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IRS Delays Tax Basis Reporting of Capital Accounts to 2020

The IRS has revealed that there is a delay to partnership requirements to report tax basis capital accounts.

Partnerships were originally required to report partners’ tax basis on their 2019 tax returns and Schedule K-1s. Now, the requirement will apply for all partnership tax years that start on, or after, January 1, 2020. So, how will this affect IRS Penalty Relief? Will there be any negative effects on partnerships? Let’s take a closer look at the impact of this delay.

The Background

The proposed drafts of 2019’s Schedule K-1 require that partnerships report their partner tax basis capital if applicable and prohibit the use of GAAP to report partner capital for the tax year 2019 under Code Section 701(b). This code section would also prohibit other methods, as well as the Generally Accepted Accounting Principles, for 2019.

The 2019 Schedule K-1 drafts would also require partnerships to report other information, such as shares of any net unrecognized Sec. 704(c) loss or gains from the start and end of 2019’s tax year. The set of draft instructions for these forms includes no definition of a net unrecognized Sec. 704(c) loss or gain.

Delayed Reporting of Tax Basis Capital Accounts

The delay of partnership requirements to report their tax basis capital accounts until 2020 affects those persons and partnerships required to file and furnish Schedule K-1 forms 1065 or 8865. There is no requirement to report partner capital accounts under the tax basis method on 2019 tax returns.

Instead, persons and partnerships in the 2019 tax year should report their partner capital accounts using the 2018 reporting requirements. This includes requirements to report any negative tax basis capital accounts held on an individual partner basis.

It is expected the IRS’s final instructions, which apply to 2019’s Schedule K-1 Forms 1065 and 8865, will include extra information. These details should outline how a partnership should carry out this reporting. Additional guidance will be provided to prepare for the filing of partnership tax returns in the 2020 tax year. The IRS should define what the partner tax basis capital is.

Notice 2019-66 defines and clarifies 2019’s requirement for all partnerships to report their partners’ share of net unrecognized Sec. 704(c) loss or gain. Solely for completing 2019 Forms Schedule K-1 1065 and 8865, the following definition applies:

The partner share of a net unrecognized Sec. 704(c) loss or gain applies to partnership property. This includes Code Sec. 704(c) losses and gains that arise from a revaluation of the partnership property.

The IRS has now exempted publicly traded partnerships from reporting partner shares of their net unrecognized Section 704(c) loss or gain in 2019 and from this requirement after 2019 until they receive notice.

What About IRS Penalty Relief?

Taxpayers who follow Notice 2019-66 instructions will not receive any penalties. This includes penalties under Code Section 6722 for failing to furnish the right payee statements and penalties under Code Section 6698 for failing to file partnership returns that show the required information. In addition, there could be penalties under Code Section 6038 for failing to provide the required information on Schedule K-1 Form 8865. This is good news for partnerships that were worried about falling afoul of the new regulations.

For more information about this article, please contact our tax professionals at or toll free at 844.4WINDES (844.494.6337).
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