Partnership Income/Earned Income Credit

[rpittman]

I entered K-1 income from an LLC for a client who normally qualifies for the earned income credit. The amount entered exceeded the $11000 threshold for investment income, but was not listed on the EIC worksheet and therefore allowed the credit. IRS disallowed the credit and requested an amended return, but can't get the program to handle correctly. 

[Just-Lisa-Now-]

If IRS disallowed the credit and the outcome is now correct, what's there to amend?

[rpittman]

I thought the same thing but when client talked to them by phone, that's what they wanted. I advised the client to pay the additional tax billed on the notice, without submitting an amended return, until I could figure out how to get the program to handle correctly, if in fact an amended return was needed. Regardless of the outcome, am I missing something on how to enter the information, so the K-1 income is shown on the investment income worksheet and ultimately exceeds the $11,000 threshold?

[Accountant-Man]

What kind of income is it, and what is the owner's role in the business?

[TaxGuyBill]

What kind of K-1 is it?

Which box of the K-1 is the "investment" income in?

If it is Box 1 of a 1065-K-1, does Box 14 have an amount in it?

[rpittman]

It's a K-1 from a partnership (Form 1065) in which the taxpayer is a 50% owner. The investment income is "Ordinary Business Income" from box 1. Box 14 contains the same amount coded with "A" (Net earnings from self-employment) and Code "C" (Gross non-farm income) which obviously is a higher amount. 

[sjrcpa]

That's not investment income. That's Earned Income.

[rpittman]

Thanks. I used the term investment because it's the name of the smart worksheet where other types of income are listed and the total is referred to as total investment income to which the $11,000 limitation is applied. This is a separate worksheet inside the EIC worksheet. 

I would think the earned income from the K-1 would be shown on the worksheet as partnership income, which would result in the total exceeding the limitation so they would not qualify for the EIC. The only input box is for adjustments. The other fields for different types of income are automatically calculated with the exception of a couple. 

[TaxGuyBill]

The Partnership income is NOT part of the $11,000 limit which is why it is not on the worksheet.

Have you read the IRS notice carefully?  Does it specifically state WHY the Earned Income Credit was disallowed?  I suspect you may be looking at the wrong thing for why it was disallowed.