A New Year, A New Tax Basis Capital Account Reporting Requirement

Partners in a partnership can often have a negative tax basis capital account. A negative tax basis capital account can be created in different ways, for example; deductions, distributions and losses allocated to a partner or partner contributions of property for which debt liability exceeds adjusted tax basis of the property.

A partner who has a negative tax basis capital account is not necessarily subject to income recognition when the capital account goes negative if the partner has properly allocated his share of partnership liabilities. In the 2018 Form 1065 instructions, the IRS  inserted a new reporting requirement for the partnership.

In the 2018 Form 1065 instructions, the IRS inserted a new reporting requirement for the partnership. If the partnership reports partners’ capital accounts other than on a tax basis (that is, GAAP, Section 704(b), book, or other), and if the tax basis reported would be negative, the partnership must report to the partner what the beginning and ending tax basis negative capital accounts is on Schedule K-1 line 20 using code AH.

For those partnerships currently reporting Schedule K-1 partner capital accounts on a tax basis, they are already in compliance with the new reporting requirement and further information is not required.

Partnerships that meet the following four requirements are exempt from the reporting requirement:

1. Less than $250,000 in total partnership receipts for the year
2. Less than $1 million in total partnership assets at the end of the tax year
3. Timely filing of all K-1s (including extensions) with partnership return and are furnished to partners on or before due date
4. No M-3 filing requirement for partnership

The IRS will be imposing penalties for failure to comply, however penalties will be waived for those partnerships filing timely tax returns providing all other required information. Further, those partnerships will have up to 180 days past the extended six-month due date to provide the remaining required information. Final reporting is required no later than March 15, 2020.

If you have received your partnership K-1 and have questions regarding new information reporting, please contact your RINA representative.