This article focuses solely on the entry of the Deduction items which are found on Lines 12 and 13 of the Schedule K-1 (Form 1065) Partner’s Share of Current Year Income, Deductions, Credits, and Other Items. For additional information regarding the requirements for Schedule K-1 (Form 1065), see: Partner’s Instructions for Schedule K-1 (Form 1065).
To enter the deduction items from a K-1 (Form 1065) in Keystone Tax Solutions Pro from the Main Menu of the Tax Return (Form 1040) select:
Income Menu
Rents, Royalties, Entities (Sch E, K-1, 4835, 8582)
K-1 Input – Select New and double-click on Form 1065 K-1 (Partnership) which will take you to the K-1 Heading Information Entry Menu. If the initial K-1 entry was previously keyed in, double click on the entry in the K-1 pick list.
After entering all of the information required on the K-1 Heading Information screen, select ‘OK’. The K-1 1065 Edit Screen has two distinct sections entitled Heading Information and Income, Deductions, Credits, and Other Items.
The K-1 1065 Edit Screen in the tax program has an entry for each box found on the Schedule K-1 (Form 1065) that the taxpayer received. A description of the items contained in boxes 12 through 13, including each of the Codes for Other Deductions that can be entered in Box 13 can be found below. The amounts shown in boxes 12 through 13 reflect the taxpayer’s share of deductions from the partnership. These amounts do not take into consideration the following limitations: the adjusted basis of the partnership interest; the amount for which the taxpayer is at risk; or the passive activity limitations. See: Publication 925 – Passive Activity and At-Risk Rules. Accordingly, the taxpayer may be limited in the amount of the deduction that is available.
DEDUCTIONS
Line 12 – Section 179 Deduction – Section 179 Limitations are not calculated by the System, enter ONLYSection 179 Expenses within the Limitations. To determine the amount to be entered in this field, Form 4562 must be completed. Specifically, the amounts reported in Box 12 are used, along with the total cost of section 179 property placed in service during the year from other sources, to complete Part I of Form 4562. See: Partner’s Instructions for Schedule K-1 (Form 1065). Form 4562 can be accessed from the Income Menu of Keystone Tax Solutions Pro by selecting Rents, Royalties, Entities (Sch E, K-1, 4835, 8582) and selecting Form 4562. See: Instructions for Form 4562.
Once the correct amount has been calculated on Form 4562, enter the amount on Line 12 of the K-1 Edit Screen. If the amount calculated on Form 4562 is entered as a Non-passive Section 179 Deduction it will automatically carry to the Schedule E (Form 1040), Line 28 column (i). It will also automatically reduce any Self-employment earnings reported on Schedule SE. See information on Line 14A – Net Earnings (Loss) from Self-Employment in Form 1040 – Schedule K-1 (Form 1065) – Self-Employment Earnings (Loss). If the amount is entered as Passive Section 179 Deduction, it has no impact on Self-Employment Earnings and it will automatically carry to Worksheet 3 of Form 8582 – Passive Activity Loss Limitations where any deduction may be limited.
The Section 179 Deduction that is allowed can affect the Qualified Business Income (Section 199A income) and the amount reported by the partnership as Qualified Business Income (Loss) on Box 20, Code Z may need to be adjusted to reflect any allowed Section 179 Deduction.
Charitable Contributions – Any contributions reported in Box 13, Codes A through G may affect the Qualified Business Income (Loss) coming from the partnership. If the taxpayer has Itemized Deductions on Schedule A, the entire amount of the Charitable Gifts claimed on the Schedule A that were from the partnership, will reduce the QBI coming from that partnership. The charitable contributions entered in the tax program on the following Line 13, Codes A through G. that are allowed contribution on Schedule A – Itemized Deductions will automatically reduce the Qualified Business Income from that partnership.
Line 13A – Cash Contributions 60% – Amounts reported in Box 13, Code A represent a taxpayer’s share of cash contributions made by the partnership.. This amount will automatically pull to Schedule A (Form 1040), subject to the 60% AGI limitation on such contributions. Prior to the passage of the Tax Cuts and Jobs Act this deduction was subject to a 50% AGI limitation and not 60%.
Line 13B – Cash Contributions 30% – Amounts reported in Box 13, Code B represent a taxpayer’s share of cash contributions made by the partnership. This amount will automatically pull to Schedule A (Form 1040), subject to the 30% AGI limitation on such contributions.
Line 13C – Non-Cash Contributions 50% – Amounts reported in Box 13, Code C represent a taxpayer’s share of contributions of property other than cash that was made by the partnership. This amount will NOT pull to Schedule A (Form 1040). Instead, a manual entry must be made on the Schedule A Gifts to Charity Menu, subject to the 50% AGI limitation on such contributions. If an entry is made in this field, a warning is provided upon exiting the K-1 Edit Screen Entry Menu that non-cash contributions have to be entered on Schedule A and will not automatically carry from this menu.
Line 13D – Non-Cash Contributions 30% – Amounts reported in Box 13, Code D represent a taxpayer’s share of contributions of property other than cash that was made by the partnership. This amount will not pull to Schedule A (Form 1040). Instead, a manual entry must be made on the Schedule A Gifts to Charity Menu, subject to the 30% AGI limitation on such contributions. If an entry is made in this field, a warning is provided upon exiting the K-1 Edit Screen Entry Menu that non-cash contributions have to be entered on Schedule A and will not automatically carry from this menu.
Line 13E – Capital Gain Property to a 50% Organization (30%) – Amounts reported in Box 13, Code E represent a taxpayer’s share of contributions of appreciated property that was made by the partnership. This amount will not pull to Schedule A (Form 1040). Instead, a manual entry must be made on the Schedule A Gifts to Charity Menu, subject to the 30% AGI limitation on such contributions. If an entry is made in this field, a warning is provided upon exiting the K-1 Edit Screen Entry Menu that Capital Gain Property has been contributed and it has to be entered on Schedule A and will not automatically carry from this menu.
Line 13F – Capital Gain Property (20%) – Amounts reported in Box 13, Code F represent a taxpayer’s share of contributions of property other than cash that was made by the partnership. This amount will not pull to Schedule A (Form 1040). Instead, a manual entry must be made on the Schedule A Gifts to Charity Menu, subject to the 50% AGI limitation on such contributions. If an entry is made in this field, a warning is provided upon exiting the K-1 Edit Screen Entry Menu that Capital Gain Property has to be entered on Schedule A and will not automatically carry from this menu.
Line 13G – Contributions 100% – Amounts reported in Box 13, Code G represent a taxpayer’s share of qualified conservation contributions of property used in agriculture or livestock production. This contribution isn’t included in the amount reported in box 13 using code C. If the taxpayer is a farmer or rancher, they qualify for a 100% AGI limitation for this contribution. Otherwise, the deduction for this contribution is subject to a 50% AGI limitation. This amount will not automatically pull to Schedule A (Form 1040) or Form 8283. Instead, a manual entry must be made subject to the appropriate AGI limitation on such contributions. If an entry is made in this field, a warning is provided upon exiting the K-1 Edit Screen Entry Menu that Property has to be entered on Schedule A, Contributions if $500 or less or on Form 8283 if greater than $500.
Line 13H – Investment Interest Expense – Amounts reported in Box 13, Code H represent a taxpayer’s share of investment interest expense incurred by the partnership. This amount will automatically flow to Form 4952 (Form 1040), line 1; however in order to access Form 4952 in Keystone Tax Solutions Pro, the taxpayer has to meet certain conditions. See: Instructions For Form 4952 – Investment Interest Expense Deduction. If the partnership has investment income or other investment expenses, it will report the taxpayer’s share of these items in Box 20 using codes A and B of the Schedule K-1 (Form 1065) Partner’s Share of Income, Deductions, Credits, etc.
Line 13I – Deductions – Royalty Income – Amounts reported in Box 13, Code I represent a taxpayer’s share of deductions allocable to royalties. This amount will automatically pull to Schedule E (Form 1040), line 19.
Line 13J – Section 59(e)(2) Expenditures – Amounts reported in Box 13, Code J represent a taxpayer’s share of qualified expenditures that the taxpayer may make a section 59(e) election for. The partnership should provide the taxpayer with a statement that identifies the property (or properties) for which the expenditures were incurred or paid. However, no amount entered in this field will automatically flow to the tax return. Instead, the taxpayer can elect to either amortize these expenditures on Form 4562 and deduct the expenditures over a number of years or choose to deduct these expenditures in full in the current year and have the entire deduction treated as an adjustment or tax preference item for purposes of the alternative minimum tax.
Based on the election that the taxpayer makes, to have the correct amount flow to Schedule E (Form 1040), line 28 or to Form 8582, a separate entry should be made on this K-1 1065 Edit Screen identifying the item as a Section 59(e) expenditure. Based on the election made by the taxpayer either the amortized amount calculated on Form 4562 or the entire amount will be entered as a deduction (loss) on Line 1 of a separate K-1 entry. See: Partner’s Instructions for Schedule K-1 (Form 1065). Form 4562 can be accessed from the Income Menu of Keystone Tax Solutions Pro by selecting Rents, Royalties, Entities (Sch E, K-1, 4835, 8582) and then the Form 4562 menu. See: Instructions for Form 4562. Form 6251 – Alternative Minimum Tax – Individuals can be accessed from the Other Taxes Menu of Keystone Tax Solutions Pro by selecting Alternative Minimum Tax. See: Instructions for Form 6251.
Line 13K – Excess business interest expense – Amounts reported in Box 13, Code K represent a taxpayer’s share of business interest that was limited under the provisions of the Tax Cuts and Jobs Act. Amounts reported in Box 13, Code K may be required to be reported on Form 8990 – Limitation on Business Interest Expense Under Section 163(j). See: Instructions for Form 8990. Generally, small business taxpayers (which are defined as taxpayers with average annual gross receipts of $25 million or less for the previous three years) are not subject to these limitations and do not file Form 8990.
Prior to 2018, Line 13K was used for “Deductions – Portfolio (2% Floor)”, which represented a taxpayer’s share of portfolio deductions that are subject to the 2% income limitation as a Miscellaneous Deduction on Schedule A (Form 1040). These Miscellaneous Deductions subject to the 2% income limitation were eliminated by the Tax Cuts and Jobs Act.
Line 13L – Deductions – Portfolio (Other) – Amounts reported in Box 13, Code L represent a taxpayer’s share of portfolio deductions that are not subject to the 2% income limitation as a Miscellaneous Deduction on Schedule A (Form 1040). This amount will automatically carry to Schedule A (Form 1040), line 16 with a description that it came from this entity.
Line 13M – Amounts Paid for Medical Insurance – Amounts reported in Box 13, Code M represent the amounts paid during the tax year for insurance that constitutes medical care for the taxpayer, spouse, dependents, and any children under age 27 who are not dependents. Upon entering this menu, the amount can be entered as a medical expense under itemized deductions and it will automatically be pulled to line 1 of Schedule A (Form 1040).
If the taxpayer seeks to deduct this amount as an adjustment to income on line 29 of Schedule 1 (Form 1040), no amounts entered in this field will carry to the Self-Employed Health Insurance Deduction Menu. Instead, if the taxpayer elects to have the amounts treated as an adjustment to income, the Self-Employed Health Insurance Deduction Menu should be completed. This menu can be accessed from the Main Menu of Keystone Tax Solutions Pro by selecting the Adjustments Menu, then Self-Employed Health Insurance and entering the appropriate amounts. If the taxpayer qualifies, the amount calculated on the Self-Employed Health Insurance menu will carry to line 29 of Schedule 1 (Form 1040).
Line 13N – Educational Assistance Benefits – Amounts reported in Box 13, Code N represent the amounts paid by the partnership for the taxpayer’s educational assistance. No amount entered in this field will automatically carry to the 1040. If the taxpayer is eligible to deduct their educational assistance benefits (up to the $5,250 limitation) against any income reported on Line 1, it should be reported on a separate entry made on Line 1 of the K-1 1065 Edit Screen which identifies the item as educational assistance from this partnership entity. By making a separate K-1 entry, it will allow the item to be reported as a separate line item on Schedule E (Form 1040), line 28, column (h). If the benefits exceed $5,250, the excess amount may be entered on Form 8863 to figure education credits. See: Partner’s Instructions for Schedule K-1 (Form 1065); Publication 970 – Tax Benefits for Education.
Line 13O – Dependent Care Benefits – Amounts reported in Box 13, Code O represent the amount the taxpayer received for dependent care benefits from the partnership. This amount will not automatically pull to Form 2441, Part III. Instead, this amount is entered directly as Employer Paid Dependent Care Benefits on the Form 2441 if the taxpayer is claiming a dependent care credit. Form 2441 can be accessed from the Main Menu of Keystone Tax Solutions Pro by selecting, Credits, then Child and Dependent Care Expense Credit (2441).
Line 13P – Preproductive period expenses – Amounts reported in Box 13, Code P represent the amounts of costs and expenses incurred before the entity commenced production. The taxpayer may be able to deduct these expenses currently or they may need to capitalize them under section 263A. See Pub. 225, Farmer’s Tax Guide, and Regulations section 1.263A-4 for details. No amounts entered in this field will carry to Form 1040.
Line 13Q – Commercial revitalization deduction from Rental Real Estate Activities – Amounts reported in Box 13, Code Q represent the amounts paid by the partnership that would qualify for a special revitalization deduction. Commercial revitalization is for the rehabilitation of certain buildings in distressed communities that were placed in service before January 1, 2010. Follow the Instructions for Form 8582 to figure how much of the deduction can be reported on Schedule E (Form 1040), line 28, column (f). Any amount in Box 13, Code Q that is determined to be deductible should be reported on a separate entry made on the K-1 1065 Edit Screen. Enter the deductible amount on Line 1 as a passive loss. Identify the item as a commercial revitalization deduction. By making a separate entry on Line 1 of the K-1 1065 Edit Screen, it will allow the item to carry to Worksheet 3 of Form 8582, and if the deduction is allowed under the passive loss requirements, it will be reported as a separate line item on Schedule E (Form 1040), line 28, column (f).
Line 13R – Pensions and IRAs – Amounts reported in Box 13, Code R represent payments made by the partnership on the taxpayer’s behalf to an IRA, qualified plan, simplified employee pension (SEP), or a SIMPLE IRA plan. This amount will not automatically pull to Schedule 1 (Form 1040). Enter payments made to a qualified plan, SEP, or SIMPLE IRA plan on Schedule 1 (Form 1040), line 28. If the amounts reported in Box 13, using code R represent contributions to an IRA, see the instructions for Schedule 1 (Form 1040), line 32 to figure your IRA deduction.
If the payments to a qualified plan were to a defined benefit plan, the partnership should give the taxpayer a statement showing the amount of the benefit accrued for the current tax year.
Line 13S – Reforestation Expense Deduction – Amounts reported in Box 13, Code S represent the amounts paid by the partnership for reforestation expenses on qualified timber property. This expense deduction is limited to $10,000 ($5,000 if married filing separately) for each qualified timber property. The amount entered on Line 13S will not automatically carry to Form 1040. If the taxpayer materially participated in the reforestation activity, the deduction should be reported as a nonpassive loss by making a separate K-1 entry from the K-1 1065 Edit Screen. Enter the amount on Line 1 of the separate K-1 as a nonpassive loss. Identify the item as Reforestation Expense.
If the taxpayer did not materially participate in the reforestation activity the expense deduction should be reported as a passive loss by making a separate K-1 entry from the K-1 1065 Edit Screen. Enter the amount on Line 1 of the separate K-1 as a passive loss. Identify the item as Reforestation Expense. The amount entered will flow to Form 8582, Worksheet 3 where, based on other passive items affecting the taxpayer, it will determine if any amount will be allowed on Schedule E (Form 1040), line 28, column (f). Any remaining deductions above the $10,000 ($5,000 if married filing separately) for each qualified timber property can be amortized. See: Partner’s Instructions for Schedule K-1 (Form 1065).
Codes 13T through 13U are currently reserved and are not used. Prior to December 31, 2017 this section was used to report information related to the Domestic Production Activities Credit. For tax years prior to 2018, the following information was found on a Schedule K-1 (Form 1065):
Domestic Production Activities Information – This amount was previously reported in Box 13, Code T and it represented information on the partnership’s domestic production activities. The partnership would provide the taxpayer with a statement that contains the information that was used to figure the domestic production activities deduction on Form 8903. Many times there was no actual amount reported in Box 13, code T, but instead the K-1 would have a reference to an attached statement. The information contained on this statement should be entered directly on Form 8903. See: Instructions for Form 8903 – Domestic Production Activities Deduction. Effective for all tax years starting after December 31, 2017, the Tax Cuts and Jobs Act eliminated the Domestic Productions Activity Credit and this item will no longer be reported on the Schedule K-1 (Form 1065) starting in 2018.
Qualified Production Activities Information – This amount was previously reported in Box 13, Code U represent information on the partnership’s qualified production activities. The information contained in this section is used to calculate any potential Domestic Production Activities Deduction. See: Instructions for Form 8903 – Domestic Production Activities Deduction. Effective for all tax years starting after December 31, 2017, the Tax Cuts and Jobs Act eliminated the Domestic Productions Activity Credit and this item will no longer be reported on the Schedule K-1 (Form 1065) starting in 2018.
Employer W-2 Wages – This amounts was previously reported in Box 13, Code V and it represented the amount of Form W-2 wages reported to the taxpayer by the partnership and it was used to calculate any Domestic Production Activities Deduction. Effective for all tax years starting after December 31, 2017, the Tax Cuts and Jobs Act eliminated the Domestic Productions Activity Credit and this item will no longer be reported on the Schedule K-1 (Form 1065) starting in 2018.
Line 13V – Section 743(b) negative adjustment – Amounts reported in Box 13, Code V represent the gain resulting from the net section 743(b) basis adjustments.
Line 13W – Other Deductions – Amounts reported in Box 13, Code W are deductions that the partnership can pass through to the partner (taxpayer) but do not fit any of the categories above. An amount entered on Line 13W will not automatically flow to Form 1040. See the partner’s instructions provided by the partnership for further information on the treatment that these items will receive.
Line 13X – Section 965(c) deduction – Amounts reported in Box 12, Code K represent a taxpayer’s share of section 965(a) deductions. Any amount reported as a deduction would reduce any 965 (a) inclusion amount reported in Box 10, Code F.
NOTE: This is a guide on entering the Deduction items from Schedule K-1 (Form 1065) into the tax program. This is not intended as tax advice.
Additional Resources:
Partner’s Instructions for Schedule K-1 (Form 1065)
Schedule K-1 (Form 1065) – Overview
Schedule K-1 (Form 1065) – Heading Information
Schedule K-1 (Form 1065) – Income (Loss) Items
Schedule K-1 (Form 1065) – Self-Employment Earnings (Loss)
Schedule K-1 (Form 1065) – Credits & Foreign Transaction Items
Schedule K-1 (Form 1065) – Alternative Minimum Tax (AMT) Items
Schedule K-1 (Form 1065) – Tax Exempt Income, Non-Deductible Expenses, Distributions & Other Items