether.

This is really helpful - thank you for clarifying the distinction between distributive share income and guaranteed payments. I think this confusion might be part of what's causing issues for people. Just to make sure I understand correctly: if a limited partner receives a guaranteed payment of $5,000 for bookkeeping services they provided to the partnership, that $5,000 would go in Box 4 of their K-1 and would be subject to self-employment tax, but their distributive share of the partnership's ordinary business income would not be subject to SE tax and should not appear in Box 14c. Is that right? Also, when you mention real estate partnerships being treated differently - are you referring to the material participation rules under Section 469, or is there something else specific to gross nonfarm income reporting for real estate partnerships?

Yes, you've got it exactly right! The $5,000 guaranteed payment for bookkeeping services would go in Box 4 and be subject to SE tax, while their distributive share stays out of Box 14c. For real estate partnerships, I was referring to both the material participation rules and the fact that rental income is generally not subject to self-employment tax regardless of whether you're a general or limited partner (unless you're a real estate professional). So even general partners in real estate partnerships typically wouldn't have rental income flowing to Box 14c - it would stay in Box 1 as ordinary income but not be subject to SE tax. The gross nonfarm income in Box 14c is really meant for active trade or business income where the partner would be subject to SE tax if they were a general partner. Real estate rental activities are usually passive by nature, so they don't fall into this category.

Great question about the rental income! For farming partnerships, the treatment of rental income in Box 14c depends on whether the rental activity is considered part of the active farming business or a separate passive rental activity. If the partnership is actively engaged in farming operations and the land rental is incidental to the farming business (like renting out excess land while still farming the majority of their property), then the rental income might be considered part of the farming business and subject to SE tax for general partners. However, if the land rental is truly a separate passive activity where they're just collecting rent without active farming involvement, then it would typically not be subject to SE tax even for general partners and shouldn't flow to Box 14c. The key factors are: 1) Is the rental activity integrated with the active farming operations? 2) Does the partnership provide substantial services to the tenant farmers? 3) Is the rental on a crop-share basis where they participate in farming decisions? I'd recommend reviewing the partnership's activities carefully and possibly consulting the Section 1402(a)(1) regulations for farming partnerships to make sure you're treating this correctly.

This checklist is exactly what I needed! As someone new to partnership taxation, I've been feeling overwhelmed by all the different allocation rules. Your step-by-step approach makes it much more manageable. I'm curious about step 3 - when you mention guaranteed payments in Box 4, does this apply even if the limited partner is providing minimal services? For example, if a limited partner receives $1,200 annually just for attending quarterly partnership meetings and reviewing financials, would that still need to go in Box 4 and be subject to SE tax, or is there a de minimis threshold? Also, are there any other common boxes that get misallocated between general and limited partners that should be on this checklist? I want to make sure I'm not missing anything obvious. Thanks for sharing your experience - it's really helpful to hear from someone who's been through this learning curve!