The IRS is stepping up scrutiny of partnerships and is requesting more information concerning partnership arrangements going forward. For the most part, capital basis reporting requirements encompass the most significant changes, with the bulk of those being enforced beginning in the 2020 tax year.
These changes affect how gains and losses for individual partners are recorded. The IRS would like partnerships to start reporting a partner’s tax basis capital account or “tax capital.” For the 2019 tax year, however, partnerships can still report partners’ capital per GAAP or Section 704(b) book basis. This is in addition to the requirement to disclose negative beginning and/or ending tax basis capital, which began with the 2018 tax year. For the 2020 tax season and beyond, partnerships must report partner capital accounts on the tax basis method and also report specific partner at-risk information.
It’s an evolving issue, with the IRS recently moving compliance and penalty deadlines from 2019 to 2020 due to a lack of tax industry attention to the changes. What’s more, the IRS states that “in preparation for filing partnership tax returns for the 2020 taxable year, further guidance will be published that provides, and requests comments on, the definition of partner tax basis capital.”
In the meantime, please feel free to contact us about these or other changes/questions that might affect the way you’re currently recording partnership gains and losses. The IRS offers this notice and a Form 1065 FAQ page for additional help.