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New Partnership Reporting Requirement: Negative Tax Basis Capital Account Information

Overview

The IRS now requires partnerships to report each partner’s tax basis capital on their respective Schedule K-1 (Line 20, code AH) if the amount was negative at either the beginning or end of the year beginning with taxable years after December 31, 2017.

Negative Tax Basis Capital

The IRS defines a partner’s tax basis capital account (or “tax capital”) as a partner’s equity calculated using tax principles, not based on GAAP, Section 704(b), or other principles. Negative “tax basis capital” can exist if a partnership allocates tax deductions or losses or makes distributions to a partner in excess of the partner’s tax basis equity in the partnership. It can also occur when a partner contributes property subject to debt in excess of the property’s adjusted tax basis to a partnership.

Who Must Comply

All partnerships must comply with this new reporting requirement unless the partnership satisfies all four of the below conditions provided on Schedule B, Question 4 of Form 1065:

  1. The partnership’s total receipts for the tax year were less than $250,000;
  2. The partnership’s total assets at the end of the tax year were less than $1 million;
  3. Schedule K-1s are filed with the return and furnished to the partners on or before the due date (including extensions) for the partnership return; and
  4. The partnership is not filing and is not required to file Schedule M-3.

Penalties for Noncompliance

For the 2018 tax year, the IRS has provided penalty relief for missing negative tax basis capital account information (Notice 2019-20) provided (i) partners’ Schedule K-1s are timely filed with the IRS (including extensions) and have been furnished to the partners; (ii) the filed and furnished Schedule K-1s contain all other required information; and (iii) the supplemental information schedule is filed with the IRS no later than one year after the original, unextended due date of Form 1065 (i.e., for 2018 calendar year taxpayers, the due date would be March 15th, 2020).

For tax years beginning after December 31, 2018, penalties for noncompliance are $195 per partner, per month, for up to 12 months for each tax reporting period.

Recommended Next Steps

MFA recommends partnerships complete a tax basis capital account analysis to determine if each partner’s reportable tax basis capital was negative at the beginning or end of the tax year. If you would like to discuss having MFA prepare this analysis and submit the information to the IRS on your behalf, please contact us.

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