IRS Releases Draft Schedule K-1
December 06, 2019
By Virginia Miller, Ambreen Naz and Richard Shapiro
The IRS recently released a draft Schedule K-1 for tax year 2019 with many proposed changes. The most significant of these changes is the requirement that a partner’s capital account provided in Part I, question L of the form, be reported on a tax basis.
Previously, the partner’s capital account could be reported on the Schedule K-1 on a tax basis, GAAP basis, Section 704(b) book, or other basis.
The Tax Cuts and Jobs Act created additional disclosure on the 2018 Schedule K-1 that required a taxpayer to report each partner’s tax capital account on Line 20AH if it was negative at the beginning or end of the year. However, in the new draft revision, the partner’s capital account is now required to be reported in Item L of the 2019 Schedule K-1 on a tax basis with no exception. Historically, most partnerships have reported partner capital accounts on a GAAP basis or other book basis. The tax basis determination requires a review of all prior year Schedule K-1s for each partner from the inception of a partnership through 2019.
Below is a list of other changes made in the 2019 draft Schedule K-1 that will require additional reporting to the IRS and partners.
Part II – Information About the Partner
- Item E – Only a social security number (SSN) or taxpayer identification number (TIN) is reported; a disregarded entity TIN should not be reported here.
- Item H2 – A new box is added to disclose a disregarded entity TIN and beneficial owner.
- Item J – Partner’s share of profit, loss and capital percentages: a box needs to be checked if a decrease in share is due to a sale or exchange of partnership interest.
- Item K – Partner's share of liabilities: a box needs to be checked if the share of liabilities includes liabilities from lower tier partnerships.
- Item N – Partner’s share of “net unrecognized Section 704(c) gain or (loss)”: – with respect to contributed property, the partnership must disclose a partner’s net unrecognized gain or loss at the beginning and end of the tax year.
Part III - Partner's Share of Current Year Income, Deductions, Credits, and Other Items
The draft Schedule K-1 added two more boxes to check:
- Box 21 – “More than one activity for at-risk purposes” and
- Box 22 – “More than one activity for passive activity purposes.”
The need for tax basis capital accounts and all the other changes reflected in the draft Schedule K-1 will involve substantial amounts of additional time and compliance burden. Taxpayers should be aware of the proposed changes and should discuss with their tax advisors the work necessary to comply with this new reporting to the extent adopted in the final 2019 Schedule K-1.