Your Schedule K-1s being filed this year may look very different from last year, particularly for private equity and investment industry funds. Toward the end of 2019, the IRS issued a new Schedule K-1 Form (Form 1065) that aims to gather more information from partnerships than ever before.
The additional information is largely aimed at helping the IRS identify noncompliant taxpayers or those who may be at the highest risk to become noncompliant. Coupled with the relatively new partnership IRS audit rules that went into effect in 2018, many anticipate an increase in IRS partnership audits may not be far off.
Read “Final Guidance Released on Partnership Representatives Under IRS Partnership Audit Rules”
Below are the three primary changes to look for on your K-1s in 2019 and beyond.
Partners that are considered disregarded entities are subject to additional disclosure requirements. A disregarded entity can be a business entity organized as an LLC with only one owner or a grantor trust, and, therefore, is not recognized for tax purposes as an entity separate from its owner. Partnership K-1s will now reflect the information of the beneficial owner of the disregarded entity, rather than the disregarded entity itself. Therefore, if the direct partner is a disregarded entity, the information of the beneficial owner needs to be disclosed, including the name and EIN of the beneficial owner, type of entity of the beneficial owner, and name and EIN of the disregarded entity.
Essentially, these changes mean your name could appear on the K-1 in these areas for the first time. Disclosing this information about the beneficial owner will allow the IRS to trace income and deductions reported by the partnership to the beneficial owner’s personal tax return.
Note: There are potential penalties related to providing inaccurate information on a K‐1. Reach out to your investors if your partnership contains an LLC or trust to confirm if they are a regarded entity. If they are, do not assume your CPA knows; communicate that information during K-1 preparation.
New to the K-1 this year is the requirement for a partnership to disclose each partner’s share of net unrecognized Section 704(c) gain or loss for the beginning and end of the year. An unrecognized Section 704(c) gain or loss arises when a partner contributes property (other than cash) into a partnership with basis different from the fair market value on the date contributed, or when partnership assets are booked up to fair market value as a result of an admission of a new partner. Reporting is required for all built‐in gain or loss amounts. Disclosure of unrecognized gain or loss will provide the IRS a way to track if the gain or loss is realized upon a triggering event.
As in 2018, all partnerships must report negative partners’ tax capital when not otherwise reported. However, unlike in 2018, there is no extended period to file and report this information in 2019; any partner’s negative beginning and ending tax capital accounts must be disclosed on Line 20AH.
As a side note, beginning with 2020 tax returns, the IRS will require partnerships to track and report the tax capital for each partner annually, which may require significant time and effort for larger partnerships to comply. Tax basis is used in determining the income or loss realized upon a sale or transfer, the deductibility of losses, tax implications of distributions, liquidations and several other transactions.
In addition to these larger changes, taxpayers will notice a host of others, including:
Contact Carmela Minnie or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.