On September 30, 2019, the Internal Revenue Service issued drafts of the 2019 Forms 1065 and 8865, Schedule K-1 proposing to require partner tax basis capital reporting by all partnerships and to prohibit the reporting of partner capital under Section 704(b) of the Internal Revenue Code, generally accepted accounting principles (GAAP), or any other method for 2019.
Based on comments received, the Department of the Treasury and the IRS have become aware that certain persons required to file Forms 1065 or 8865 may be unable to timely comply with the requirement to report partner capital on the tax basis method for 2019.
On December 9, 2019, the IRS issued Notice 2019-66, which provides that partnerships required to furnish and file Form 1065 or 8865, Schedule K-1 will not be required to report partner capital accounts using the tax basis method for 2019 but will be required to do so for tax years that begin on or after January 1, 2020.
Instead, partnerships must report partner capital accounts for 2019 consistent with the reporting requirements for the 2018 Forms 1065 or 8865, as applicable. This means that partnerships may continue to report partner capital accounts on Forms 1065 or 8865, Schedule K-1 using any method available in 2018 (tax basis, Section 704(b), GAAP, or any other method) for 2019.
For 2019 partnership taxable years, partner “tax basis capital” must be calculated as provided in the 2018 Form 1065 and Schedule K-1 instructions. Beginning with the 2018 partnership taxable year, if a partner’s tax basis capital was negative at the beginning or end of a partnership’s taxable year, a partnership or other person is required to report on line 20 of a partner’s Schedule K-1, using Code AH, such partner’s beginning and ending tax basis capital. Partnerships and other persons who follow Notice 2019-66 and report partner capital accounts for 2019 on Schedule K-1 by using a method other than the tax basis method must continue to comply with the requirement in the 2018 forms and instructions with respect to negative tax basis capital accounts.
The IRS website for Form 1065 Frequently Asked Questions, “Negative Tax Basis Capital Account Reporting Requirements,” provides guidance on the calculation of a partner’s tax basis capital account.
In addition to delaying the reporting of 2019 partner capital accounts solely on the tax basis, the IRS announced the following other items in Notice 2019-66:
Insight:
Comments received by the Treasury Department and the IRS from practitioners and trade associations had a meaningful impact on the timing of the proposed disclosure requirements. Although taxpayers now have more time to fully prepare for the new tax capital and at-risk reporting requirements that will begin with their 2020 tax year filings, partnerships will be subject to net unrecognized Section 704(c) gain or loss disclosures for 2019 that necessitate data collection including a comparison of each partner’s Section 704(b) capital and their adjusted tax basis.