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Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 10149
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I am preparing a Form 1065 General Partnership couple. The

Customer Question

I am preparing a Form 1065 General Partnership for a couple. The partnership is a member of an LLC that is in bankruptcy. They received a K-1 from the bankruptcy court with 1 line filled in Line 14C for 502,719 They have no idea what this is or how it is to be reported.
Submitted: 1 year ago.
Category: Finance
Expert:  Lane replied 1 year ago.

Hi,

...

This is to give them the OPTION of using the non-Farm optional method for calculating their self-employment tax

...

They do not have to use this at all, ... But if the LLC is in bankruptcy, or has a loss for the tax year, then this gives them the option of paying into social security even though there was a loss. ... and in SOME situations works out not to add that much to the tax bill.

...

The most likely path here is that completely disregard ...

...

But again, if the LLC is at a loss, normally self employment tax isn't owed ( and we'd need a lot more data to see whether or not this would work for them - likely not at this number) - but IRS provides an optional self-employment tax calculation method which may give the taxpayer credit toward Social Security [SOMETIMES] without increasing their taxes.

...

Before going into the detail provided in pub 334, let me show you a quick "Tax Act specific" blub on how to use the method in THEIR software (which might shed some relative light for you procedurally):

...

"If you realize a net business loss on Schedule C Profit or Loss from Business, you are not required to file Schedule SE Self-Employment Tax and pay self-employment taxes. However, the IRS provides an optional self-employment tax calculation method which may give you credit toward Social Security without increasing your taxes. If you would like to test whether the Optional Method benefits you in TaxACT, follow these instructions:

  1. Click on the Federal Q&A tab
  2. Click Business Income to expand the category and then click either your Self-Employment Tax or your spouse's Self-Employment Tax
  3. Click the Optional Method button and continue to the screen titled Schedule SE - Nonfarm Optional Method
  4. Check the box to Use the Nonfarm Optional Method. If your refund amount decreases, click the back arrow and uncheck Use the Nonfarm Optional Method"
Expert:  Lane replied 1 year ago.

Now, I'll skip the part of pub 334 that deals with calculating SE Tax through the regular method (if you'd like to reference for relativity/comparison, you'll find that here: http://www.irs.gov/publications/p334/ch10.html#en_US_2014_publink1000313617

Expert:  Lane replied 1 year ago.

But just under that, you'll see the non-farm optional method ... which can be used for the following self-employed individuals: (I'll underline the pertinent part)

Gross nonfarm income. Your gross nonfarm income generally is the total of the amounts from:

  • Line 7, Schedule C (Form 1040),

  • Line 1, Schedule C-EZ (Form 1040),

  • Box 14, code C, Schedule K-1 (Form 1065) (from nonfarm partnerships), and

  • Box 9, code J2, Schedule K-1 (Form 1065-B).

Expert:  Lane replied 1 year ago.

As a quick bit if context ... there's IRS's explanation of how this fits:

...

Why use an optional method? You may want to use the optional methods (discussed later) when you have a loss or a small net profit and any one of the following applies.

  • You want to receive credit for social security benefit coverage.

  • You incurred child or dependent care expenses for which you could claim a credit. (An optional method may increase your earned income, which could increase your credit.)

  • You are entitled to the earned income credit. (An optional method may increase your earned income, which could increase your credit.)

  • You are entitled to the additional child tax credit. (An optional method may increase your earned income, which could increase your credit.)

Effects of using an optional method. Using an optional method could increase your SE tax. Paying more SE tax could result in your getting higher benefits when you retire.

If you use either or both optional methods, you must figure and pay the SE tax due under these methods even if you would have had a smaller tax or no tax using the regular method.

The optional methods may be used only to figure your SE tax. To figure your income tax, include your actual earnings in gross income, regardless of which method you use to determine SE tax.

Expert:  Lane replied 1 year ago.

And to step back one MORE step, an even more global view...

...

"There are three ways to figure your net earnings from self-employment.

...

(Of course, only the first two would apply here)

...

  1. The regular method.

  2. The nonfarm optional method.

  3. The farm optional method."

Expert:  Lane replied 1 year ago.

Then from Pub 334...

Nonfarm Optional Method

Use the nonfarm optional method only for earnings that do not come from farming. You may use this method if you meet all the following tests.

  1. You are self-employed on a regular basis. This means that your actual net earnings from self-employment were $400 or more in at least 2 of the 3 tax years before the one for which you use this method. The net earnings can be from either farm or nonfarm earnings or both.

  2. You have used this method less than 5 years. (There is a 5-year lifetime limit.) The years do not have to be one after another.

  3. Your net nonfarm profits were:

    1. Less than $5,198, and

    2. Less than 72.189% of your gross nonfarm income.

Net nonfarm profits. Net nonfarm profit generally is the total of the amounts from:

  • Line 31, Schedule C (Form 1040),

  • Line 3, Schedule C-EZ (Form 1040),

  • Box 14, code A, Schedule K-1 (Form 1065) (from nonfarm partnerships), and

  • Box 9, code J1, Schedule K-1 (Form 1065-B).

However, you may need to adjust the amount reported on Schedule K-1 if you are a general partner or if it is a loss.

Gross nonfarm income. Your gross nonfarm income generally is the total of the amounts from:

  • Line 7, Schedule C (Form 1040),

  • Line 1, Schedule C-EZ (Form 1040),

  • Box 14, code C, Schedule K-1 (Form 1065) (from nonfarm partnerships), and

  • Box 9, code J2, Schedule K-1 (Form 1065-B).

Figuring Nonfarm Net Earnings

If you meet the three tests explained earlier, use the following table to figure your net earnings from self-employment under the nonfarm optional method.

Expert:  Lane replied 1 year ago.

Many examples follow...

Expert:  Lane replied 1 year ago.

But again, if they're not interested in paying into Social Security and medicare (SE tax) at all then, because line 14(a) is blank .... throw it away because net earnings were zero

Customer: replied 1 year ago.
I guess i'm not asking the right question I understand the non farm optional method and why and how it works, what i don't understand is the bankruptcy court for the LLC issued this K-1 to the partnership being a partner of the LLC for 502,719 line 14 C when their was no income . This is the only entry on the K-1. So how does the partner file it on the general partnership.The LLC has been tied up in bankruptcy since 2009
Expert:  Lane replied 1 year ago.

If they don't want to use the non-farm method to pay-in to the system, they Don't file anything ... there's no income or loss to file ... What did you do last year?

Expert:  Lane replied 1 year ago.

Again this isn't a 1065 filing issue, it's a schedule SE issue for them if they'd like to use it

Expert:  Lane replied 1 year ago.

That's why I boldfaced and underlined, above, the following:

..

The optional methods may be used only to figure your SE tax. To figure your income tax, include your actual earnings in gross income, regardless of which method you use to determine SE tax.

...

I would do exactly what you've always done in terms of your 1065 ... this is just an option for them on their 1040 Schedule SE

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