What’s New in the Draft Form 1065 and Draft Schedule K for 2019?

Draft Form 1065, draft Schedule K-1, and draft Form 1120-S would require partnerships and S corporations to report more details on their activities than before. The IRS released the draft forms in early October 2019, requesting comments.

The IRS said getting that additional information on these forms will help it make sure taxpayers are complying with laws enacted in the Tax Cuts and Jobs Act (TCJA).

In a notice issued with the draft forms, the IRS said it “would be able to assess compliance risks and identify potential noncompliance with the additional information requested by the draft form and schedule, while ensuring that compliant taxpayers are less likely to be examined.”

New Information Required on Draft Form 1065, U.S. Return of Partnership Income

In the requirements added to the draft 1065, partnerships will give more information related to:

  • loss limitations;
  • business interest expenses;
  • U.S. gain of foreign partners; and
  • transfers between partnerships and partners that must be disclosed.

The details of these items would still be found in:

  • a taxpayer’s books and records; and
  • other IRS forms partnerships and partners are required to file.

However, as noted, the IRS intends to be more efficient in assessing compliance risks for audit.

When Activities are Aggregated or Grouped Under IRC Section 465 or Section 469

Partnerships will report how they calculated any loss limitations on New Line J on draft Form 1065. The form provides boxes for a partnership to check if it:

  • aggregated activities for section 465 at-risk purposes; or
  • grouped activities for section 469 passive activity purposes.

In addition to checking a box on Form 1065, partnerships with an activity subject to both the at-risk rules and the passive activity rules first complete Form 6198, At-Risk Limitations.  Then, depending on the taxpayer, any allowable loss to would be carried over to:

  • Form 8582, Passive Activity Loss Limitations; or 
  • Form 8810, Corporate Passive Activity Loss and Credit Limitations.

Section 465 At-Risk Rules

A taxpayer may have losses from an investment in an activity financed by nonrecourse loans.

Section 465 prevents taxpayers from offsetting trade, business, or professional income with losses from investments.

Section 469 Passive Activity Rules

Under the passive activity rules, taxpayers can deduct losses and expenses from passive activities only from income from passive activities. 

Business Interest Expense Reporting

On Schedule B of draft Form 1065, the IRS has made the questions on Line 24 for business interest expense reporting easier to understand. Line 24 asks the partnership to report reasons why it would be required to file Form 8990, Limitation on Business Interest Expense Under Section 163(j).

Reporting Effectively Connected Gain of Foreign Partners

Also, on Schedule B of draft Form 1065, a partnership would report the number of foreign partners that have a U.S. gain or loss under section 864(c)(8) that tax year.

Generally, a foreign partner has a U.S. gain or loss under section 864(c)(8) when it  transfers or receives an interest in a partnership that has U.S. effectively connected income (ECI).

Transfers Disclosed on Form 8275

Finally, a partnership would have to note on Schedule B whether there had been transfers between the partnership and its partners that must be disclosed under Regulations section 1.707-8.

Under regulations section 1.707-8, partners and partnerships must disclose transaction between each other on Form 8275, Disclosure Statement. For example, disclosure is required for:

Changes on the draft Schedule K-1 for 2019

The new information required for Schedule K-1 would report:

  • the name and TIN of disregarded entities that hold an interest in the partnership;
  • whether the liabilities from lower-tier partnerships are included in the partner’s share of liabilities on Line K;
  • only tax basis capital on the Line L Capital Account Analysis;
  • the partner’s beginning and ending share of net unrecognized partner’s section 704(c) gain or loss; and
  • guaranteed payments for services separately from guaranteed payments for the use of capital.

Loss Limitation Reporting on Draft Form 1120-S, U.S. Income Tax Return for an S Corporation

The 2019  draft Form 1120-S, like the draft Form 1065, requires an S corporations to report whether it:

  • aggregated activities for section 465 at-risk purposes; or
  • grouped activities for section 469 passive activity purposes.

By Lisa Lopata, J.D.

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