UPDATE: IRS Reverses Course on Tax Basis Capital Account Reporting Requirement for Tax Year 2019
December 26, 2019
Due to overwhelming feedback, the IRS has backed away from tax basis capital account reporting requirements for tax year 2019.
In November 2019 we detailed the updates included in the IRS’s draft 2019 Schedule K-1 (Form 1065). These updates included the requirement for each partner’s capital account to be presented on the tax basis (including Section 704(c) adjustments) starting on tax year 2019 Schedules K-1 for Partnerships filing Form 1065. This requirement represented a significant obstacle for many companies and tax preparers, as the data necessary to determine tax / 704(c) basis capital accounts may not have been readily available to them.
In early December 2019 the IRS reversed course on the tax / 704(c) basis capital account reporting requirement in Internal Revenue Notice 2019-66 (https://www.irs.gov/pub/irs-drop/n-19-66.pdf). The IRS adjusted its requirements after hearing from persons required to file forms 1065 that some would be “unable to timely comply with requirements”. The IRS reportedly received significant feedback from taxpayers, practitioners, and the American Institute of Certified Public Accountants (AICPA).
While many taxpayers and tax preparers saw the IRS’s change of heart as good news, it only provides a one year delay in the requirements. Notice 2019-66 indicates that tax / 704(c) basis capital accounts will be required for the 2020 tax year. In addition, requirements that were first implemented for the 2018 tax year are still in force. Specifically, partnerships are required to provide tax basis capital account balances for any partner who does not have positive tax capital at the beginning or end of a tax year.
TAKEAWAY: While the IRS has provided a temporary reprieve for taxpayers whose partnership K-1’s are not presented on a tax / 704(c) basis, taxpayers should consider coordinating with partners and / or tax professionals to establish appropriate tax / 704(c) capital account balances leading into the 2020 tax year. Contact us with questions or to establish the best plan of action for these requirements.