Expertise Beyond the Numbers

2019 Proposed Regulations Under Chapter 3 and Chapter 4

As discussed in our prior article on “Reporting and Withholding Requirements for Funds with Foreign Investors,” partnerships with foreign partners and withholdable income are required to file Forms 1042 and 1042-S each year. The IRS recently released proposed regulations that would change the reporting and deposit procedures for Forms 1042 and 1042-S beginning with income earned in 2019.

Under current law, withholding agents are required to follow the “lag method” meaning income reported on a Year One Schedule K-1 is reported on a Year Two 1042-S. Going forward, this Year One income would be reported on a Year One 1042-S instead. The deposit rules would similarly be adjusted so that deposits of amounts withheld from distributions would be attributed to the year the income was earned by the partnership.

Under the proposed regulations, the filing of Form 1042-S will be due September 15th in cases where a partnership withholds on a distribution after March 15th of the year following the year the income was earned by the partnership. The IRS intends to add a check box to the new 1042-S Form to indicate whether it qualifies for the September 15th due date. This makes it easier for those tiered partnerships who receive K-1s during the summer.

Overall, the proposed regulations simplify the withholding rules by removing the reporting mismatch under the “lag method.”

Does your fund have foreign partners? If so, you need to make sure you are following the correct withholding procedures for income earned in 2019. If you have any questions, please contact us.

2019 Tax Planning