Additional Reporting Requirements for Form 1065 Schedule K-1 are here!
As a new tax filing season begins, it brings with it an updated Form 1065 and related Schedule K-1. As a result of the 2017 Tax Cuts and Jobs Act, the IRS has issued notices and changes to the Partnership Schedule K-1, including the reporting of tax basis capital.
Tax Basis Capital
Per the IRS, “A partner’s tax basis capital account (sometimes referred to simply as “tax capital”) represents its equity as calculated using tax principles, not based on GAAP, § 704(b), or other principles.” In many instances, the tax basis capital is equal to the partner’s tax basis (outside basis) in its partnership interest. Tax basis capital differs from tax basis in that tax basis capital does not account for a partner’s share of liabilities. Tax basis capital can be negative, and in the event of a transfer, the tax basis capital account of the transferee becomes equal to the tax basis capital account of the transferor (unless a Section 754 election is in place or a mandatory Section 743 adjustment is necessary). In order to calculate both tax basis capital and tax basis, the following items are included in the calculation, but is not all inclusive:
+ Cash and adjusted tax basis of net property contributions
– Cash and adjusted tax basis of net property distributions
+ Partner’s cumulative taxable income (loss)
+ Tax-exempt income
– Nondeductible expenses
– Noncapital expenditures
Partnerships were never required to calculate and track partners’ tax basis capital, as this was the responsibility of each partner respectively. In order to be prepared for this change, partnerships should begin gathering prior year tax returns and begin calculating tax basis capital accounts for each partner.
Additional Reporting Requirements Related to Tax Basis Capital
With the release of the new tax law, the IRS increased reporting requirements on Form 1065 Schedule K-1. New requirements regarding negative tax basis capital were created for partnerships with taxable years beginning on or after January 1, 2018, but before January 1, 2019. The 2018 Form 1065 instructions stated that if the partnership’s capital accounts on Item L were not reported as tax basis capital, a disclosure of the partner’s beginning and ending shares of negative tax basis capital was to be reported on line 20, code AH. The instructions further stated that if the partnership failed to comply with the disclosure, it would be subject to penalties.
Fortunately, relief from penalties was granted with the release of Notice 2019-20 in March 2019. The notice indicated that as long as the 2018 Schedule K-1s were timely filed with the IRS, timely furnished to the appropriate partners, and all other required information was reported, the partnership would be allowed an extension for the disclosure of no later than one year after the original, un-extended due date of the partnership return, which is March 15, 2020 for calendar year taxpayers.
In order to comply with Notice 2019-20, a partnership must submit a schedule with the statement “Filed Under Notice 2019-20” providing, for each partner with a negative tax basis capital account, the partnership’s taxpayer information, the partner’s name, address and taxpayer identification number, along with the taxpayer’s amount of negative tax basis capital at the beginning and end of the taxable year. The partnership must send the schedule to the following address and is not required to file amended Schedule K-1s or file an administrative adjustment request. Further presentation and guidance can be found on the IRS website under Form 1065 FAQ.
1973 North Rulon White Blvd.
Ogden, UT 84404-7843
Attn: Ogden PTE
Recently, the IRS has taken further action related to tax basis by revising Item L on the 2019 Schedule K-1. The draft K-1 and instructions released in September 2019 changed Item L to report tax basis capital. This modification has since been postponed until the 2020 tax year (Notice 2019-66). With the release of the finalized 2019 Form 1065 instructions in early January 2020, the IRS instructs partnerships to continue using line 20, code AH to disclose a partner’s beginning and ending shares of negative tax basis capital.
Section 704(d) Changes
One of the many changes that has evolved from the issuance of the 2017 Tax Cuts and Jobs Act relates to IRC Section 704(d), which limits a partner’s distributive share of loss to the extent of the partner’s outside basis in its partnership interest as of the end of the partnership tax year. This modification defers the losses in excess of basis, which should now carried forward to future years. In addition, the Tax Cuts and Jobs Acts changes the way foreign tax credits and charitable contribution deductions affect tax basis. Beginning with tax years after December 31, 2017, charitable deductions and foreign taxes are subject to the same limitation if the taxpayer’s tax basis in the partnership is zero, thus limiting the losses, charitable contribution deductions, and foreign tax credits a partner can take. If the charitable deduction by the partnership is a result of built-in gain property, the excess amount over its adjusted tax basis can be deducted without limitation. With the change enacted by the new tax law, partners may be further limited on the deductible charitable contributions and foreign tax credits they are able to use on their tax returns each year.
Additional Changes to Schedule K-1:
To assist readers, the following are some new additions to the Form 1065 Schedule K-1 to be aware of, heading into the 2019 tax filing season:
- A partner information question for disregarded entities and additional information requested.
- A checkbox indicating if a partner’s profit/loss/capital percentages have decreased due to a sale or exchange of the partnership interest.
- A checkbox indicating if liabilities include amounts from lower-tier partnerships.
- Schedule N to show a partnership share of net unrecognized section 704(c) gain/(loss).
- New checkboxes for Lines 21 and 22, indicating if one or more activities are at-risk or passive activities.
- Box 20 codes:
- Code Z: Section 199A information.
- Code AA: Section 704(c) information.
- Code AB: Section 751 gain/(loss).
- Code AC: Section 1(h)(5)gain/(loss).
- Code AD: Deemed Section 1250 unrecaptured gain.
In addition, guaranteed payments are now required to be shown separately for amounts for services and for capital as well as a total amount.
As a result of the Tax Cuts and Jobs Act of 2017 and the demand for additional transparency on tax returns by the Internal Revenue Service, reporting and disclosure requirements for partnerships have increased. Since Form 1065 and Schedule K-1 are continuously changing, it is important to be mindful and stay up-to-date, as the tax law is complex. Should you need assistance interpreting these changes in tax law and understanding the updated filing forms, please contact a Marcum professional.