The Tax Cuts and Jobs Act (TCJA) threw tax practitioners nationwide for a loop last year, especially relating to partnership taxation. While we now have one TCJA tax season under our belts, partnership taxation continues to be complex and there are additional changes for 2019 of which to be aware.
One of the biggest headaches we’ve encountered thus far for 2019 returns relates to partnerships with partners that are disregarded entities. For 2019, the IRS now wants the OWNER of that disregarded entity to be listed as the partner (using the owner’s address and EIN/SSN) on the K-1. The disregarded entity and its EIN will now be listed on a new line, Item H, underneath the owner’s information on the K-1. While this is a relatively straight-forward change to the federal K-1, we’re seeing a lot of state issues with changing the name of the partner, especially for states that require tax returns for disregarded entities. We have yet to see any guidance from states regarding the impact of the federal change on the state.
Additional changes to the 2019 federal K-1s include:
A new checkbox has been added to indicate the sale of a partnership interest
A new checkbox has been added to indicate whether a partner’s share of liabilities includes liabilities from lower-tier partnerships
New checkboxes have been added to indicate multiple activities for passive and at-risk purposes
Partnerships are now required to list partners’ share of net unrecognized section 704(c) gain or loss at the beginning and at the end of the year
Guaranteed payments will now be broken out on 3 lines: for services, for capital, and total guaranteed payments.
Only Box 20 Code Z will be used in 2019 for the Qualified Business Income (QBI) Deduction. In 2018, QBI information was reported in Codes Z through AD, but for 2019, Codes AA – AD will be used for completely different purposes. Be cautious of this change when comparing 2018 K-1s to 2019 K-1s
Another item not to lose sight of is partner tax basis capital accounts. The IRS delayed the requirement to report tax basis capital accounts on all K-1s until 2020; however, partnerships are still required to disclose negative beginning or ending tax basis capital accounts to partners in 2019. Preparing tax basis capital account schedules for all partners in partnerships that have existed for many years can be a daunting task. Partnerships really need to focus on this now, well in advance of the 2020 requirement to disclose.
Keep in mind that we’re only a few weeks into the 2019 tax filing season. The IRS could issue guidance or clarifications for some of the changes listed above, but we are doubtful anything will come out before for partnerships by the March 15th deadline. If you have questions about filing your partnership tax return or how these changes may affect your business, please call on The Tax Warriors® at Drucker & Scaccetti.