I HATE K-1s!

While unlike Nick Bottom I don’t hate Shakespeare, I do hate K-1s.  Specifically, K-1s for limited partnership investments. 

First, they are never sent out to taxpayers until mid to late September – so taxpayers with these investments require a GDE (the E = extension).

But more important, the K-1 for limited partnership investments report many sources of “Other Income” and “Other Expenses” without clear instructions about where to report these items on the Form 1040.  It is confusing and a true PITA for both taxpayers and professional tax preparers.

For example - what is “portfolio income”?  A post from THE STREET explains -

“In a word, portfolio income is the totality of investment income in a single portfolio, including dividends, interest, and capital gains. In many cases, portfolio income also includes any money (in the form of royalties) from real estate investments.”

The K-1 has specific lines for reporting dividends, interest, capital gains, and royalties with explicit instructions as to where to put these numbers on the Form 1040.  But under “Other Income” there is often reported “Other Portfolio Income”.  Why is this “other” portfolio income identified separately and not included in the specific lines for portfolio income?  There is no clear instruction on where to report this income.

The items of Other Income and Other Expenses also refer to obscure Internal Revenue Code Sections 59(e), 743, 754, 965, 988, etc. and other obscure items - with no clear instructions on exactly where on the Form 1040 to report these items.  And the new K-3 for foreign tax items adds more complexity and confusion to an already confusing issue.

I have not come across anywhere any CPE seminars, workshops or classes or any books or publications dealing specifically with exactly where to put all K-1 items on the Form 1040.  NATP has provided an offering on preparing the K-2 and K-3 – but not on how to put K-3 items on the Form 1040.  In the past when print K-1 packages were sent via postal mail there occasionally was a “map” for 1040 reporting, but now most K-1s are received via pdf email attachment with no more such assistance. 

Before retiring, my response to this issue was to refuse to do tax returns for any taxpayer, any potential or current client, who had K-1s from limited partnership investments that report anything in Box 11 and Box 13.  Unfortunately, there was one client with over a dozen such K-1s that I could not refuse. 

Tax professional associations should include a seminar or class on this topic in their CPE offerings.  

Fellow tax pros - do you agree with me?  

TTFN