Limited partner and self-employment tax

[Kimmyjack]

The question is not whether a limited partner is subject to self-employment tax, but how to get self-employment tax to calculate in proseries for a limited partner that is active in the business.  I do not want to change to general partner and do not want to have guaranteed payments.  Any options or ideas?

[rbynaker]

Does an amount in K-1 Box 14 trigger SE tax?

[Kimmyjack]

There is a zero in that box on Schedule K because the K-1 worksheet shows him as a limited partner.

[Just-Lisa-Now-]

I thought limited partners cant have an active role in the business.
Limited partners are not subject to SE taxes.

[Kimmyjack]

I would agree with you.  I have a new client who is listed as a limited partner on the tax return and is in a limited partnership.  He is 100% active in the business.  So by definition, he is not a limited partner, but is shown as such in the legal documents.  Based on research with court cases, the IRS has won where a person is involved in the business, but listed as a limited partner and not paying self-employment taxes.  I have received K-1's on different clients where they are listed as limited partners, but still have self-employment taxes.  Based on my research, I believe he should be paying self-employment taxes because of his involvement, but I do not want to change his status on the return as a limited partner.  It doesn't appear that Proseries will allow you to do that unless you override or make him a general partner.  

I was hoping to avoid explaining all that with my first comment......"I am not asking if a limited partner is subject to self-employment tax"., but rather if the system will allow you to do it in some way.

If you have research to the contrary of what I listed, please share.

[sjrcpa]

Limited Partner or Limited Liability Company Member?

I haven't seen a limited partnership in years.

[Kimmyjack]

It is a limited partnership with an S-corp as the general partner. I didn't set it up.  I just inherited it.

[dascpa]

On a 1065 K-1 if the person is in an active business (as opposed to for example a rental real estate business) there should be both an entry for net earnings from self-employment and separately gross income.  To fix your problem in the K-1 Worksheet on the 1065 you have to mark "General".  That's the only way for SE to activate.  It does not make them the General Partner, it just activates the SE.

[BobKamman]

According to the instructions,

"whether a partner qualifies as a
limited partner for purposes of
self-employment tax depends upon whether
the partner meets the definition of a limited
partner under section 1402(a)(13)."

If your client calls himself a limited duck because he doesn't want to pay money to creditors, but he acts like a general duck, then I think the courts (and IRS) would see through his status in the pond, regardless of how he quacks.  

[BobKamman]

When some of the 87,000 IRS enforcers carrying  AK-47s show up in jackboots at your client's door, they probably will have first reviewed this IRS training material:

https://www.irs.gov/pub/irs-utl/pst_c_366_01_01_01.pdf

and particularly the material on pages 14 et seq about the Renkemeyer decision from Tax Court.  As far as whether tax software should require an override for application of this situation, it gets back to "don't charge me for the cost of developing your special features that few other people will use."

[Kimmyjack]

Thank you for your thoughts and comments.  The question was not if he was subject to it.  I agree with all of you that he is and he is ok with that.  I just wanted to be able to get the program to calculate it without changing his status.  I think that could open up a lawsuit possibly and if they want to determine he is a general partner in the courts, that is ok with me.  I just don't want to open that up.  Only one of you answered my question and the rest of you took the position that we were trying to get away with something that we were not.  If you read my question, I was asking how to get the program to calculate it, not how to get out of paying it.

There was a comment about not asking the program to calculate something that only a few will use.  I am surprised that more of you have not run into this situation.  I have seen it calculated on some of the K-1's that I get from clients who are limited partners and I do not think this is an isolated incident.

[Accountant-Man]

To get SE tax calculated on income that is not automatically added, go to the Sch SE adjustments worksheet. Input on line 6, Other SE non-farm profit or loss.

I do this when I see a 1099-NEC but don't want to add a Schedule C. Some clients don't want a Sch C, but SE tax is required.

Some clients say that they don't have a business, so no Sch C.

[sjrcpa]

I think OP wants to know how to get it to show as SE income on the K-1; not how to subject it to SE tax on the 1040.

[dkh]

just wanted to be able to get the program to calculate it without changing his status.

Marking the K1 as General instead of Limited within the 1040 program K1 entry  is NOT going to change his status with the IRS.  Only the F1065 K1 filing would do that.   

do like @dascpa suggested - change it to General so the  program will calculate the SE tax - problem solved.

[BobKamman]

I think he's preparing a 1040, not a 1065.  

And now that he has called attention to the problem, IRS will probably demand that before they approve software it has to include a box to check for "Is taxpayer not a limited partner for purposes of SE tax."  After all, he says lots of K-1 recipients would be affected.  

[BobKamman]

So where do you report the 1099-NEC for income tax purposes -- Schedule 1, Line 8z ?  I'm not sure that won't generate a CP 2000, especially if there are other income items on Schedule 1.  

If my clients tell me they don't have a business, I tell them that I do, and I don't want it to be shut down by a preparer project because IRS thinks my clients tell me how to run it.  

[Kimmyjack]

I am preparing a 1065, as I have seen other K-1's reported this way.  If you look at the cases, they do not say they are not a limited partner, but they do say that they are subject to SE.  I didn't call attention to the problem, except the problem that the software does not possibly work correctly in this situation.  If you do any research, you will see that the problem has been out there for a while.  

[BobKamman]

For a 1065 preparer, I see this as an MYOB situation.  The issue of whether the partner activity rises to the level requiring payment of self-employment tax depends on all the facts and circumstances.  Let the partner deal with it.  Or at least first check with your malpractice insurer, if someone files a claim because they don't like the idea of sending IRS $20,000 based on your "audit."

[Kimmyjack]

Apparently you don't even read my responses.  No one is trying to get out of paying the self-employment tax.  I am simply trying to get it on the return.  I also prepare the 1040.  I never asked for your opinion on the situation, only how to get it on the return.

[dkh]

Oh @Kimmyjack , in this forum the entree of information always comes with a side dish of opinion
That's what makes it interesting and delicious

[TaxGuyBill]

---

@Kimmyjack wrote:

There is a zero in that box on Schedule K because the K-1 worksheet shows him as a limited partner.

---

I think your answer is to override that, and put the proper amount in Box 14.

[FinchCPA]

A little late to the party but I have the same issue and have a solution for it that worked, without changing the "Limited" partner box

Go to Schedule K, line 14A for Self Employment Earnings  Double click the number that takes you through to the "Net Self-Employment Earnings Worksheet".

One line 4d, you can type in a Special allocation code and an amount.  If you put that same Special Allocation code (like a "1") on the partner you want to have SE tax and a ratio %, it will allocate the amount you type on this form to his K1 as self-employment earnings.  The amount is usually the same as the amount of ordinary income on line 1

[BobKamman]

Double click on the right line?  Why does this remind me of how to win at Super Mario?