This is arguably inconsistent with IRS FAQs (released in April of this year) addressing the negative tax basis capital account reporting requirement. Furthermore, the Draft Instructions' definition of tax basis capital implicitly indicates that IRC Section 743(b) adjustments do not affect transferee partners' tax basis capital accounts. To the extent partnerships have not historically maintained tax basis capital accounts, significant work may be required to prepare such capital accounts in anticipation of 2019 tax filings, because the partnership's activities since its formation need to be rolled forward using the income tax rules.
First, it mandates that partnerships use a historic approach to compute their partners' tax basis capital accounts and does not provide a safe harbor. Insight : The definition of tax basis capital is noteworthy in several regards. For such purposes, tax basis capital means: The Draft Instructions define tax basis capital for purposes of the amended capital account reporting requirement. The draft 2019 Schedule K-1 goes further and requires the reporting of each partner's tax basis capital account, regardless of whether a partner's tax basis capital account is positive or negative. The 2018 Form 1065 instructions, however, required partnerships to report partners' tax basis capital account information for partners with negative tax basis capital accounts at the beginning or end of the tax year (see Tax Alerts 09). The proposed changes to the Form 1065, Schedule K-1 and associated instructions, if adopted, will likely add significant time and complexity to the partnership tax reporting process.īefore release of the 2018 Form 1065 instructions, partnerships had the option of reporting their partners' capital accounts under any one of several different methods ( e.g., tax basis, GAAP or IRC Section 704(b) book). However, the Draft Instructions raise other questions.
The Draft Instructions address some of the questions raised by the October 2019 release of an amended draft Form 1065 and an amended draft Schedule K-1 (See Tax Alert 2019-1832). Return of Partnership Income, and Schedule K-1, Partner's Share of Income, Deductions, Credits, etc. On October 29, 2019, the IRS released draft instructions for 2019 Form 1065, U.S. If your business has unfiled tax returns or has unpaid taxes, call us, we can help.IRS releases draft Form 1065 and Schedule K-1 instructions We understand that the burden the government places upon businesses is tremendous and is often difficult to handle. There is usually no federal income tax due from a partnership because the income flows through to the partners and is reported on their personal tax returns. These companies must pay tax at the corporate level and the individual must then pay additional taxes on their Form 1040 tax returns.Ī Form 1065 tax return is typically filed annually by partnerships. Corporations that have not elected or are not eligible for “S” status file Form 1120 tax returns. As a result, that income is taxed on the owners’ federal Form 1040 tax return. The income reported on an 1120S tax return typically flows through directly to the owner of the business. A Form 1120S tax return is filed by corporations that have elected the “S” status. If you are a corporation or a partnership, you typically file a Form 1120 or a Form 1065 tax return.Ī Form 1120 tax return is filed on a yearly basis for corporations. If you are in business as a sole proprietorship, you report your income and expenses on a Schedule C attached to your federal Form 1040 tax return when it is filed.