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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 jkristan@eidebailly.com Amie Kuntz, CPA, Tax Senior Manager Eide Bailly amiekconsulting@gmail.com

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 1040

February 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

• f the beneficial owner of the

DE in Item E and the beneficial

• wner'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

• r 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

• r 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 4

59

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

• nce.

Remember – the only place 9c goes is the Sch. D. Unrecaptured

• Sec. 1250 gain worksheet. This computes the rate on the amount
• n 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

• n 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” noted

95

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)

• f 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

• f 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.

128

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

• n 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.

129

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 year

131

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

132

PTP EXAMPLE: USING PY DISALLOWED LOSS

Current 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

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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)

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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 1

IF NOTHING ELSE, REMEMBER THIS!

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THANK YOU

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