2018 Form 1065 Reflects Audit and Tax Law Changes

Form 1065, U.S. Return of Partnership Income, contains significant changes for the 2018 tax year. The changes reflect:

  1. the new centralized partnership audit regime; and
  2. the Tax Cuts and Jobs Act (TCJA).

Centralized Audit Regime Reporting

Form 1065, Schedule B-2, Election Out of the Centralized Partnership Audit Regime, is new for 2018. Eligible partnerships with 100 or fewer partners use this form to elect out of the centralized partnership audit regime.

The election must be made every year.

The form includes questions concerning:

  • eligible partners;
  • S corporation shareholders for S corporation partners; and
  • the number of Schedule K-1s issued by the partnership and by any S corporation partners.

Form 1065, Schedule B has been revamped for 2018 to:

  • remove information related to the old Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA); and
  • add centralized partnership audit regime information.

For example:

  • the Form 1065, Schedule B signature block now designates a partnership representative as required under the centralized partnership audit regime, rather than a tax matters partner, as under TEFRA; and
  • new question 25 on Form 1065, Schedule B asks if the partnership is electing out of the centralized audit regime.

The main Form 1065 adds line 25 on page one. This new line is for imputed underpayments under the centralized partnership audit regime.

New Deductions and New Limitations Under TCJA

The 2018 Form 1065 also reflects changes made by the Tax Cuts and Jobs Act (TCJA).

The TCJA removed the domestic production activities deduction and added a deduction for qualified business income (the “pass-through” deduction). As a result, the designated codes for domestic production activities have been removed from Form 1065 Schedules K and K-1, and new codes have been added to Schedule K-1 (Codes Z through AD) for the qualified business income deduction.

The TCJA imposes limits on business losses and business interest deductions. To reflect these limitations:

  • Form 1065, Schedule B adds Questions 23 and 24; and
  • Form 1065, Schedules K and K-1 add Codes AE and AF.

By Robert Recchia

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