When working on a Form 1065 with LLC members and you receive the following error message:
"Form 1065 p4-5: Recourse liabilities. The program will not allocate recourse debt to Limited Liability Company Members. Either reclassify the debt as nonrecourse or enter a special allocation code to indicate how the amount should be allocated."
There are two ways to resolve this error:
- Reclassify the debt as nonrecourse, or
- Enter a special allocation code to allocate the recourse debt.
Please refer to the IRS instructions for Form 1065 and the Schedule K-1 for determining if you need to keep this amount as recourse or if you need to classify it as nonrecourse.
Option 1 - Reclassifying the debt as nonrecourse:
- Navigate to Form 1065, page 5.
- Find the Partners' Liabilities Smart Worksheet located below the Schedule L.
- Input the amount of the debt reported on line D to the amount on line C.
- Remove the number on line D and key in a 0.
Option 2 - Enter a special allocation code to allocate the recourse debt:
- Navigate to Form 1065, page 5.
- Find the Partners' Liability Smart Worksheet located below the Schedule L.
- Enter a special allocation code in the column to the left of the dollar amount on line D.
- To allocate by the partners profit percentage enter P.
- To allocate by the partners loss percentage enter L.
- To allocate by the partners ownership percentage enter O.
- To allocate by any other dollar figure please see 1065, Special Allocation to Partners.
