Qualified tips deduction under OBBBA on form 1065 schedule K-1

[ChiHoang]

Anyone know where to enter qualified tips deduction under OBBBA on form 1065 schedule K-1

[Terry53029]

You don't report on 1065. Employees will report on their 1040 (either 1099 or W2)

[ChiHoang]

These tips are from partnership tax form 1065, not from 1099 or W-2

[sjrcpa]

You're saying the partnership received tips on behalf of partners?

[ChiHoang]

Yes, where  do partners report tips on form 1065 sch K-1 and on form 1040 sch 1-A ?

[ChiHoang]

They are not the same.

One is where to enter tips deductions on form 1065

The other one is where to enter tips deduction on form 1040 for partners receiving tips from form 1065

[sjrcpa]

On the K-1s tips should be included in Guaranteed Payments since they are for services.

Then I guess the K-1s should have a statement saying $XXX of the Guaranteed Payments are tips.

On the 1040, enter the same as any other tips.

[TaxGuyBill]

As of now, I don't think there is a way.

Tips the Partnership itself are not deductible.

Tips to the Partners would need to somehow start off on a 1099 (probably to the Partnership), but there has been no guidance for that and no way for the Partnership to pass it along to the Individual.

In short, with the current guidance, it isn't a deduction.  Perhaps whenever Final Regulations are made that could change, but as of now, I don't see anything that indicates it can be deductible.

[ChiHoang]

Tips to partners are already included in partnership income which is allocated in K-1, part III line 1 Ordinary business income (loss). So they should not be in guaranteed payments to partners.

These tips are qualified tips deduction under OBBBA, my question is how do we pass them to partners' individual tax returns 1040. 

On 1065, I enter partners' tips on K-1 line 13 (Z) as other deductions. On 1040, I enter partners' tips on K-1 line 13 (Z), but don't see any impact on 1040 as income deduction. Any idea ? Thanks   

[TaxGuyBill]

As I said before, here is no guidance from the IRS for how tips can pass through to the Partner, or even if they can do that.  Because there is no guidance, the tax software isn't going to do it unless you override the software.

As a side note, although I haven't researched it, if a tip is specifically given to one person, it doesn't make sense that it should be in Box 1 of the K-1 (Guaranteed Payments or some other method seems more logical to me).

[Skylane]

 my original notes from BBB say that owners of a partnership are not allowed a deduction for no tax on tips. Deductions are for w2 employees and sole proprietors 

ya just can’t make everyone happy….

[ChiHoang]

Thank you all for your insights

[JanieE]

This is incorrect.  1065's have nothing to do with W2s. Many self employed people, ma and pa businesses, use a 1065 as a way of reporting their business income.

[JanieE]

I believe you are incorrect.  Many of the trades who are "sole proprieters" use a 1065 and pass income through to partners (often husband and wife) through the K-1s.  So to say that just because you use a K-1 to pass income over to your 1040 then you cannot deduct tips is incorrect.  Our trade happens to be on the table of allowable occupations where the tip deduction is allowed.  There is a misconception that folks who are in partnerships and use 1065s are "big business", and that is completely false.

[Skylane]

@JanieE 

Partners in a partnership filing Form 1065 generally cannot directly deduct tips received as a personal deduction on Form 1040. Instead, tips are considered income to the partnership, which are then passed through to partners via Schedule K-1

While 2025 tax law allows a $25,000 deduction for qualified tips, this is for employees, not partners reporting self-employment income. 

This is the reason the software does not allow the tips deduction on a 1065 or k1 (for the owners) though tips may be passed along to employees trough wages or a 1099NEC. 

This forum is for professional preparers, not business owners trying to fit a square peg into a round hole

[TaxGuyBill]

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@JanieE wrote:

So to say that just because you use a K-1 to pass income over to your 1040 then you cannot deduct tips is incorrect.  

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The law clearly says that individual person must receive a W-2 or a 1099 that includes the tip.

While it is possible the IRS could create a Regulation that allows the qualified tip to be passed through via a K-1, that has not happened as of now.  Unless that does happen, the law clearly says the "individual" needs to receive a W-2 or 1099 in order to get the tip deduction.

[birch]

There was an IRS notice 2025-69 that gave relief for reporting tips on W-2s and 1099s for 2025 becasue they were not going to update the forms that late in the year.  While they did not explicitly say that you could report without the forms in 2025, I do believe they implied it.  Read the notice and this might help you decide if their is leeway to deduct without the tips on a report.

[TaxGuyBill]

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@birch wrote:

IRS notice 2025-69 ...  While they did not explicitly say that you could report without the forms in 2025, I do believe they implied it. 

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They did explicitly state that 1099s are required.  Starting on the bottom of page 16.