IRS changes Form 1065 and the Form 1065 K-1 for 2019 December 17, 2019

The IRS released revised drafts of the 2019 Form 1065 and the 2019 Form 1065, Schedule K-1 (updated with final form links below). There are lots of changes from the prior year. It will save you time in your busy tax season if you take a moment now to review the changes and decide what additional information you might need from your partnership client. The draft forms are linked for your convenience.

What’s New on the Draft 2019 Form 1065? Updated Links to Final Form 1065 & Instructions

SCHEDULE B

• New Question 27 has been added to Schedule B to enter the number of foreign partners that transferred all or part of their interests or received a distribution subject to §864(c)(8)¹.
• New Question 28 regarding disclosures for disguised sales has been added to Schedule B.

SCHEDULE K

• Schedule K (and Schedule K-1, line 4), Guaranteed payments, now has three lines:
  • Guaranteed payments for services,
  • Guaranteed payments for capital, and
  • Total.

What’s New on the Draft 2019 Form 1065, Schedule K-1? Updated Links to Final Form 1065, Schedule K-1 & Instructions

There are lots of changes to the K-1 schedules for you to note before you begin preparing 2019 partnership returns.

• Item E–A parenthetical has been added to caution against using the TIN of a disregarded entity.
• Item H–Has been revised to request the name and TIN of a disregarded entity, if applicable. If the beneficial owner of the disregarded entity is an individual, the TIN is the individual’s SSN (not the EIN of the disregarded entity).
• Item J–A new checkbox has been added to indicate the sale of a partnership interest. If the beneficial owner of the disregarded entity is a person, the TIN is the SSN of the individual.
• Item K–A new checkbox has been added to indicate whether the liabilities shown in Item K include liabilities from lower-tier partnerships.
• Item L–Partner’s capital accounts were to be reported on the tax basis for 2019. Notice 2019-66 postponed that change until 2020. For 2019, partnerships and other persons must report partner capital accounts consistent with the reporting requirements in the 2018 forms and instructions, including the requirement to report negative tax basis capital accounts on a partner-by-partner basis.
  • Note: For most small partnerships and LLCs, the books are kept on a tax basis and thus the capital accounts are reported on the tax basis method.
• Item N–A new item has been added for partner’s share of unrecognized §704(c)² gain or (loss) at the beginning and the end of the year. See Notice 2019-66 for more details.
• Box 4–Guaranteed payments, now has three lines: a. Guaranteed payments for services, b. Guaranteed payments for capital, and c. Total.
• Box 11–Code F will no longer be used for §951A income. Instead, it will now be used for any net positive income effect from §743(b)³ adjustments.
• Box 13–New code V has been added for any negative income effect from §743(b) adjustments.
• Box 20–Codes Z through AD that were previously used to report §199A information have been changed. Only code Z will be used to report §199A information. A supplemental schedule will be needed to provide the details required to compute the QBI deduction on the partner or member’s Form 1040.
• Box 20–Code AA is used for the net income/loss effect for all §704(c) adjustments.
• Box 20–Code AB is used for §751⁴ gain or loss from the sale of a partnership interest.
• Box 20–Code AC is used for any deemed gain or loss from §1(h)(5) collectibles from the sale of a partnership interest.
• Box 20–Code AD is used for any deemed gain under §1250 from the sale of a partnership interest.
• Box 20–Code AH, Other, includes net §743(b) adjustment for partners with basis adjustments.
• Lines 21 and 22–These new lines have checkboxes to indicate that there are attachments to the Schedule K-1 related to the partnership having more than one activity for §465 at-risk purposes, or more than one activity for §469 passive activity purposes, or both.
  • Note: The instructions to the 2019 Form 1065 are also in draft if you need more details.

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¹§864(c)(8) provides that gain or loss derived by a non-US person on the sale or exchange of a partnership interest that is engaged in a US trade or business is generally subject to US tax.
²§704(c) requires income, gain/ loss, and deduction with respect to contributed property to be allocated among the partners so as to take account of the variation between the basis of the property to the partnership and its FMV at the time of contribution.
³ §743(b) provides for an adjustment to basis of partnership property in the case of a transfer of an interest in a partnership by sale or exchange or upon the death of a partner if a §754 election is in place.
⁴§751 provides that the gain or loss from the sale of “hot assets (unrealized receivables and inventory items) is ordinary income and thus the gain or loss is separately stated.