Authored by: Paul Dillon, Michelle Hobbs, Mike Schiavo and Michael Wronsky
On Dec. 9, 2019, the IRS issued Notice 2019-66 temporarily postponing certain partnership reporting requirements.
Mandatory partnership reporting of tax basis capital and certain at-risk disclosures are delayed until partnership tax years beginning on or after Jan. 1, 2020. The notice allows taxpayers to report partner capital in the same manner as used on the 2018 return. Therefore, partners may report their capital accounts using tax basis, section 704(b), generally accepted accounting principles (GAAP) or any other permissible method on the 2019 Schedules K-1. However, partnerships must continue to report negative tax basis capital accounts on a partner-by-partner basis, consistent with the 2018 return reporting requirement.
Despite the temporary reprieve, businesses operating in partnership form are encouraged to continue gathering the necessary data to compute tax basis capital. The IRS provided this delay, in part, as a recognition that for many partnerships, substantial time may be required to obtain this information. For large partnerships, partnerships that have been in existence for many years, and/or partnerships that have undergone multiple ownership changes, computing tax capital from inception may be challenging to complete within the extended time allotted. Preparing tax basis books, whether or not they are required to be reported to the IRS, would help execute various tax calculations and prepare accurate tax returns. Accordingly, we recommend beginning this process as soon as possible.
In addition, the notice now defines partners’ shares of net unrecognized built-in gain or loss (section 704(c) gain or loss), as required to be reported on 2019 tax returns. The requirement to compute net unrecognized built-in gains or loss means many partnerships will still have to compute tax basis capital for 2019 returns to satisfy this requirement with accurate information. However, reporting of net unrecognized section 704(c) gain or loss will not apply to publicly traded partnerships until the IRS issues further guidance. For purposes of 2019 reporting, the notice indicates partnerships should continue using a reasonable manner to apply section 704(c) to partners.
Furthermore, the new detailed at-risk activity reporting has also been delayed for the same time period. Partnerships with more than one activity that may be subject to limitation under the at-risk rules were required to report additional information separately for each activity within the entity. While this additional reporting has been delayed for another year, the notice does indicate that partnerships and partners must still comply with the at-risk rules, requiring partnerships to furnish partners with a separate statement of income, expenses and deductions for each at-risk and not-at-risk activity.
Finally, taxpayers that follow the provisions of the notice will not be subject to certain penalties, including failure to furnish correct payee statements, failure to file a partnership return that shows required information and failure to furnish information required on a Schedule K-1.