IRS Issues Draft 2019 Partnership K-1s with New Reporting Requirements

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.

About the Author(s)

Ben is a Principal in the Tax Advisory Group (TAG) of HBK and works in the Youngstown, OH office. He has been with the firm since 2009 and has focused extensively on entity tax issues, entity planning, and flow-through taxation. Additionally, he has experience with many of our real estate, manufacturing, and cannabis clients.

As a member of TAG, Ben frequently teaches tax-related training courses both internally for the firm and externally for clients and the public. Ben provides research and expert counsel on complex tax issues for our clients. He also regularly appeared on the mid-day news broadcast of Youngstown, Ohio's NBC affiliate station in a segment called “Smart Money” which highlights personal financial planning tips.

Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.