Tax Basis Reporting Requirements Delayed
On September 30, 2019, the Internal Revenue Service issued drafts of the 2019 Forms 1065 and 8865, Schedule K-1 proposing to require partner tax basis capital reporting by all partnerships and to prohibit the reporting of partner capital under Section 704(b) of the Internal Revenue Code, generally accepted accounting principles (GAAP), or any other method for 2019.
Based on comments received, the Department of the Treasury and the IRS have become aware that certain persons required to file Forms 1065 or 8865 may be unable to timely comply with the requirement to report partner capital on the tax basis method for 2019.
On December 9, 2019, the IRS issued Notice 2019-66, which provides that partnerships required to furnish and file Form 1065 or 8865, Schedule K-1 will not be required to report partner capital accounts using the tax basis method for 2019 but will be required to do so for tax years that begin on or after January 1, 2020.
Instead, partnerships must report partner capital accounts for 2019 consistent with the reporting requirements for the 2018 Forms 1065 or 8865, as applicable. This means that partnerships may continue to report partner capital accounts on Forms 1065 or 8865, Schedule K-1 using any method available in 2018 (tax basis, Section 704(b), GAAP, or any other method) for 2019.
For 2019 partnership taxable years, partner “tax basis capital” must be calculated as provided in the 2018 Form 1065 and Schedule K-1 instructions. Beginning with the 2018 partnership taxable year, if a partner’s tax basis capital was negative at the beginning or end of a partnership’s taxable year, a partnership or other person is required to report on line 20 of a partner’s Schedule K-1, using Code AH, such partner’s beginning and ending tax basis capital. Partnerships and other persons who follow Notice 2019-66 and report partner capital accounts for 2019 on Schedule K-1 by using a method other than the tax basis method must continue to comply with the requirement in the 2018 forms and instructions with respect to negative tax basis capital accounts.
In addition to delaying the reporting of 2019 partner capital accounts solely on the tax basis, the IRS announced the following other items in Notice 2019-66:
- The 2019 draft K-1s for Forms 1065 and 8865 propose to require partnerships to report partners’ shares of net unrecognized Section 704(c) gain or loss as of the beginning and end of the partnerships’ 2019 taxable year. Notice 2019-66 defines a partner’s share of “net unrecognized Section 704(c) gain or loss” as the partner’s share of the net (net means aggregate or sum) of all unrecognized gains or losses under Section 704(c) in partnership property, including Section 704(c) gains and losses arising from revaluations of partnership property. Net unrecognized Section 704(c) gain or loss reporting will not apply to publicly traded partnerships (defined in Section 7704) and their partners for 2019, and thereafter, until further notice.
- The 2019 Form 1065 draft K-1 requires partnerships that have aggregated activities for purposes of the at-risk limitation rules under Section 465 to report certain additional information separately for each activity on an attachment to a partner’s Schedule K-1. Based on comments received, the IRS announced in Notice 2019-66 that partnerships required to furnish and file Schedule K-1 will not be required to report information for each at-risk activity separately for 2019 that was not previously required to be reported for the 2018 partnership taxable year. Partnerships must still indicate in Item K on Form 1065 whether they have aggregated activities for Section 465 at-risk purposes for 2019.
- Taxpayers who follow the provisions of Notice 2019-66 will not be subject to any penalty for reporting in accordance with the guidance provided in the notice, including a penalty for failure to furnish correct payee statements and a failure to file a partnership return that shows the required information.
Comments received by the Treasury Department and the IRS from practitioners and trade associations had a meaningful impact on the timing of the proposed disclosure requirements. Although taxpayers now have more time to fully prepare for the new tax capital and at-risk reporting requirements that will begin with their 2020 tax year filings, partnerships will be subject to net unrecognized Section 704(c) gain or loss disclosures for 2019 that necessitate data collection including a comparison of each partner’s Section 704(b) capital and their adjusted tax basis. The Tax Team at MFA can assist partnerships with their disclosures and help ensure they are ready to meet IRS requirements.
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