Major partnership reporting changes for 2019

The IRS recently released draft 2019 forms and instructions for Form 1065, U.S. Return of Partnership Income, and the corresponding Schedule K-1. In an effort to make audit issues more readily identifiable, partnership returns now require additional information be included. Some of this material is particularly complex and will require taxpayers and their advisors to spend more time and resources to ensure it is reported accurately.

While the forms and instructions are in draft format, all indications from the Treasury Department and commentators lead us to believe the IRS is unlikely to make substantial modifications. The new requirements are the result of an effort to make certain partners are correctly reporting certain partnership transactions. Furthermore, the data is necessary to administer compliance needs under the Tax Cuts and Jobs Act for computing items such as the business interest expense deduction limitation, the qualified business income deduction and the limitation on excess business losses of noncorporate taxpayers.

Despite the additional compliance burden, we view this as an excellent opportunity to review the economics of the partnership and to confirm that the reporting on the tax return accurately reflects the economic deal among the partners. This is the best way to ensure the tax benefits and burdens are shared in accordance with your economic deal and to avoid unexpected allocations of taxable income or loss.

Key changes

The following summarizes significant changes in the draft 2019 Form 1065 and corresponding Schedule K-1.

• Question L on the K-1 will now require reporting of tax basis capital. Reporting capital on GAAP or other methods on this line is no longer permitted.
  For 2018 returns, the IRS mandated disclosure if any partner had negative tax capital at the end of the year. For 2019 returns, all partner K-1s require tax basis capital reporting on line L.
  Tracking tax capital generally has been considered the responsibility of the partner, however, the IRS now compels the partnership to track and report tax capital for all partners.
• Any unrealized gain or loss under section 704(c) (built-in gain (BIG) property) must be reported for each partner in every tax year.  

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.