K-1 and Box 18C

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Topic Author
jaj2276
Posts: 588
Joined: Sat Apr 16, 2011 5:13 pm

K-1 and Box 18C

Post by jaj2276 »

The K-1 instructions for Box 18C state:
Code C. Nondeductible expenses. The nondeductible
expenses paid or incurred by the partnership aren't
deductible on your tax return. Decrease the adjusted
basis of your interest in the partnership by this amount.
What does this mean? I have a K-1 with an amount in 18C. Do I really adjust the basis of my interest (investment)? Would this mean that if I invested $5,000 and the 18C amount was $150, I wouldn't do anything with the $150 on this year's tax return but I would say that my investment basis was now $4,850? And if my thinking is correct, would this imply that when my investment is sold and/or redeemed, I would see an additional $150 of "profit"? If this investment is held for longer than a year, would this $150 get taxed at capital gains rates instead of ordinary rates?

As an aside, this amount is included in calculating Box L Current Year Net Income on my K-1.

(L) Beginning Account = 5000
(L) Current Year Net Income = 300
(L) Withdrawals and Distributions = 500
(L) Ending Capital Account = 4800

Current Year Net Income = Box 1 + Box 5 - Box 12 - Box 13A - Box 18C.

Box 1 + Box 5 - Box 12 - Box 13A = $450.

Ending Capital Account = Beginning Account - Withdrawals & Distributions + Current Year Net Income.

Since Current Year Net Income is reduced by 18C and Current Year Net Income increases my Ending Capital Account, is there really anything I need to do? If I had no amounts in 18C then my ending Capital Account would be $4950 (5000 - 500 + 450) so it seems that my partnership capital account has already accounted for this amount. Although maybe the partnership capital account isn't the same thing as my basis?
Gadget
Posts: 1037
Joined: Fri Mar 17, 2017 1:38 pm

Re: K-1 and Box 18C

Post by Gadget »

My Box 18C deduction is specifically shown above in Box L under the Partner's Capital Account Analysis. So the ending capital Account value on your schedule K should already be correct and adjusted if yours is the same.

It's like your schedule K added instructions for what the CPA was supposed to do on the Schedule K. You just enter the values from the boxes. I wasn't aware I had to do something extra.

For what it's worth, my schedule K doesn't have that same note in Box 18C.
Topic Author
jaj2276
Posts: 588
Joined: Sat Apr 16, 2011 5:13 pm

Re: K-1 and Box 18C

Post by jaj2276 »

Ok thanks.

The instructions I provided were from the IRS Partner's Instructions for Schedule K-1 (Form 1065). My specific K-1 does not have that note as well.

I have convinced myself that I too don't need to do anything. As noted in my original email, the (L) Ending Capital Account is not as high as it *could* be because the amount has been reduced by the amount in 18C. Basically if I started out with $5k and earned $500, my ending capital account would be $5500. However it's only worth $5350 because the amount in 18C ($150) is an expense that wasn't deductible.

It just seems odd that 18C even exists. I wonder who would/could need to do something with that amount that isn't already accounted for in their box L capital accounts.
HootingSloth
Posts: 1157
Joined: Mon Jan 28, 2019 2:38 pm

Re: K-1 and Box 18C

Post by HootingSloth »

jaj2276 wrote: Wed Jul 10, 2024 10:31 am Ok thanks.

The instructions I provided were from the IRS Partner's Instructions for Schedule K-1 (Form 1065). My specific K-1 does not have that note as well.

I have convinced myself that I too don't need to do anything. As noted in my original email, the (L) Ending Capital Account is not as high as it *could* be because the amount has been reduced by the amount in 18C. Basically if I started out with $5k and earned $500, my ending capital account would be $5500. However it's only worth $5350 because the amount in 18C ($150) is an expense that wasn't deductible.

It just seems odd that 18C even exists. I wonder who would/could need to do something with that amount that isn't already accounted for in their box L capital accounts.
Computing a partner’s outside basis is necessary, for example, when determining the maximum amount of any deduction or loss that passes through to the partner (losses in excess of basis generally are suspended), the gain or loss from the disposition of a partnership interest (you noted this above), the tax consequences of cash distributions (cash distributions in excess of basis are taxable), and the tax consequences of property distributions (generally a carryover basis is used for property distributions, but this is capped by the partner's outside basis). A partner is required to maintain adequate books and records to substantiate the partner's basis in their partnership interest when any of these events occur. Part of the purpose of Schedule K-1 is to include sufficient information so that a partner's outside basis can be computed by someone who has all of the Schedules dating back to the year the partner acquired the partnership interest.

A partner's capital account is not the same thing as the partner's outside basis, although the two are related. For example, a partner's outside basis includes the partner's share of partnership liabilities and the partner's section 743(b) basis adjustments, while the partner's capital account does not include these items.

A common way of *estimating* outside basis is to start with a "tax basis capital account" and make appropriate adjustments. Using this method of *estimation* would not require separately taking amounts in box 18C into account because they are already accounted for in determining the tax basis capital account. However, the definitive way of determining outside basis is to go through the exercise of computing its initial value and all adjustments in all years held. Box 18C would be needed to do that exercise.

More details can be found here and here.
Building TIPS ladder for all residual needs and some wants after SS, pension, and paid-off house. Other wants from 5% constant percentage from Risk Portfolio (80/20 AA w/ 80% global + 20% US-tilt)
Topic Author
jaj2276
Posts: 588
Joined: Sat Apr 16, 2011 5:13 pm

Re: K-1 and Box 18C

Post by jaj2276 »

HootingSloth wrote: Wed Jul 10, 2024 11:38 am
jaj2276 wrote: Wed Jul 10, 2024 10:31 am Ok thanks.

The instructions I provided were from the IRS Partner's Instructions for Schedule K-1 (Form 1065). My specific K-1 does not have that note as well.

I have convinced myself that I too don't need to do anything. As noted in my original email, the (L) Ending Capital Account is not as high as it *could* be because the amount has been reduced by the amount in 18C. Basically if I started out with $5k and earned $500, my ending capital account would be $5500. However it's only worth $5350 because the amount in 18C ($150) is an expense that wasn't deductible.

It just seems odd that 18C even exists. I wonder who would/could need to do something with that amount that isn't already accounted for in their box L capital accounts.
Incredibly useful information removed for brevity
Hey Sloth, thanks so much for the explanation and the two links. I continue to be amazed by the expert knowledge available through the BH forums.
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