By Mike Radich, CPA
Since 2018, the IRS has been priming tax practitioners on new capital analysis reporting requirements on the Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc., and it seemed like we were finally going to have a resolution for the 2019 tax year. Draft forms and instructions released on Sept. 30, 2019, detailed significant changes to partner basis reporting in that all partners’ basis must be reported on the tax basis. The date of compliance was tentatively set at March 15, 2020, however, on Dec. 9, 2019, the IRS dropped Notice 2019-66 – again postponing the tax basis reporting requirement.
So, what does this mean for practitioners for the 2019 tax filing season? Well, it means that 2019 reporting will be the same as 2018.
Looking at Notice 2019-66, partnerships or other persons (LLCs, LLPs, PLLCs, etc.) will be required to report partners’ capital accounts exactly as it was done in 2018. That means if the partnership or other person reports partner basis on GAAP, Section 704(b) Book, or any other method, or if a partner’s tax basis capital account is negative at either the beginning or end of the tax year, the tax basis capital amount must be reported on line 20 of the Schedule K-1 using code AH. Additionally, an elective safe harbor calculation method is available to partnerships or other persons. Under this method, a partner’s tax basis negative account is the excess of the partner’s share of partnership liabilities under IRC Section 752 over the partner’s outside basis. For partnerships or other persons making this election, a statement must be attached to the partner’s Schedule K-1 that reports the amount of the partner’s outside basis, share of partnership liabilities under Section 752, and tax basis capital account under the safe harbor approach at the beginning and end of the tax year at issue. This information is consistent with the 2018 Form 1065 Frequently Asked Questions page as required under Notice 2019-20, Penalty Relief for Missing Negative Tax Basis Capital Account Information. However, the information required under FAQ 8(2)(d)(iii) is the only information required for 2019. The other items apply to the 2018 tax year only.
Furthermore, partnerships or other persons that satisfy the following four conditions do not have to report tax basis negative capital account information. This is because such partnerships or other persons are not required to complete Schedule K-1 (Form 1065), part II, item L, regarding partner capital account analysis (FAQ 7).
- The partnership’s or other person’s total receipts for the year were less than $250,000.
- The partnership’s or other person’s total assets at the end of the tax year were less than $1 million.
- Schedule K-1s are filed with the return and furnished to the partners on or before the due date (including extensions) for Form 1065.
- The partnership or other person is not filing and is not required to file Schedule M-3, Net Income (Loss) Reconciliation for Certain Partnerships.
As we move into 2020, the IRS has promised that it will release timely and relevant information regarding the tax basis capital account reporting requirements for tax years beginning on or after Jan. 1, 2020.
Mike Radich, CPA, is the founding and managing shareholder of MGR CPA & Consultants PC in Pittsburgh. He is also chair of PICPA’s Federal Taxation Committee.
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