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Reporting Partnership K-1s on Form 1040: Tax Basis...
Transcript of Reporting Partnership K-1s on Form 1040: Tax Basis...
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Reporting Partnership K-1s on Form 1040: Tax Basis Capital,
Built-In Gains, and 2019 Additions
TUESDAY, FEBRUARY 11, 2020, 1:00-2:50 pm Eastern
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February 11, 2020
Reporting Partnership K-1s on Form 1040: Tax Basis Capital, Built-In Gains, and 2019 Additions
Joe B. Kristan, CPA, Partner
Eide Bailly
Amie Kuntz, CPA, Tax Senior Manager
Eide Bailly
Notice
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY
THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY
OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT
MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR
RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
You (and your employees, representatives, or agents) may disclose to any and all persons,
without limitation, the tax treatment or tax structure, or both, of any transaction
described in the associated materials we provide to you, including, but not limited to,
any tax opinions, memoranda, or other tax analyses contained in those materials.
The information contained herein is of a general nature and based on authorities that are
subject to change. Applicability of the information to specific situations should be
determined through consultation with your tax adviser.
REPORTING PARTNERSHIP K-1 ON FORM 1040February 11, 2020
DISCLAIMER
These materials, and the accompanying oral presentation, are for
educational purposes only and are not intended to be “written advice
concerning one or more Federal tax matters” subject to the
requirements of section 10.37(a)(2) of Treasury Department Circular
230.
This information is of a general nature and based on authorities that
are subject to change.
6
AGENDA
New 2019 Items
Capital Account Reporting
Liability Allocation
Income Items
Deductions and Losses
Other Reporting Items
Joe Kristan, CPA
Partner
Amie Kuntz, CPA
Senior Tax Manager
7
NEW ITEMS FOR 2019
8
9
10
11
DISREGARDED ENTITIES
Item E
In the case of a DE, the
partnership will enter the TIN
of the beneficial owner of the
DE in Item E and the beneficial
owner's address in Item F
Item H2
If the partner is a DE, such as
a single member LLC that did
not elect to be treated as a
corporation, the partnership
will check the DE box and
enter the name and TIN of the
DE
12
CAPITAL ACCOUNT
REPORTING
13
CAPITAL
Capital accounts track a partner’s net investment in the
partnership and is reflected on the partnership balance sheet
“Book” capital accounts reflect property contributed at FMV on
date of contribution
• Match to financial records to determine economic
consequences of partnership transactions
• GAAP, 704(b)
Tax capital accounts reflect property contributed at its adjusted
tax basis (carryover basis)
• Used to determine tax consequences of partnership
transactions, such as tax gain or loss
14
CAPITAL VS. BASIS
Terminology can get confusing
“Tax Basis Capital” or “Tax Capital” reporting
is a partnership calculation of the adjusted tax
basis in partnership assets
“Tax Basis” is the partner level calculation
“INSIDE” BASIS REFERES TO THE
PARTNERSHIP’S BASIS
“OUTSIDE” BASIS IS THE
PARTNER’S SHARE OF THE
PARTNERSHIP’S BASIS
15
DISCUSSION OF TAX CAPITAL ACCOUNTS
The final version of the form instructions removed the requirement for all
partnerships to disclose “Tax Basis” capital account information.
All good, right?
Well, no.
16
NEGATIVE TAX BASIS CAPITAL ACCOUNTS
The 2018 requirement to report “negative tax basis capital accounts” as
a line 20 Code AH disclosure remains.
Oddly, this isn’t the same thing as partner tax basis. From the 1065
instructions.
For these purposes, the term “tax basis capital” means (i) the amount of cash plus
the tax basis of property contributed to a partnership by a partner minus the
amount of cash plus the tax basis of property distributed to a partner by the
partnership net of any liabilities assumed or taken subject to in connection with such
contribution or distribution, plus (ii) the partner's cumulative share of partnership
taxable income and tax-exempt income, minus (iii) the partner's cumulative share of
taxable loss and nondeductible, noncapital expenditures.
17
18
704(C) DISCLOSURES
An odd new disclosure. This may function primarily as a reminder to
Partnerships that Section 704(c) exists and that partnerships are
supposed to track it and report accordingly. The partners don’t use
this information on their own returns.
19
WHAT IS A BUILT-IN GAIN?
Becky owns a hot dog stand debt-free at the end of 2018.
Its original cost was $50,000, its adjusted basis is zero, and
its fair market value Is $50,000.
To finance growth, Becky goes into partnership with Ethan.
Becky contributes the hot dog stand, and Ethan contributes
$50,000 in cash. Each partner is credited with a 50%
interest.
What is the built-in gain?
20
BALANCE SHEETS
Book Capital Tax Capital
Cash 50,000 50,000
Fixed Assets 50,000 50,000
Accumulated Depreciation (50,000)
Total Assets 100,000 50,000
Liabilities - -
Becky Capital 50,000 -
Ethan Capital 50,000 50,000
Liabilities + Capital 100,000 50,000
21
HOW IT SHOULD LOOK ON THE 1065 K-1
22
REPORTING ON FORM 1040
These amounts are not reported on Form 1040; this is information the IRS
will likely use to ensure proper allocations and tracking by the
partnership
The partnership will track 704(c), allocate built in gain/loss as
appropriate, and report on relevant K-1 lines
23
LINE 20, CODE AA: SECTION 704(C) INFORMATION
This code tells the partner how much of any item on the return is due to a
Sec. 704(c) adjustment
24
LIABILITY
ALLOCATIONS
25
26
LIABILITY ALLOCATION
Recourse Liability
To the extent any partner personally bears the risk of loss
for the liability
Nonrecourse Liability
No partner personally bears the economic risk of loss for
the liability
Qualified Nonrecourse Liability
Debt borrowed in connection with the activity of holding
real property
*important to the at-risk rules
27
“QUALIFIED” NON-RECOURSE?
Sec. 465(b)(6):
28
SO WHAT?
“Nonrecourse” financing is normally not “at-risk,” so losses
from such debt are deferred. But “qualified nonrecourse”
financing is excused from those limits.
29
HOW ITEM K DISCLOSURES ARE USED
These go into the computation of the “At-risk” limits – the second of
the four hurdles to loss deduction – on Form 6198.
30
31
LINES 21 AND 22
These new disclosures cover whether the partnership has more than one
activity for At-risk and Passive Loss rule groupings.
In the past, the only disclosure was usually reporting the separate
activities in supplementary schedules.
32
INCOME ITEMS
33
34
LINE 1: ORDINARY BUSINESS INCOME (LOSS)
35
LINE 1: ORDINARY BUSINESS INCOME (LOSS)
Where it can go:
Directly to Sch. E, page 2 for materially-participating owners without at-
risk or basis issues.
36
LINE 1: ORDINARY BUSINESS INCOME (LOSS)
Where it can go:
To Form 6198, Line 1 (or worksheet) if “at-risk” rules are in play.
37
LINE 1: ORDINARY BUSINESS INCOME (LOSS)
Where it can go:
To Form 8582, worksheet 3, for passive activities after considering at-
risk issues…
38
LINE 1: ORDINARY BUSINESS INCOME (LOSS)
Where it can go:
…and from there to Line 3a or 3b, page 1, of Form 8582.
39
LINES 2 & 3: NET RENTAL INCOME/(LOSS)
40
LINES 2 & 3: NET RENTAL INCOME/(LOSS)
Generally, income and loss reported in boxes 2 & 3 are passive
• Exception for materially participating real estate professionals in
box 2
Box 2 reports rental real estate activity
Box 3 reports other rental activity
If the partnership has more than one rental activity, a statement of
income and loss by activity will be provided
Reporting on Form 1040 depends on if the activity produces income
or loss
41
LINES 2 & 3: NET RENTAL INCOME/(LOSS)
Passive Income:
Report box 2 or 3 activity on Schedule E, Line 28, Col (h) passive income
42
LINES 2 & 3: NET RENTAL INCOME/(LOSS)
Materially participating real estate professionals:
Report box 2 activity on Schedule E, Line 28, Col (i) nonpassive loss
allowed or (k) nonpassive income
43
LINES 2 & 3: NET RENTAL INCOME/(LOSS)
Passive Loss:
Report box 2 or 3 allowed loss on Schedule E, Line 28, Col (g) passive
income
44
LINE 4A: GUARANTEED PAYMENTS FOR SERVICES
46
LINE 4A: GUARANTEED PAYMENTS FOR SERVICES
From the Partner Instructions to Schedule K-1:
Guaranteed payments are payments made by a partnership to a partner that are
determined without regard to the partnership's income. Generally, amounts on this
line are not passive income, and you should report them on Schedule E (Form 1040
or 1040-SR), line 28, column (k) (for example, guaranteed payments for personal
services).
47
LINE 4B: GUARANTEED PAYMENTS FOR CAPITAL
48
LINE 4B: GUARANTEED PAYMENTS FOR CAPITAL
From the Partner Instructions to Schedule K-1:
These are guaranteed payments other than for services, such as for the use of
capital or attributable to section 736(a)(2) payments for unrealized
receivables or goodwill. Amounts on this line should be reported on Schedule
E (Form 1040 or 1040-SR), line 28, column (k) (for example, guaranteed
payments for capital).
49
LINE 5: INTEREST INCOME
50
LINE 5: INTEREST INCOME
• Ultimately reported on line 2b of Form 1040
• Potentially reported on Schedule B (discussed shortly)
• Form 4952: Investment Interest Expense Deduction – if investment
income, it will also be reported on line 20a
• Form 8990: Business Interest Expense Limitation (discussed more later)
51
LINE 6: DIVIDENDS
52
LINE 6: DIVIDENDS
6a: Ordinary Dividends
• Reported on line 3b of Form 1040, potentially Sch B (discussed shortly)
6b: Qualified Dividends
• Reported on line 3a of Form 1040• Are part of line 6a ordinary dividends (don’t double count)• Taxed at preferential long term capital gains rate• Excluded from investment income on Form 4952, but can elect to include
6c: Dividend Equivalents
• Not reported on Form 1040• Provided for foreign persons who are required to treat dividend equivalents
as U.S. source dividends• Not included in line 6a ordinary dividends 53
SCHEDULE B: REPORTING INTEREST & DIVS
Part 1: Interest
Part 2: Ordinary Dividends
Part 3: Foreign Accounts
When Schedule B is required:
• Over $1,500 taxable interest or ordinary dividends
• Seller-financed interest mortgage where buyer’s personal residence
• Accrued bond interest
• OID reported is less than on Form 1099-OID
• Reducing reported interest by amortizable bond premium
• Exclusion of interest from series EE or I U.S. Savings bonds
• Received interest or ordinary dividends as a nominee
• Have interest or signature authority over foreign financial accounts
54
55
LINE 7: ROYALTIES
56
LINE 7: ROYALTIES
57
LINES 8 & 9: CAPITAL GAINS/(LOSSES)
58
LINES 8 & 9: CAPITAL GAINS/(LOSSES)
Ultimately reported on line 6 of Form 1040
Line 8: Short Term Capital Gains/(Losses)
• Reported on Form 1040 Sch D, Line 5
Line 9a: Net Long-Term Capital Gains/(Losses)
• Reported on Form 1040 Sch D, Line 12
Line 9b: Collectibles (28%) Gains/(Losses)
• Report on 1040 28% Rate Gain Worksheet, Line 459
60
Found in Schedule D Instructions
61
9C: UNRECAPTURED SECTION 1250 GAIN
62
9C: UNRECAPTURED SECTION 1250 GAIN
Gain from the sale of partnership assets goes to line 5 of the Sch. D
Unrecaptured Sec. 1250 gain worksheet.
63
9C: UNRECAPTURED SECTION 1250 GAIN
Gain from the sale by the partnership of an interest in another partnership
attributable to unrecognized unrecaptured Sec. 1250 gain goes on
worksheet line 10.
64
9C: UNRECAPTURED SECTION 1250 GAIN
Note that the only place line 9c goes is the Sch. D
worksheet. It doesn’t itself go to the front of any
form. It doesn’t go to Page 1 of Sch. D or to the
partner Form 4797.
65
LINE 10: NET SECTION 1231 GAIN (LOSS)
66
LINE 10: NET SECTION 1231 GAIN (LOSS)
If nonpassive or a gain:
67
LINE 10: NET SECTION 1231 GAIN (LOSS)
If a loss from a passive activity, it goes through the 8582 passive
loss worksheet mixer.
68
DON’T DOUBLE UP LINE 9C AND LINE 10!
The amount on line 9c is part of line 10. It’s not an additional
gain on top of line 10. Make sure you only ends up in income
once.
Remember – the only place 9c goes is the Sch. D. Unrecaptured
Sec. 1250 gain worksheet. This computes the rate on the amount
on line 10. It doesn’t add to the amount.
69
LINES 11: OTHER INCOME/(LOSSES)
70
LINE 11, CODE A: OTHER PORTFOLIO INCOME/(LOSS)
Portfolio income other than interest, dividends, royalties, and capital
gains and losses.
REMIC (Real estate mortgage investment conduit) activity is reported on
Schedule E, line 38
71
LINE 11, CODE B: INVOLUNTARY CONVERSIONS
Reported on Form 4684, Casualties and Thefts
72
LINE 11, CODE C: 1256 CONTRACTS & STRADDLES
Reported on Form 6781, Gains and Losses from Section 1256, line 5
73
LINE 11, CODE E: CANCELLATION OF DEBT
This one can get complicated.
The taxability of debt cancellation income is determined at the
partner level. This differs from the S corporation determination.
If there is no exclusion, it goes to Form 1040, Sch. 1, Line 8.
The debt may be excludible in whole or part at the partner level
if the partner was insolvent prior to the debt forgiveness. If so,
then you need to file Form 982 to compute tax attribute
reductions.
74
LINE 11, CODE F: SEC. 743(B) POSITIVE ADJUSTMENTS
This can end up in many places, depending on what assets the
adjustment relates to and what triggered it.
If an asset’s basis with respect to the partner was reduced when
the partnership interest was acquired – if there was a built-in loss
on the asset at the time – there will be a positive adjustment
when the asset is sold. This can affect Form 4797, Sch. D, and of
course the passive loss computations.
An adjustment here will probably require looking at a supporting
K-1 schedule to determine where it will go.
Negative Sec. 743 adjustments will appear on Line 13, code V.
75
LINE 11, CODE G: SEC. 965 INCLUSIONS
This will relate to deferred income from 2017 from the
partnerships investment in Controlled Foreign Corporations. It will
come through to the 1040 via Form 965, most likely through Sch.
1., line 8.
76
LINE 11, CODE G, H: CFC ITEMS
Code G will relate to deferred income from 2017 from the
partnerships investment in Controlled Foreign Corporations. It will
come through to the 1040 via Form 965, most likely through Sch.
1., line 8.
Code H will report certain subpart F inclusions other than GILTI
and Sec. 965 items.
77
DEDUCTIONS AND
LOSSES
78
80
LINE 12 SEC. 179
81
LINE 12: SEC. 179
For a non-passive partner, go directly to Form 4562, line 6. Enter
"from Schedule K-1 (Form 1065)" across columns (a) and (b).
82
LINE 12: SEC. 179
It will go from there to page 2, Sch. E.
83
LINE 12: SEC. 179
For passive taxpayers, it goes through the Form 8582 passive
loss worksheet mixer.
84
LINE 13: OTHER DEDUCTIONS
85
LINE 13, CODES A-G: CHARITABLE CONTRIBUTIONS
Reported on Schedule A
Be aware of AGI limitations depending on the type of contribution; with contributions carried forward 5 years
Noncash contributions may require additional reporting
Use Form 8283 to report noncash contributions > $500• If no 8283 is provided with K-1, combine amount reported as noncash from
partnership with other noncash to see if $500 threshold passed• If Form 8283 required and K-1 doesn’t provide all necessary information,
complete only column (h) of line 1 with your share of the contribution and enter “From Schedule K-1 Form 1065) across columns (d)-(g)
Form 8283 will be provided by the partnership to attach to Form 1040 if the partnership’s donation is $5,000 or greater for one or similar items
• Partner will deduct amount on K-1 line 13c, not the amount on Form 8283
86
87
LINE 13, CODE H: INVESTMENT INTEREST EXPENSE
To Form 4952, line 1, and from there to Sch. A or Sch. E.
88
LINE 13, CODE I: ROYALTY EXPENSE
89
LINE 13, CODE J: SECTION 59(E)(2) EXPENDITURES
This can cover a variety of expenditures for which an
amortization election is available to the partner. These include:
• Circulation expenditures
• Research and experimental expenditures
• Intangible drilling costs
• Mining development expenditures
• Mining exploration costs
If currently expensed, rather than amortized, there is an AMT
adjustment or preference.
90
LINE 13K: EXCESS BUSINESS INTEREST EXPENSE
This is the partner’s share of interest expense disallowed at the
partnership level under Sec. 163(j) on the partnership’s Form
8990. This goes to Form 8990, Schedule A, Column C.
91
LINE 13, CODE M: AMOUNTS PAID FOR MEDICAL INSURANCE
Either reported on line 1, Schedule A, Itemized Deductions
Or,
Line 16 on Schedule 1, Additional Income and Adjustments to Income
92
LINE 13, CODE N: EDUCATIONAL ASSISTANCE BENEFITS
These are includible in partner income and should be part of
guaranteed payments, but may create deductions and credits for the
partner
Deduct on a separate line of Schedule E, line 28, on Form 1040 up to
the $5,250 limitation
• Section 127 excludes from income up to $5,250 in employer
education assistance benefits for undergrad or grad courses each
year if used to pay for tuition, fees, books, supplies and equipment
If reported benefits exceed $5,250, the excess may be used on Form
8863 for an education credit
93
LINE 13, CODE N: EDUCATIONAL ASSISTANCE BENEFITS
Wait: Partners can’t be employees of the partnership?!
§127(b)(3) Not more than 5% of amounts paid during the year can be
for partners (or their spouse/dependent) who own >5%
§127(c)(3) An individual who owns the entire interest in an
unincorporated trade or business shall be treated as his own employer. A
partnership shall be treated as the employer of each partner who is an
employee within the meaning of …
§401(c)(1) Self-employed individuals treated as employee…
§401(c)(1)(B) The term “self-employed individual” means an individual
who has “earned income” (net earnings from self-employment)
94
LINE 13, CODE 0: DEPENDENT CARE BENEFITS
Report on Form 2441, Child & Dependent Care Expenses, Part III
Used to compute deductible and taxable benefits, and credit
Include deductible benefits in the total entered Schedule E, line 28
(allowed loss)
Include taxable benefits on Form 1040, line 1, wages with “DCB” noted95
96
LINE 13, CODE P
This relates to preproductive period expenses of
plants. If the preproductive period exceeds two
years, these expenses may be subject to 263A
For most individuals, they will be deductible,
subject to normal loss limit rules
97
OTHER ITEMS
98
99
LINE 15: CREDITS
In general, do not need to complete the source credit form if the partner
receiving the K-1 isn’t a partnership or S corporation, and the only
source for a credit listed on Form 3800, Part III is passed through from a
partnership, S corporation, estate, trust, or coop
Simply report the credit amount from the K-1 onto Form 3800, Part III for
the appropriate credit and enter the EIN of the partnership in column (b)
of Part III
Exceptions: passive activity, investment, or biodiesel and renewable fuels
100
101
LINE 16: FOREIGN TRANSACTIONS
Used to calculate the partner’s potential foreign tax credit on Form
1116: Notice the now 7 different categories of income!
102
LINE 16: FOREIGN TRANSACTIONS
Form 1116 instructions give guidance for less than 10% limited partners:
If you are a limited partner and you own a less-than-10% interest
(by value) in the partnership, you generally may categorize your
distributive share of foreign source income and deductions from
that partnership as passive income. See Regulations section 1.904-
4(n) for more details and exceptions.
*This rule takes precedence over the income category rules outlined
in the instructions that follow for line 16, codes C and D–H, of
Schedule K-1 (Form 1065) and the apportionment of deductions
rules outlined in the instructions for line 16, later, codes J and K–O
103
LINE 17: ALTERNATIVE MINIMUM TAX (BOO)
104
LINE 17: ALTERNATIVE MINIMUM TAX (BOO)
Report these items on Form 6251, Alternative Minimum Tax
Adjustments and preference items that increase or decrease
alternative minimum taxable income
Compared to taxable income that ensures a 26-28% tax
rate
*Eliminated for C Corporations, but not individuals
105
LINE 18: TAX EXEMPT & NONDEDUCTIBLES
106
LINE 18: TE INCOME & N/D EXPENSES
Tax Exempt Income
Reported on Form 1040, line 2a
*Increase basis in partnership! (Don’t want to have it taxed upon disposal
of partnership interest)
Nondeductible Expense
Not deductible on Form 1040, but still reduces basis in partnership
interest (otherwise you’d be getting a deduction for it on disposal of
partnership interest)
107
LINE 19: DISTRIBUTIONS
108
WHY BASIS MATTERS• The company had losses
• Several tests exist to take a loss, one of which is to
the extent of partner basis - 704(d)
• The company made distributions
• Excess distributions may be taxable to the partner
• Liquidating Distributions
• Gain/Loss
• Nonliquidating distributions
• Basis of distributed property
• Transfers of Interest
• Calculation of gain
• Section 743 step-ups
Think of basis like a
piggy bank to avoid
being taxed twice on
the same income
109
COMPUTING PARTNERSHIP BASIS
Similar to S corporation shareholder basis, with a big
exception.
1. Start with your initial investment
2. Increase for your share of partnership income items
(including “permanent” exempt income and non-
deductible expense differences)
3. Reduce for distributions
4. Reduce for loses
5. Increase for partner share of partnership debt.
110
111
INSIDE AND OUTSIDE BASIS
Inside basis reflects the partnership’s adjusted basis in its assets
• Each partner owns a share of the partnership’s inside basis of
assets, which becomes a partner’s outside basis
Outside basis reflects the partner’s adjusted basis in its interest in
the partnership
112
§704(d) PROHIBITS PARTNERS FROM TAKING
LOSSES IN EXCESS OF OUTSIDE BASIS; INSTEAD
THEY ARE CARRIED FORWARD
Sam’s share of partnership loss is $10,000. His
adjusted basis for his partnership interest at the
end of the year (before the loss) is $6,000. Sam is
allowed a loss of only $6,000 in this year, with his
basis reduced to zero and a carryover loss of
$4,000 to a future year.
Next year, Sam's share of partnership income is
$5,000. Sam may now take the entire $4,000
carryover loss in this year. His basis is now $1,000.
113
§731(a)(1) REQUIRES A PARTNER TO
RECOGNIZE A GAIN ON DISTRIBUTIONS IN
EXCESS OF OUTSIDE BASIS
If Sam has $10,000 basis in his partnership interest,
and the partnership distributes $15,000 in cash to
Sam, he must recognize a $5,000 capital gain on
distributions in excess of his basis.
Note that if the partnership distributes property in a
non-liquidating distribution, the outcome can differ. If
Sam had received $7,000 in cash and property with
FMV of $8,000 Sam would not recognize a gain on
excess distribution. Sam first takes the cash distribution
to reduce basis and next the partnership’s basis in the
property, with any gain later recognized when Sam
disposes. 114
LINE 20: ALL THE OTHER STUFF
115
116
LINE 20, CODE L
Partners that have disposed of Sec. 179 property at a gain will report
information here that will go to a Form 4797 worksheet:
117
LINE 20, CODE M
This code covers property subject to a prior Sec. 179 election for which
business use has fallen below 50%. The partnership is required to
provide information sufficient to complete Part IV of Form 4797.
118
LINE 20, CODE Z: 199A INFORMATION
The partnership provides information necessary to calculate this potential
partner level deduction
Form 8995 or 8995-A, Qualified Business Income Deduction
*Amounts reported on the K-1 aren’t automatically included in QBI –
partner must look to how it’s reported on their Federal return
Ordinary business income or loss is included in QBI if it was used in
computing taxable income – not excluded, suspended, or
disallowed under any other Code section
Section 1231 gain or loss is only includable in QBI if it isn’t capital
gain or loss
119
LINE 20, CODE Z: 199A INFORMATION
Partners can expect to see a schedule such as the following attached to their K-1
120
LINE 20, CODE Z: 199A INFORMATION
Partners can expect to see a schedule such as the following attached to their K-1
if an aggregation election was made
121
LINE 20, CODE Z: 199A INFORMATION
Partners can expect to see a schedule such as the following attached to their K-1
if from a Coop
122
LINE 20, CODE AB, AC, AD: SALE OF INTEREST
For partners who have sold an interest in the partnership:
• Code AB is the portion of the gain that is ordinary under Sec. 751.
• Code AC is the portion of the gain that represents “collectibles” gain
under Sec. 1(h)(5).
• Code AD is the portion of the gain representing unrecaptured Sec.
1250 gain.
123
LINE 20, CODES AE AND AF
These items enable a partner to determine whether any of the
excess business interest reported on current or prior K-1s of the
partnership may be deducted.
If the partner is personally subject to the Sec. 163(j) interest
limits – in other words, personally has >$25 million in gross
receipts directly or via pass throughs – these amounts go into the
partner’s personal Sec. 163(j) computation.
For partners not personally subject to the limits, these amounts
enable the partner to determine whether amounts disallowed in
prior years at the partnership level may be deducted.
124
LINE 20, CODES AE AND AF
125
LINE 20, CODES AE AND AF
126
PARTNER SHARE OF GROSS RECEIPTS
The following are amount the items whose tax treatment depends on
gross receipts:
- Sec. 163(j) interest limits
- Favorable accounting methods, such as cash basis, non-Sec. 263A
inventory accounting, and completed contract accounting.
Partners are supposed to take their pro-rata share of partnership gross
receipts into account in determining their eligibility for these limits.
There is no prescribed place or requirement in the partnership instructions to
report this.
127
LINE 20, CODE AG: GROSS RECEIPTS FOR 59A(E)
The following are amount the items whose tax treatment depends on
gross receipts:
- Sec. 163(j) interest limits
- Favorable accounting methods, such as cash basis, non-Sec. 263A
inventory accounting, and completed contract accounting.
Partners are probably required to take their pro-rata share of
partnership gross receipts into account in determining their eligibility for
these limits. S corporations partners, for example, take their shares of
partnership gross receipts into account in determining the application of
Sec. 1375.
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LINE 20, CODE AG: GROSS RECEIPTS FOR 59A(E)
Most taxpayers won’t be subject to the 59A tax, as it is a minimum tax
on taxpayers with average gross receipts over $500 million over the last
three years and that have multinational operations.
Still, gross receipts are gross receipts, and they are needed for other
purposes, so partnership return preparers should make this disclosure as
a matter of good practice, and so that partners don’t have to bug the
partnership for the information.
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FISCAL YEAR
Most individuals are calendar year filers
Many businesses are fiscal year filers
Report amounts on your tax return for the year in which the partnership’s
fiscal year ends
Ex: If the partnership’s tax year ends June 30th, 2019, report that period’s
amounts on your 2019 tax return (it will be a 2018 Schedule K-1)130
PTP LOSSES
Item D is checked when the partner is invested in a publicly traded
partnership
Passive loss rules are applied separately for PTPs
A passive loss from a PTP cannot offset other passive income – it is
suspended and carried forward to be applied against passive income
from the same PTP in later years
Unused losses at the time of a partner’s entire disposal are allowed in full
in that year131
PTP GAINS
Net gains from a PTP are nonpassive income
• Included in investment income to compute the
investment interest expense deduction on Form
4952
• Included in MAGI for figuring the $25K special
allowance for rental real estate loss on Form
8582
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PTP EXAMPLE: USING PY DISALLOWED LOSSCurrent Year Schedule E Income 10,000 Prior Year Disallowed PTP 4797 Loss (3,500)Current Year PTP Overall Gain 6,500
Report on:Schedule E, Part II, Col K (Nonpassive Income) 6,500 Schedule E, Part II, Col H (Passive Income) 3,500 Form 4797 (3,500)Current Year PTP Overall Gain 6,500
133
PTP EXAMPLE: CY LIMITATION
PY Sch E Disallowed Loss (5,000)(12,000)
CY Sch E Loss (7,000)
CY Form 4797 Gain 2,000
Current Year PTP Overall Activity (10,000)
Report on:
Form 4797 2,000
Schedule E, Part II, Col G (Passive Loss) (2,000)
Total Loss (12,000)
Total Gain 2,000
Loss Carried Forward to Future (10,000)
134
ERRORS AND DISAGREEMENTS
When a K-1 contains errors
Notify the partnership and ask for a corrected K-1
Be sure the partnership files the corrected K-1 with the IRS
When a partner reports differently than K-1
File Form 8082, Notice of Inconsistent Treatment with your
return to identify and explain any inconsistency or non-filing
partnership
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WHEN IN DOUBT – READ THE INSTRUCTIONS
THE PARTNER INSTRUCTIONS FOR SCHEDULE K-1 CONTAIN A WEALTH OF
INFORMATION
TRACK BASIS
BASIS IN A PARTNERSHIP INTEREST IS TECHNICALLY THE PARTNER’S
RESPONSIBILITY TO TRACK. GET A HEAD START!
MATCH OR FILE AN 8082
THE IRS GETS A COPY OF THE K-1 AS WELL AND WILL COMPARE NOTES
BREATHE
IN AND OUT; TAX AND LIFE AREN’T EASY. JUST TAKE ONE THING AT A TIME
2
3
4
1IF NOTHING ELSE, REMEMBER THIS!
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THANK YOU
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