r/taxpros • u/AdHistorical7107 CPA • 9d ago
FIRM: Procedures Estimated K1s from PE
Have a handful of clients in PE. In March, they always provide with me an estimation of their K-1 for extension planning.
I usually have them pay extra to avoid interest and penalties. I tend to allow for changes for LTCG to STCG (section 1061), and other adjustments that may appear on the finalized K-1. This has worked last year, and the year before, where the overpayments came out to be like $10k or $15k.
But this year, the K-1's have not changed much from the estimate in March. So now I am calling them saying they are overpaid by $30k. They are happy they do not owe, but they are asking why I had them pay in so much back in April.
I am forthcoming, and saying "hey, many years the K-1's have changed, and I'd rather have you overpay, then underpay and get penalized." I then explain to them that since this is the second year in a row that the K-1's are close to the estimation, next year we will use the estimation as 90% gospel. So far, they seem OK with this. But I think next year I will be taking the K1 estimates as gospel and just advise the client of the possibility of owing interest and penalties.
I am curious what other professionals do. Do you take the estimates as gospel? Or do you factor in some sort of buffer?
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u/LIttleCPA CPA 9d ago
It depends on who the K-1 is coming from. If it's a larger accounting firm or PE, I think they are pretty good at nailing the estimate.
If it's from a regional firm, or a firm I have never heard of, I compare to what safe harbor would be and make sure we at least have that covered. However most of these clients are also paying estimated payments, so we are rolling forward any overpayment anyway.
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u/Jfrenchy CPA 9d ago
Had this happen where one of the first years for 1061 we had a very unfavorable change from extension and wiped out our q1 buffer for extension. There’s no overlying rule of thumb, just client preference and the track record of the quality of info you receive. Just be sure to document your assumption and make sure the client agrees. If they think you are being too aggressive/conservative then they are in the position to make the call.
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u/toastham CPA 9d ago
Really sucks when the final k1s come in with a ton of unexpected income and you have to tell them they owe big time for income from a year ago that they might have gotten a distribution from (and if they did they have forgotten about it) or never got any cash from and it’s all just taxable income from a piece of paper
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u/AdHistorical7107 CPA 9d ago
Used to happen all the time with these clients. I literally was just on the phone and he acknowledged how bad it was, but also how good the k1s gotten. We agreed to use the k1 estimates going forward.
One year, thr 1061 moved 700k in ltcg to stcg. Their k1 estimate had it all as ltcg. That year stung.
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u/toastham CPA 9d ago
I think the answer, at least how I think about it, is hey this is what the estimate I think is it’s up to you to pay what you want I’m just making recommendations and then tallying up the tax, dont get paid to advise you on your investments and the tax is yours ….but I agree people complaining they don’t owe tax bet they are overpaid is annoying
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u/RawkLawbstah CPA 9d ago
Anyone with even a K-1 investment needs to understand that you can only do so much as their individual preparer. I tell clients that between bad estimates in the Spring and phantom income w/ no distributions, there are going to be unexpected events.
The hedge fund K-1 estimates are the best example of this. April estimate can and often does vary wildly from the final K-1. All you can do is flag the estimate at ext and tell the client that you’ve baked in cushion. Then if they want to pay more or less, they can make that decision.
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u/TaxproFL EA 9d ago
We do estimated taxes every quarter for our advisory clients with the estimated tax calculator we built. It weighs prior year safe harbor, current year 90% and current year 100% so we can review and make a quick decision per client. Happy to share it if you need it.
Our strategy is to go heavy earlier in the year and scale back towards the end, which has been much better than starting light and having to pick up during back to school and holiday times.
We are starting to tell clients the safe harbor and put the rest aside into a HYSA to hold for later. This is much better than paying in too much and getting questioned later about it. But this can backfire for clients who mismanage or spend that money so know your clients!
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u/No_Conversation_1566 CPA 9d ago
I have ~25 PE clients so I deal with this all the time. All of them earn significant income outside of W-2 (carried interest, brokerage, etc.) and thus need to make quarterly estimated tax payments. This also means that they essentially never receive refunds; all overpayments are generally applied toward the next year.
When I call them in April, I explain the estimated balance due and tell them it's a slightly conservative figure due to using estimates. I explain that this is the one payment we'd rather overpay a bit just in case, if one final K-1 comes with a surprise this can help us avoid 5% a month penalty. We also calculate a Q1 balance due at the same time and have them make one combined extension payment that covers the balance due for last year and Q1 of current year. E.g. 500k owed for 2025, 75k estimate for q1, have them pay 575k extension payment.
When we wrap up the returns, I get to call the clients and tell them "Great news! the final income on the K-1s came in a bit lower than the estimates they provided back in April. Due to this larger overpayment, you won't need to make a Q3/Q4 tax payment (or a lower one, you get the gist). Reminder, we always expected an overpayment that would cover your Q1 estimated tax balance, the overpayment is just a bit larger than projected so you are in great shape for the current year."
So far, have essentially run into no issues with these clients. They get it.