New legislation isn’t the only factor resulting in a change in tax reporting. Sometimes, changes are the result of revisions to tax forms and the instructions. The IRS identified a potential underreporting of income resulting from distributions in excess of basis. Schedule K-1s were changed accordingly.
In the last 12 months, instructions related to owners’ basis were changed for S Corporations and Partnerships. Tax preparers are required to compute and report owners’ cumulative tax basis. With 2018 returns, preparers were required to check a box and attach a basis schedule if an S Corporation had a loss or distribution. For 2019, the capital account activity on a partnership Schedule K-1 must be reported on a tax basis. In the past, the activity could be reported based upon GAAP, Sec 704(b), books and records or “other” in addition to the tax basis. This is a major change to documentation.
An owner’s basis is the accumulation of
- Cash activity (in and out),
- Taxable income and losses reported,
- Nondeductible or nontaxable items,
- Noncash capital contributions and distributions,
- Purchase of units or interest from other owners and
- Income from distributions in excess of basis.
The following does not affect basis:
- Unrealized gain or loss
- Syndication costs
- Redemptions of other owners
- Book/tax differences
Balances on the partnership Schedule K-1 may or may not be tax basis. For example, income from distributions in excess of basis is a unique tax item. If an owner receives cash in excess of basis, a tax basis Schedule K-1 will show a negative capital account. For tax purposes, the negative is additional income in the current year. Now, the owner has a Schedule K-1 with a negative balance but a tax basis of $0. (Recognizing income eliminates the negative amount shown in the basis computation.) So, your Schedule K-1 which says “tax basis” may not be the true tax basis.
We are reaching out to clients to update them of the additional reporting for 2019. Additional time will be required for us to generate the tax basis number for 2019 reporting. We may be contacting you for additional records to build the report.
(The above does not discuss the effect of liabilities on owners’ basis.)