(Note: Just to be clear, within Form 1065, the Schedule K and Schedule K-1 are different forms, not the same)
We have an 2 member LLC that used to own Rental Property but sold the property and carried the Loan Note in the LLC. After selling, usually only income is interest on Note. Our LLC splits profit loss 50/50 and I tell (TT for Business) this on my form 1065 each yr.
And TT rightfully splits our Interest income 50/50 to each our Schedule K-1s in box 5. This passes through to each our 1040's, we pay income tax on the Loan Interest but not SE tax since the interest is Passive income.
Now not always but some yrs the Property Owners business has cash flow issues and the sales contract denotes charges for late payment fees to compensate for my time with collections, bad checks, etc. This creates Ordinary Income which must be taxed also on SE tax.
The other LLC member is a Limited Partner in that he does not actively participate in the running of the business. I do all that and tell TT that I am a Managing Partner and he is a Limited Partner. Ok so far.
But here's the catch, Form 1065, page 4, aka Schedule K, on Line 14a, is supposed to be the sum of Self-Employment earnings for all partners subject to SE income under those tax rules.
The IRS Law reads only General Partners or LLC Active Member Managers (MMGR) are subject to SE tax for all Ordinary income & guaranteed pmts. Whereas Limited Partners are subject SE tax only on guaranteed payments (since as Limited Partners they aren't eligible for Ordinary income).
Now TT will attempt to get this right, since other member is designated a Limited Partner, TT will leave his Schedule K-1 box 14 blank. But in my Schedule K-1 box 14 it puts only 50% of the total Ordinary Income (aka SE Income).
Now I understand that TT is told we are 50/50 Profit Loss between the 2 members. But it would appear to me that the IRS wants all of it's SE tax not just 50% of it. So to work around this I pay myself the other 50% in guaranteed Payments to get the correct amount in my Schedule K-1 box 14.
It seems to me that TT for Business should put 100% of the Self Employment earnings in my Schedule K-1 box 14 without me having to do the guaranteed pmts. Appreciate any input on this.
We have an 2 member LLC that used to own Rental Property but sold the property and carried the Loan Note in the LLC. After selling, usually only income is interest on Note. Our LLC splits profit loss 50/50 and I tell (TT for Business) this on my form 1065 each yr.
And TT rightfully splits our Interest income 50/50 to each our Schedule K-1s in box 5. This passes through to each our 1040's, we pay income tax on the Loan Interest but not SE tax since the interest is Passive income.
Now not always but some yrs the Property Owners business has cash flow issues and the sales contract denotes charges for late payment fees to compensate for my time with collections, bad checks, etc. This creates Ordinary Income which must be taxed also on SE tax.
The other LLC member is a Limited Partner in that he does not actively participate in the running of the business. I do all that and tell TT that I am a Managing Partner and he is a Limited Partner. Ok so far.
But here's the catch, Form 1065, page 4, aka Schedule K, on Line 14a, is supposed to be the sum of Self-Employment earnings for all partners subject to SE income under those tax rules.
The IRS Law reads only General Partners or LLC Active Member Managers (MMGR) are subject to SE tax for all Ordinary income & guaranteed pmts. Whereas Limited Partners are subject SE tax only on guaranteed payments (since as Limited Partners they aren't eligible for Ordinary income).
Now TT will attempt to get this right, since other member is designated a Limited Partner, TT will leave his Schedule K-1 box 14 blank. But in my Schedule K-1 box 14 it puts only 50% of the total Ordinary Income (aka SE Income).
Now I understand that TT is told we are 50/50 Profit Loss between the 2 members. But it would appear to me that the IRS wants all of it's SE tax not just 50% of it. So to work around this I pay myself the other 50% in guaranteed Payments to get the correct amount in my Schedule K-1 box 14.
It seems to me that TT for Business should put 100% of the Self Employment earnings in my Schedule K-1 box 14 without me having to do the guaranteed pmts. Appreciate any input on this.