NJ 1065 For Tiered Partnership

[Night Owl]

I am working on a 2023 Form NJ 1065 for a tiered partnership and am getting a strange result.  In 2022, the starting point for the NJ 1065 for a tiered partnership was to fill out Schedule A, report the federal figures in column A, then eliminate any amounts from tiered partnerships in Column B and enter the difference in Column C, which represented income earned directly from the partnership.  Column C then became the starting point for lines 1-11 of the NJ 1065.  The NJ K1 amounts from tiered partnership was then added to this figure and this is the income which was reported to partners on their NJ K1s in column A.  This makes sense since partners are only taxed on tiered partnership amounts that have been adjusted for NJ law (such as decoupling from bonus depreciation, etc.)

In 2023, the instructions changed (which LaCerte is following) and indicate that the 1065 lines 1-11 should pull from Column A of Schedule A.  This amount represents the federal 1065 schedule K figures and includes all income from tiered partnerships.  This makes no sense to me since ultimately, this is the income figure that is reported in Column A of the NJ K1.  I am only filing the NJ 1065 because the partnership has NJ resident partners but it has no NJ source income.  The NJ K-1s the partnership received are lower than the federal K1 figures due to depreciation being higher for NJ than for federal.  However, now in Column A of the NJ K1, the full federal figures are being reported instead of the NJ K1 amount passed through by tiered partnership.  This seems wrong and unfair.  The NJ resident partners will now be reporting income from partnerships on their NJ 1040s which do not reflect the NJ K1s received from the underlying partnerships in the tier.  

I'm not sure if I am explaining this clearly, but has anyone else experienced this?  Am I misunderstanding the new instructions for tiered partnerships for 2023?  The NJ K1s received by the partnership from underlying partnerships seem irrelevant with these new instructions as the NJ K1 amounts are subtracted and added back on the NJ 1065 on lines 18 and 21, which basically results in federal figures being reported by the NJ resident partners on their 1040s which does not seem correct.

[Jackiei99]

You are totalling making sense and I am having the same problem in ProConnect Tax Online (same platform as Lacerte)  The 2023 NJ 1065 page 1 doesn't make sense, it ignores Column C of NJ Schedule A Part I, and doesn't account for federal/state tax differences in tiered partnership income from NJ K-1.

[Night Owl]

After numerous phone calls to the NJ Tax Practitioner Hotline to explain the problem, they finally gave me the following answer after presumably checking with the department who made the change - "If the amounts from the lower tiered partnership include state modifications, then the difference between the state and federal amounts will be entered into line 13b (if the state amount is a positive difference) or line 15e (if the state amount is a negative difference), respectively."

This does fix the problem, but it would have been nice if the instructions to Form 1065 indicated this.  LaCerte is not handling the adjustment automatically (probably because the adjustment is not addressed in the instructions) so it is necessary to make a manual adjustment. 

Hope this helps.

[Jackiei99]

Hi. Calling them was going to be my next step and what you mentioned seems to be the only likely work around for now. Thank you for calling them already.

It reminds me of the situation when the PTE-100 first came out. Lol. Hopefully New Jersey will take this problem into consideration for next year forms and instructions. 

Thanks again! 

[Night Owl]

In response to questions NJ received on this topic, the following was posted to their website.  The representative I spoke with previously called to let me know. So now the informal answer I previously received is official. 

How to Report Federal and State Differences on 2023 NJ-1065 from K-1s Received from Lower-Tier Partnerships

Some practitioners and taxpayers have asked about how to report the federal and State differences from federal K-1s and NJK-1’s received from lower-tier partnerships on the 2023 NJ-1065.

Please be advised that Lines 13b and 15e on the 2023 NJ-1065 are for reporting “other modifications” that were not accounted for elsewhere that are a State addition or deduction to income, respectively.

The corresponding difference between the lower-tier’s federal K-1 and NJK-1 is reported on line 13b if the net NJK-1 income amounts from the lower-tier partnerships are greater than the lower-tier partnerships’ federal K-1s. The corresponding difference between the lower-tier’s federal K-1 and NJK-1 is reported on line 15e if the net NJK-1 income amounts from the lower-tier partnerships are less than the lower-tier partnerships’ federal K-1s.

[Jackiei99]

Thanks. I am glad they put out some information, because a lot of returns coming off extension will probably have incoming K-1s. I actually just received an email back from the regulations department with same answer too. So seems like they are on this!

[Night Owl]

Too bad they didn't think of this before they changed the instructions and made a mess of things!  Definitely wasted a number of hours on this one.  Glad they addressed it though.