2022 Tax Filings: Updates and Reminders for Alternative Investment Fund Clients
By Ryan Siegel, CPA, Tax Supervisor, Alternative Investment Group
The 2022 tax filing season is upon us. There are a few notable changes this year, as well as important dates to remember. Keep the following exceptions, penalties, and due dates in mind.
K-3 Filing Exceptions
The IRS has finalized the 2022 partnership instructions for Schedules K-2 and K-3. Securing an exception to avoid filing these forms is now more difficult.
Per the finalized instructions, there are two exceptions available. The first is the Domestic Filing Exception, which says a domestic partnership is not required to file or furnish forms K-2/K-3 to its partners if it meets the following criteria for the 2022 tax year:
- No or limited foreign activity;
- Partners are all U.S. citizens/resident aliens;
- Partners receive written notice that they will not get a Schedule K-3 unless the partner requests one; and
- The partnership does not receive any 2022 Schedule K-3 requests in the month before it files Form 1065 (the one-month date).
To meet the second criterion listed above, the partnership must not be owned by another partnership, corporation, foreign trust (grantor or non-grantor), or foreign estate.
The second exception, referred to as the Form 1116 Exemption, says a domestic partnership is not required to file forms K-2/K-3 if it meets the following criteria for the 2022 tax year:
- All partners are eligible for the Form 1116 exemption; and
- The partnership is notified of the partners’ eligibility for the Form 1116 exemption by the one-month date.
If the partnership only receives notification of eligibility from some partners, it must complete Schedules K-2 and K-3 for the partners who are not exempt or have not notified the partnership of their exemption.
Penalties for Tax Year 2022
For 2022, penalty relief for taxpayers who exercise good faith is no longer applicable as it relates to filing Schedules K-2 and K-3. The relief was provided in FAQ 10 and Notice 2021-39 to ease the original transition period. If you do not meet the above exceptions and you file late or fail to file, you’ll likely incur a couple of penalties. The Late Filing of Return (Schedule K-2) penalty is $220 for each month or part of a month that the failure continues, multiplied by the total number of partners in the partnership during any part of the tax year (maximum of 12 months). The Failure to Furnish Information Timely penalty is $290 for each Schedule K-3 for which a failure occurs.
Other Form 1065 Updates and Reminders
Below are a few helpful reminders and important dates to remember for the 2022 tax year.
Temporary allowance of 100% business meals:
- A partnership is allowed a 100% deduction for certain business meals paid or incurred after 2020 and before 2023.
Section 1061 reporting:
- Section 1061 recharacterizes certain long-term capital gains of a partner who holds one or more applicable partnership interests as short-term capital gains. An applicable partnership interest is an interest in a partnership that is transferred to or held by a taxpayer, directly or indirectly, in connection with the performance of substantial services by the taxpayer or any other related person, in an applicable trade or business.
- For all pass-through entity tax returns filed after December 31, 2021, the entity is required to attach Section 1061 Worksheet A to the partner’s Schedule K-1. Worksheet A shows an applicable partnership interest’s capital gain in a one-year distributive share amount and a three-year distributive amount.
EIN reporting for IRA partners:
- The partnership reports the EIN of the IRA’s custodian in item E of the K-1. If the partnership reports unrelated business taxable income to an IRA partner on line 20, code V, the partnership must report the IRA’s EIN on line 20, code AH.
Section 743(b) adjustment:
- Code U on line 20c of Schedules K and K-1 is used to report the total remaining section 743(b) adjustment for applicable partners. This was reported in previous years on line 20, code AH.
Payroll credit for COVID-related paid sick leave or family leave:
- If, under the Families First Coronavirus Response Act (FFCRA), as amended, and the American Rescue Plan Act of 2021 (the ARP), an eligible employer took a credit against payroll taxes owed for amounts paid for qualified sick leave or family leave incurred during the allowed period (4/1/20-9/30/21), then the amounts claimed are reportable as income on line 7(other income) as there is no double tax benefit allowed.
Important Due Dates
March 15, 2023
- Deadline for S-corporations and partnership tax returns (Forms 1120-S and 1065) to file for tax year 2022, or to request an automatic six-month extension.
- Partnerships: File Forms 8804 and 8805 for a calendar year entity. For an automatic six-month extension, file Form 7004.
- Partnerships (NYS only): File NYS IT-204-LL and pay fee if applicable.
- File Forms 1042 and 1042-S and furnish copy to income recipient. File Form 7004 for automatic 30-day extension of Form 1042, and Form 8809 for automatic 30-day extension of Form 1042-S. A separate request is required for a 30-day extension to provide Form 1042-S to recipients.
April 18, 2023
- Deadline to file corporate tax return (Form 1120) for tax year 2022, or to request an automatic six-month extension of time to file.
June 15, 2023
- Deadline to file foreign corporate tax return if corporation does not have an office or place of business in the United States (Form 1120-F) for tax year 2022, or to request an automatic six-month extension of time to file.
There are always many deadlines and updates to filing requirements to consider each tax year. The above information can be very complicated to keep track of and understand. Consider consulting with your Marcum tax professional to discuss tax planning opportunities and filing requirements that may be of issue for you.