2019 Form 1065 and K-1 Updates
November 11, 2019
The IRS released draft versions of Form 1065 and Schedule K-1 (Form 1065) on September 30, 2019 with changes aimed at ensuring proper reporting and compliance with the code and related regulations. The most significant change for 2019 is the presentation of capital accounts on the face of Schedule K-1, “K-1”, with the draft version showing “Tax Basis Capital” without the option of showing the K-1 on any other basis (i.e. GAAP). While some partnerships have been presenting their K-1s on tax basis from the beginning, this may create additional time and effort for those who have historically presented K-1s on GAAP or other bases. Considering an update made to the instructions to Form 1065 for 2018 requiring disclosure of negative tax capital accounts, this change is seemingly in line with IRS’s aim to track members’ inside tax basis in their respective interest.
While most of the other changes shown in the draft forms will not require a significant amount of extra effort for most taxpayers, some will certainly direct taxpayers to additional reporting requirements. Informational reporting with regards to disregarded entities is now requested on the face of the K-1 with instructions not to list a DE as the partner, but to disclose it below the identifying information presumably to track items through reporting levels. It is therefore recommended that partnerships have all necessary information in their records now to ensure they are in compliance with this requirement.
Changes for entity reporting include disclosing disguised sales and transactions involving foreign partners’ sale or exchange of partnership interest, while also separately stating adjustments related to Sec. 743(b). These changes are intended to direct taxpayers to other reporting and/or withholding obligations, some of which are new.
Some items that affect both entity and member reporting include disclosing Sec. 465 (At Risk) and Sec. 469 (Passive Activity) aggregation and grouping, respectively, and distinguishing between Guaranteed Payments made for services or for use of capital. The aggregation and grouping election check box likely are an attempt to ensure year to year conformity in the election and maintenance of consistent reporting. The differentiation between the origination of guaranteed payments to partners leads down two paths, one being an employee (for services rendered) and the other as an investor via debt (for the use of capital). The employee view would subject the member’s payments to self-employment tax (Sec. 1402(a)(13)) while the debt investor would include their payments in the Net Investment Income tax computation as if they were interest (REG–130843–13).
It is important to note that the changes above are based on draft forms which have been updated once already; final forms may be different than what we are currently seeing. If you have any questions, please don’t hesitate to contact us.