The IRS recently released the draft 2019 Form 1065 Schedule K-1. The draft includes significant changes which place new disclosure requirements on partnerships.

According to the IRS release, the changes are intended to “improve the quality of the information reported by partnerships both to the IRS and the partners,” and “aid the IRS is assessing compliance risk” by identifying potential noncompliance. If finalized, these changes will create a significant compliance burden for partnerships.

New Required Reporting

Tax Basis Capital Accounts
Perhaps the most impactful of these changes is the requirement that a partner’s capital account be reported on the tax basis. Historically, the responsibility for keeping track of a partner’s basis has belonged to the individual partners, not the partnership. In prior years, partner capital accounts could be reported using tax, GAAP, Section 704(b), or any other basis. For partnerships reporting capital on something other than tax basis, recreating partner basis schedules may be a time consuming and costly process.

Partner’s Share of Net Unrecognized Section 704(c) Gain or (Loss)
Section 704(c) requires the built-in gain or loss (differences in value and basis) of property contributed to a partnership be tracked and specifically allocated amongst the partners using one of several acceptable methods. Previous rules required the partnership to disclose the amount of gain or loss at the time of contribution, and when pre-contribution gain was recognized. The draft K-1 includes lines for reporting each partner’s beginning and ending share of unrecognized Section 704(c) gain or loss.

Separate Reporting of Guaranteed Payments for Services and Capital
Guaranteed payments to partners will be broken out and reported on two separate lines of the K-1, one for services, and one for capital. A third line is added to the K-1 to report the total guaranteed payments. The new requirement may be linked to the IRS interpretation that guaranteed payments for the use of capital are subject to the new Section 163(j) limitation on the deduction for business interest.

Section 751 Gain (Loss)
Gain on the sale of a partnership interest, which is generally taxed at favorable capital gains rates, is reclassified as ordinary if the partnership owns Section 751 “hot assets.” Under the current rules, partnerships must file Form 8308 to report a sale or exchange of a partnership with Section 751 assets. The draft K-1 includes a requirement to report Section 751 gain or loss on the face of the K-1.

Additional Disclosures

• The K-1 for a partner that is a disregarded entity must identify the name of its beneficial owner
• Whether or not the allocated liabilities amounts include amounts from lower tier partnerships
• A special code for reporting income and deductions associated with Section 743(b) adjustments
• Whether a decrease in a partner’s profit, loss or capital is due to a sale or exchange of the partnership interest
• If the partnership aggregated or grouped activities for at-risk or passive activity purposes

Impact on 2019 and Beyond
Compliance with the numerous changes will require substantial effort from both tax professionals and partnership owners, adding time and complexity to the tax preparation process. HBK suggests taxpayers and their advisors start gathering the needed data now to ensure timely and complete filings for 2019 and beyond. For questions, please contact a member of the HBK Tax Advisory Group at 330-758-8613.

In today’s world we are seeing drastic changes in how we interact with our environment. Those interactions are becoming predominantly electronic through the use of phones, computers, watches, etc. Our currency is following suit. By now, many have heard the terms “bitcoin” or “cryptocurrency” – but do they understand the concept? The news regularly reports on how this electronic currency enables us to complete transactions in ways that we have not experienced in the past. While this technology is being embraced by some, there may be unexpected tax-reporting implications that the headlines often miss. It’s imperative for taxpayers engaging in foreign banking and potentially, in cryptocurrencies, to understand basic information related to foreign reporting requirements. The Basics of Cryptocurrency What is “Bitcoin” and how does it work? Bitcoin is a type of cryptocurrency, which is a digital virtual currency housed online. It is generally held in a virtual “wallet.” These virtual wallets operate like bank accounts in which a third party holds the currency. Cryptocurrency can be purchased using traditional analog currency, such as U.S. Dollars, Euros, British Pounds, etc. Bitcoin is the most popular form of cryptocurrency, and it is used as a functional currency by many major retailers including Amazon, Sears, Home Depot, and CVS. While some use cryptocurrency to function like traditional currency, many are using it for investment purposes in a manner similar to that of stocks being traded on an exchange. Foreign Bank Account Reporting in General The U.S. Department of the Treasury and the IRS want to be informed as to where taxpayers are keeping their bank accounts and their respective balances. Two main documents that taxpayers involved in the use of foreign banking should be aware of are the U.S. Department of the Treasury Foreign Bank and Financial Accounts Report (Form 114) and the IRS Statement of Specified Foreign Financial Assets (Form 8938). These two foreign reporting forms are applicable to U.S. citizens, residents, corporations, partnerships, and even trusts, and must be filed (along with a normal federal income tax return) if the filing requirements are met. In general, Form 114 is applicable if a taxpayer is holding a bank account outside the United States and the balance in the account exceeds $10,000 USD at any point during the tax year. Form 8938 would become applicable (in addition to or separate from Form 114) if the bank account balance exceeds $50,000 ($100,000 for married filers) for the tax year. Both forms are informational to the applicable governmental agency and no taxes are paid on the balance. However, severe penalties can and will be assessed for a failure to file these required forms. Cryptocurrencies as Foreign Bank Accounts Since cryptocurrencies are electronic currencies tied to a virtual wallet, it is possible that the wallet where the cryptocurrency is held may be located in a foreign country. While there is currently no official guidance related to foreign reporting for cryptocurrencies, it is possible that a taxpayer owning cryptocurrency could have foreign reporting requirements based solely on the location of the wallet. The IRS recently notified the public that letters are being sent to taxpayers who are cryptocurrency holders, urging them to comply with U.S. tax laws related to cryptocurrencies. We will provide details about additional reporting requirements, and other potential tax implications for cryptocurrency holders, as they become available. Please contact a member of the HBK Tax Advisory Group at 239-263-2111 if you would like to discuss potential foreign reporting requirements for cryptocurrency or any foreign banking matters. Additional Resources: https://www.irs.gov/businesses/comparison-of-form-8938-and-fbar-requirements https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar https://www.irs.gov/pub/irs-utl/irsfbarreferenceguide.pdf https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies https://bitcoin.org/en/how-it-works