Form 1065 Schedule M-2 Line 3 with Guaranteed Payments

Forum|Forum|3 years ago
January 28, 2023
2 replies
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I have a LLC filing form 1065 where one of the partners receives a guaranteed payment. The instructions for Form 1065 Schedule M-2 line 3 state that this is generally the amount entered on line 9 of schedule M-1. They go on to state if net income includes income from guaranteed payments made to partners, remove such income on line 7.

Turbotax is not entering Schedule M-1 line 9 directly on Schedule M-2 line 3. It is subtracting guaranteed payments from the amount reported on Schedule M-1 line 9 in the smart worksheet. This seems to go against the instructions which state to adjust for guaranteed payments on line 7 - other decreases.

Has anyone else ran into this? Is Turbotax incorrectly calculating Schedule M-2? Should I go with Turbotax or override?

TurboTax Business Windows

Anonymous_

Employee

I think this is the correct behavior, but do not do an override at this point.

I will page @Rick19744 for input.

Rick19744

Employee

I don't operate in a Windows environment so can't see what TT is actually doing.

However:

Sch M-1 line 9 is net income for line 1 at the top of page 5 "Analysis of Net Income".
Sch M-2 is book income
So Sch M-1 line 9 most likely does not equal Sch M-2 line 3
It is subtracting guaranteed payments, because if you look at the actual Sch M-1 line 3, guaranteed payments are added to arrive at a figure on line 5 of Sch M-1. Appears TT is appropriately subtracting the guaranteed payments in order to avoid double dunking the guaranteed payments; because most software back into Sch M-1 line 1 which already has subtracted guaranteed payments.
Just a confusing analysis.

*A reminder that posts in a forum such as this do not constitute tax advice.Also keep in mind the date of replies, as tax law changes.

anj2Author

I completely agree that guaranteed payments need to be subtracted on Schedule M-2. According to the 1065 instructions, they should be deducted on line 7 of schedule M-2 but TT is deducting them directly against income on line 3.

Rick19744

Employee

I believe you will be fine.

Let TT compute the return and review it.

The instructions indicate "if line 3 includes income from guaranteed payments....."

Guaranteed payments in general are an expense of the partnership not income.

What the instructions are most likely referring to is if in a tiered partnership context, the partnership received a K-1 with guaranteed payments (income) then subtract those out on line 7.

Instructions are not always the model of clarity.

*A reminder that posts in a forum such as this do not constitute tax advice.Also keep in mind the date of replies, as tax law changes.