IRS Releases Draft Revision of Schedule K-1 and Notice on Reporting Partnership Capital

December 30, 2019

This year, the IRS released a new draft revision of Schedule K-1 proposing several changes for tax year 2019. Of the changes, the most significant requires that a partner’s capital account provided in Part 1, question L of the form, be reported on a tax basis.

Prior to this revision, partner’s capital account could be reported on the Schedule K-1 on a tax basis, GAAP basis, Section 704(b) book, or other basis with most partnerships reporting capital accounts on a GAAP basis or other book basis. Additional disclosure on the 2018 Schedule K-1 as dictated in the Tax Cuts and Jobs Act required a taxpayer to report each partner’s tax capital account on Line 20AH if it was negative at the beginning or end of the year. The new draft Schedule K-1 for tax year 2019 requires taxpayers to report partner’s capital account in Item L on a tax basis with no exceptions. If a partner’s capital has not historically been reported on tax basis, the change could require significant time and effort to recalculate basis from inception to 2019.

Additional changes to the draft Schedule K-1 include a breakout reporting of guaranteed payments on page 1, line 4 and page 2, line 4: 4a Guaranteed payments for services, 4b Guaranteed payments for capital, 4c Total guaranteed payments.

Since the new draft form was released on Nov. 8, 2019, the IRS determined that taxpayers would be unable to timely comply with the requirement to report partner capital on the tax basis method for the 2019 tax year. Therefore, the new draft revision of Schedule K-1 will not be effective until 2020, meaning taxpayers are still required to disclose negative tax capital and adhere to 2018 reporting requirements for the 2019 tax year.

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