Common questions about Schedule K-1 overrides for Fiduciary returns

Common questions about Schedule K-1 overrides for Fiduciary returns

Table of contents:

How to set allocation options in Lacerte for a 1041 K-1

There are two ways to allocate deductions (depreciation, depletion, and credits) in the fiduciary module. Deductions and credits can be maintained in the fiduciary entity or allocated to the beneficiaries. User options will define the default method on these allocations.

To modify these options globally:

1. From the Settings menu, select Options.
2. Select the Tax Return tab.
3. Select K-1 Distribution Options from the left sections menu.
4. Select either Maintain in Trust or Prorate between Beneficiary/Trust in the following dropdown items:
   • Depreciation
   • Depletion
   • Credits

To change the options for a specific client:

1. Open Screen 9, Schedule K-1 Distribution Options.
2. Enter a 1 or a 2 in the following fields, as applicable:
   • Depreciation: 1=in fiduciary, 2= prorate to beneficiary [O]
   • Depletion: 1=in fiduciary, 2= prorate to beneficiary [O]
   • Credits: 1=in fiduciary, 2= prorate to beneficiary [O]

To set the pro-rata and tiered method:

There are two methods to allocate expenses among different classes of income, the pro-rata and tiered method. User options can define the default method as follows:

1. From the Settings menu, select Options.
2. Select the Tax Return tab.
3. Select K-1 Distribution Options from the left sections menu.
4. In the K-1 Deductions dropdown item, select either Tier allocation or Pro-rata allocation.

To override the method for a specific client:

1. Go to Screen 44, Deduction Allocation for DNI.
2. In the DNI Allocation Options section, enter a 1 or a 2 in the field Automatic allocation: 1=tier, 2=pro-rata[O].

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Entering distributions for beneficiaries on Form 1041 in Lacerte

To begin, you must have at least one beneficiary entered in Screen 6, Beneficiary/Grantor Information before entering in the percentage or dollar amount of distributions.

Follow these steps to enter Beneficiary Distributions by percentages:

1. Go to Screen 7, 1041 Distributions.
2. Select Distribution Percentages from the left navigation panel.
3. Enter the percentage amounts to be distributed for Ordinary.
4. Enter the percentage amounts to be distributed for Short Term.
5. Enter the percentage amounts to be distributed for Long Term.

Enter the percentage amounts for the different types of income:

• Under the Required (Sch. B, ln 9) columns for Income required to be distributed
• Under the Other (Sch. B, ln 10) columns for Distributions that are not required and final year returns

The combined percentages in both the Required and Other columns must not equal more than 100% this will cause the percentages to be too high and cause a critical diagnostic to generate.

Follow these steps to enter Beneficiary Distributions by dollar amounts:

1. Go to Screen 7, 1041 Distributions.
2. Select Dollar Distributions from the left navigation panel
3. Enter the dollar amounts to be distributed for Ordinary.
4. Enter the dollar amounts to be distributed for Short Term.
5. Enter the dollar amounts to be distributed for Long Term.

Enter the dollar amounts for the different types of income:

• Under the Required (Sch. B, ln 9) columns for income required to be distributed
• Under the Other (Sch. B, ln 10) columns for Distributions that are not required and final year returns

Additional Notes:

• If you're unable to make entries on Screen 7, 1041 Distributions, or receive a Data Entry Error, "Value must be between 0 and 100" make sure that beneficiaries have been entered on Screen 6, Beneficiary/Grantor Information.
• If you need to adjust the amounts generated on the K-1 for the beneficiaries, this can be done on Screen 43, Schedule K-1 Overrides/Misc.

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Fiduciary passive loss on rental property not showing on Schedule K-1 in Lacerte

The passive loss on a rental property isn't flowing to the Schedule K-1, Line 7, Net Rental Real Estate Income.

How to override passive activity losses on your Schedule K-1:

Per Form 8582 instructions:

Estates and trusts: the passive activity loss (PAL) limitations apply in figuring the distributable net income and taxable income of an estate or trust...

The program will retain the PAL at the trust/estate (fiduciary) level until the final year of the return or until passive income can offset the losses.

To override the amounts on the beneficiary's Schedule K-1:

1. Go to Screen 43, Schedule K-1 Overrides / Misc.
2. In the Beneficiary panel, select the name of the desired beneficiary. 
3. Under the Income section, enter the new PAL amount in the field labeled Net rental real estate income (7).
4. Repeat Steps 3–5 for each beneficiary.

The un-allowed passive loss amount will continue to show on the General Info page generated with the federal forms as a carryover and can't be removed.

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Form 1041 Schedule K-1, box 14H shows an adjustment in Lacerte

When working on a Fiduciary return, you come across an adjustment on the 1041 Schedule K-1, Box 14H - Adjustment for section 1411 net investment income or deductions.

The Schedule K-1, box 14 H calculation is the difference between the Schedule B, line 15 (Income Distribution Deduction) and Schedule B recalculated using the net investment income on Form 8960 for Schedule B, line 1

If the Net Investment Income on Form 8960, line 8 is equal to Form 1041, line 9 the distribution deduction will be the same for both and an adjustment will not be generated in box 14 H of the Schedule K-1.

For more information, you may review the IRS instructions for Form 1041, namely page 44.

Even though the Form 8960 may not be generating, you can still view the form to see the amounts.

To override Lacerte's calculation:

1. Go to Screen 43, Schedule K-1 Overrides/Miscellaneous.
2. Click on the Beneficiary from the left-hand navigation panel.
3. Scroll down to the Other Information (14) section.
4. Enter an amount or -1 in Other modifications to net investment income (H).

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How to export Schedule K-1s between tax returns in Lacerte

Exporting from a Fiduciary return

Grantor Trusts do not generate a K-1 and cannot be exported.

1. Open the client return.
2. Go to Screen 43, Schedule K-1 Overrides / Misc.
3. From the Beneficiary section on the left, select the beneficiary name.
4. Under K-1 Export check the Export beneficiary K-1 data box.
5. Repeat steps 3 and 4 for each beneficiary you plan on exporting.
6. From the Tools menu choose K-1 Data Export.
7. Review the list of beneficiaries being exported.
   • If you need to make changes return to Screen 43 and make sure the correct beneficiaries are marked for export.
8. Select Export to start the export.
9. Select OK once it's complete.
   • Once the export has been completed within the business return, any changes to the K-1 will trigger Lacerteto prompt you to export the K-1 again.
10. Close the fiduciary return.
11. Open the return for the recipient.
    • This could be a 1040, 1065, 1120, 1020-S, or another 1041.
12. You will be prompted to review the Sch K-1 Data Import screen. If the data is correct select Accept Data.
13. Lacerte will ask you to confirm the overwrite of the existing data. Select Yes to continue importing the data, select No to cancel.
14. Select OK to continue to the tax return Details tab.

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Allocating Specific Items to Beneficiary or to Trust

Lacerte handles the dividing of items between Beneficiary and Fiduciary at the totals level, eg. totals of categories of income, totals of categories of deductions, etc. If the Beneficiary percentages total less than 100%, then the remainder of the items will stay at the Fiduciary level.

There is a way to override amounts on the Beneficiary Schedule K-1, but no way to override a K-1 and have the difference remain in the Fiduciary.

To Override Amounts on a Specific Beneficiary's K-1:

1. Go to Screen 43, Schedule K-1 Overrides/Misc.
2. Select the Beneficiary from the middle of the left navigation panel.
3. Fill in any and all applicable fields with the amounts you wish to override.
4. Repeat Steps 2-3 for each beneficiary.

 To change the amounts for the state level, select the specific state from the top left navigation panel, and then repeat steps 2 and 3.

Distributing losses from a trust to the beneficiaries

A Fiduciary return will allow losses to be taken on the Beneficiaries' Schedule K-1 in the final year of the return. To mark the return as final, see the steps earlier on this page.

Please note the following regarding distributions in a final year of a trust:

Per IRC Sec. 642(h), in the final year of a fiduciary, the following items are allowed as deductions to beneficiaries succeeding to the property of an estate or trust:

Net operating loss carryover (IRC Sec 172)
Capital loss carryover (IRC Sec. 1212)
Certain deductions in excess of gross income in the final year (IRC Sec. 642)
No other loss items, including suspended passive losses, disallowed investment interest, depletion carryovers, etc. are allowed to the remaindermen succeeding to the property of an estate or trust.

How do I distribute a capital loss on the K-1?

Per the Schedule K-1(1041) instructions for Boxes 3 and 4, capital losses shouldn't be included on line 3 (Short Term) or 4a through 4c (Long Term) unless it is the final year. Percentage distributions have to be used, not dollar distributions of losses.

Box 3 - Net Short-Term Capital Gain

Enter the beneficiary's share of the net short-term capital gain from line 13, column (1), Schedule D (Form 1041), minus allocable deductions. Do not enter a loss on line 3. If, for the final year of the estate or trust, there is a capital loss carryover, enter in box 11, using code B, the beneficiary's share of short-term capital loss carryover. However, if the beneficiary is a corporation, enter in box 11, using code B, the beneficiary's share of all short- and long-term capital loss carryovers as a single item. See section 642(h) and related regulations for more information.

Boxes 4a through 4c - Net Long-Term Capital Gain

Enter the beneficiary's share of the net long-term capital gain from lines 14a through 14c, column (1), Schedule D (Form 1041) minus allocable deductions.

Do not enter a loss in boxes 4a through 4c. If, for the final year of the estate or trust, there is a capital loss carryover, enter in box 11, using code C, the beneficiary's share of the long-term capital loss carryover. (If the beneficiary is a corporation, see the instructions for box 3.) See section 642(h) and related regulations for more information.

Gains or losses from the complete or partial disposition of a rental, rental real estate, or trade or business activity that is a passive activity must be shown on an attachment to Schedule K-1.

If final year of an estate or trust, there is a capital loss carryover enter in box 11 with a code C for short term capital loss carryover and code D for long term capital loss carryover.

Must be final year of the estate or trust to distribute capital losses.

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How To Distribute A Refund To The Beneficiaries In A Final Year Fiduciary

Since the Fiduciary will not carry over to the next year it becomes necessary to distribute the fiduciary refund to the beneficiaries in the current year.

Lacerte cannot distribute the refund amount to the K-1s automatically based on the distributions. A manual distributions override entry will be required for each of the beneficiary’s K-1.

Follow these steps to complete Form 1041-T, Allocation of Estimated Tax Payments to Beneficiaries, (Under Code section 643(g)):

1. Go to Screen 43, Schedule K-1 Overrides.
2. Select the beneficiary on the left hand column.
3. Select Credits and Credit Recapture under Sections in the left-hand navigation pane.
4. Enter distribution amounts in input field Trust payments of estimated taxes (A). Entries in this field will flow to form 1041-T.

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Fiduciary K-1 Export to 1040 Individual does not Export: No K-1 data available for export

There are some situations where the data may not transfer. Check the following items to make sure everything is set up correctly, or to make necessary adjustments:

1. Make sure Schedule K-1 has the information to export. If there aren't any income or loss items, the K-1 will not export.
2. Make sure the Social Security Number (SSN) of the partner(s), shareholder(s), or beneficiary(s) match the SSN for the taxpayer or spouse in the Individual module.
3. On the Partnership Information screen, make sure the Type of Entity is set to Individual.
4. Check the dates of the return. If the return is on a fiscal year, the K-1 export won't work.
5. If you've reviewed all other information and the information still isn't appearing in the Individual module, check to see if the return has been split via the Split Joint Return feature in the Tools menu.
   • If it has, Lacerte will export the K-1 information to the single/split return as opposed to the joint return. You may need to back up the MFS return and delete it in order to export the K-1 data to the MFJ return.
6. If Schedule K-1 activities already exist within Screen 20, Passthrough K-1's of the Individual module, or the SSN is correct and no import box appeared, enter the number of the specific K-1 into the entity's return as the activity number:
   • Partnership: Screen 32, code 22 - Number of K-1 Activity in 1040 [O]
   • S- Corporation: Screen 36, code 9 - Number of K-1 Activity in 1040 [O]
   • Fiduciary: Screen 43, code 116 - Number of K-1 Activity in 1040 [O]
7. Grantor Trusts do not generate a K-1 and cannot be exported.

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