Proposed Changes to K-1 Showcase IRS Focus on DREs, 704(c), and Tax Capital Accounts11 / 24 / 2019
Tax Form: Schedule K-1 (2019)
Tax Trouble: With the new Schedule K-1 (2019) draft published by the IRS, practitioners and partners/members can anticipate more of a focus on the part of the IRS on tax capital accounts and 704(c) issues
The IRS has issued proposed drafts of a new Schedule K-1 (2019), in which they make changes to the form.
The changes include:
NEW PARTNER DETAIL BREAKDOWN TO INCLUDE DETAILS REGARDING ANY DRE PARTNERS/MEMBERS
In proposing revisions to Section H of the K-1 to include a H1 and H2 section, the IRS is looking to force as part of H2, an identification of any disregarded entity partners/members, with taxpayer identification numbers.
SECTION J OF THE SCHEDULE K-1 CHANGED TO ADD PLACE TO MARK WHETHER OR NOT DECREASE IN % OWNERSHIP OR INTEREST IN PROFITS, LOSSES AND CAPITAL
In proposing revisions to Section J of the K-1, this is the section that outlines the beginning and ending percentage of ownership in profits, losses and capital. the IRS is proposing to have the partner/member identify whether or not any decreases in the % of beginning and ending balances in the beginning and ending % of ownership in capital, profits and losses.
PROPOSED CHANGE TO SECTION K, PARTNER'S SHARE OF LIABILITIES TO ALLOW FOR BOX TO BE MARKED TO INDICATE THAT SHARE INCLUDES SHARE OF LOWER-TIER PARTNERSHIPS
The IRS proposes to change this section simply by adding a place to check a box if Item K includes liability amounts from lower tier partnerships.
SCHEDULE L NOW FOCUSES ON TAX BASIS CAPITAL ACCOUNT, AND NO LONGER ALLOWED TO KEEP CAPITAL ACCOUNTS ON ANY OTHER BASIS FOR TAX PURPOSES.
The IRS proposes to change Section L to the K-1, to allow parties to indicate that the capital accounts are kept on a 704(b) or other such basis, as the tax basis is now required.
NEW SECTION N TO THE K-1 WOULD REQUIRE LISTING OF PARTNER/MEMBER SHARE OF NET UNRECOGNIZED SECTION 704(c) GAIN/LOSS
The IRS proposes to add a new Section N to the bottom left hand side of the K-1, which would require a listing of a member/partner's share of net unrecognized 704(c) gain or loss.
ON BOTTOM RIGHT SIDE OF PROPOSED K-1 FOR 2019, IRS PROPOSES TO HAVE PARTNER CHECK THAT MORE THAN ONE ACTIVITY FOR AT-RISK PURPOSES AND PASSIVE ACTIVITY PURPOSES BE IDENTIFIED/MARKED AND SUPPLEMENTED
Proposing additional items 21 and 22 to the Schedule K-1 listing of items on right side of the form, the IRS is looking to have the partner/member identify if more than one activity for at-risk and passive activity losses, and if so, to attach statement.
These changes are under review for comments. Because these are draft Form K-1 changes to the 2019 tax year, tax practitioners and consumers will want to closely monitor how/if these changes are adopted.
Because the K-1 contains incredible amounts of information, it is imperative that anyone preparing the K-1 fully understand each of these subsections to the form. If any part of the information contained within the four corners of the K-1 is in error, efforts should be made to let the partnership/LLC representatives know of the error and afford them a chance to fix it through issuance of a schedule K-1. If those errors are not fixed, then the partner/member will be in a position to prepare IRS Form 8082 and bring about a notice of inconsistent treatment. If you have any questions with regard to these type of issues, reach out to T. Scott Tufts, 407-647-7887.