IR-2020-240: IRS releases draft Form 1065 instructions on partner tax basis capital reporting
Sec. 165(g) allows that, if any security that is a capital asset becomes worthless during a tax year, the loss resulting from it is treated as a loss from the sale or exchange, on the last day of the tax year, of a capital asset. A and B contended that the Sec. 704(d) and Sec. 465 limitations did not apply to them, respectively, in determining their net earnings from self-employment subject to SECA tax. The taxpayers were allowed to deduct their claimed partnership loss in the second year because the court found that they had basis through contributions to the partnership. A claimed loss for a third year was limited under Sec. 704(d) because the taxpayer’s basis in his partnership interest was less than the loss allocated, but a sufficient portion of the loss was allowed that, along with other adjustments, the taxpayers had no remaining deficiency for that year.
To promote compliance with the tax-basis method, the IRS intends to grant penalty relief for the transition to the new rules in 2020 (see “Partnership Capital Reporting Requirements Postponed Until 2020” for earlier IRS relief). According to the IRS, this penalty relief will apply in addition to the reasonable-cause exception. Proposed regulations in 2019 expanded this rule to provide that previously disallowed losses or deductions, regardless of whether they are attributable to a trade or business and whether they would otherwise be included in QBI, are determined in the year the loss or deduction is incurred. In the 2020 final regulations, Treasury and the IRS determined that it is necessary for the FIFO rule to apply for losses included in tax years beginning on or after Jan. 1, 2018, and that the rule must be applied on an annual basis by category (i.e., Secs. 465, 469, etc.). These final regulations also provide that regulated investment company distributions attributable to income from real estate investment trusts (REITs) are eligible as QBI for REIT shareholders (conduit treatment).
However, conduit treatment is not extended to qualified publicly traded partnership (PTP) income. A review of the stoichiometric material consumption equation and other information in the petition shows that the taxable chemicals chlorine and sodium hydroxide constitute more than 20 percent by weight of the materials used in the production of sodium chlorite, based on the predominant method of production. A review of the stoichiometric material consumption equation and other information in the petition shows that the taxable chemicals ethylene, benzene, and propylene constitute more than 20 percent by weight of the materials used in the production of ethylene glycol phenyl ether, based on the predominant method of production. Comments received by the Treasury Department and the IRS from practitioners and trade associations had a meaningful impact on the timing of the proposed disclosure requirements.
For purposes of this section 4.03, “test group” has the meaning in proposed § 1.59-2(b)(6). The CAMT entity partner desiring to make a taxable-income election with respect to a partnership investment determines its test group as of the last day of the taxable year. Accordingly, such test group is comprised of the CAMT entity partner desiring to make the taxable-income election and the CAMT entities required to be aggregated with such CAMT entity partner under the relevant relationship criteria as defined in proposed § 1.59-2(b)(4) as of the last day of the taxable year. Thus, the CAMT entity partner may not apply § 721, § 731, the rules in section 3 of Notice , the rules in proposed § 1.56A-20, or the rules in section 6 of this notice to defer inclusion of FSI amounts attributable to a contribution of property to the partnership by the CAMT entity partner or a distribution of property by the partnership.
A review of the stoichiometric material consumption equation and other information in the petition shows that the taxable chemicals benzene, propylene, chlorine, and sodium hydroxide constitute more than 20 percent by weight of the materials Irs Issues Revised Instructions On 1065 Parter Tax Basis Capital Reporting used in the production of 4,4’-isopropylidenediphenol-epichlorohydrin copolymer, based on the predominant method of production. The 2020 Draft Instructions are part of a larger effort by the IRS to increase compliance by improving the quality of the information partnerships report to the IRS and furnish to partners. The use of the transactional approach method, which was requested by numerous commentators, reflects significant accommodation by the IRS to taxpayers’ situations. However, even the use of the transactional approach may entail additional work on the part of partnerships to perform calculations not previously done. Partnerships will need to spend time to determining the tax basis capital account to report on each partner’s Schedule K-1s, as well as computing and describing the items that affect the total tax basis capital on the Schedule M-2.
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If a partner disposes of a partnership interest, the adjusted basis of the partnership interest is increased immediately before the disposition by the entire amount of the partner’s remaining EBIE (“basis addback rule”). Partners also may now add back a proportionate basis on partial sales of partnership interests. The proposed regulations require the partnership to create a new block of “inert” basis in the assets equal to the amount added back on the sale or distribution. Mr. Lovett has extensive experience serving the tax needs of both public companies and closely-held businesses, including all aspects of tax compliance for partnerships and corporations. He advises clients with regard to the structure and tax consequences of new business ventures, and assists with restructuring existing businesses for increased tax efficiency. Prior to joining his firm, he was with a “Big 4” accounting firm, working closely with large, multinational real estate investment companies.
The sum of these amounts listed above must equal the amount reported on the line for ending a capital account, which may be negative.For the beginning capital account amount, if the tax basis method was used previously, then the amount entered will be the partner’s ending capital account determined from the last year. If a negative ending capital account was reported for 2019 and a different amount is determined for 2020, then an explanation must be given for the difference. If the tax basis method was not used previously for reporting partners’ capital accounts, but the tax basis method was used to maintain capital accounts in the partnership’s books and records, then the partnership must use the tax basis method for reporting the beginning capital account.
(i) The propylene glycol phenyl ether alkoxylation reaction (phenol + propylene oxide) is base catalyzed, using a small amount of metal hydroxide. Once phenoxide is made, it is regenerated following conversion to the product in the presence of propylene oxide. Regenerated phenoxide in the presence of propylene oxide will perpetually react until all propylene oxide is consumed or the reaction is halted through the use of controls. (iii) Acetic acid when combined with propylene glycol methyl under specific conditions (temperature, pressure, pH, etc.) produces propylene glycol methyl ether acetate.
If the partnership makes a guaranteed payment within the meaning of § 707(c) that is deductible for regular tax purposes, solely for purposes of this section 5.02(2)(b), the provisions of the partnership agreement that the partnership uses to allocate net § 704(b) income or loss are considered to include the provisions of the partnership agreement relating to such guaranteed payment. Section 56A(e) authorizes the Secretary to provide such regulations and other guidance as necessary to carry out the purposes of § 56A, including regulations and other guidance relating to the effect of the rules of § 56A on partnerships with income taken into account by an applicable corporation. Beginning with tax years ending on or after December 31, 2020, all capital accounts must be reported on a tax basis. While not an absolute requirement for tax year 2020 due to IRS penalty relief, changes were made in the TaxAct 1065 product to reflect these instruction changes. In Frost,46 a taxpayer who was an enrolled agent and former IRS revenue officer was not allowed to deduct losses from a partnership he formed because he did not establish his adjusted basis in the partnership interest. The taxpayer provided as documentation only self-prepared tax returns and Schedules K-1.
Since the amount of metal hydroxide used to produce propylene glycol methyl ether acetate5 is very small, the metal hydroxide has been excluded from the stoichiometric material consumption equation; including the metal hydroxide would lead to a distorted conversion factor. The public comment submitted in response to the supplemental notice of filing generally wrote in support of adding nylon 6 to the list of taxable substances. However, the commenter requested that the Treasury Department and the IRS add to the list of taxable substances the categories ‘nylon resins’ or ‘polyamides’ rather than merely the single taxable substance nylon 6. The commenter asserts that nylon 6 is one of the many grades of nylons or polyamides which contain more than 20 percent of taxable chemicals. The deferred sale approach would not apply to disregard any other FSI amount resulting to the contributor or the partnership from the transaction (for example, FSI gain or loss resulting from a deconsolidation or a dilution) for purposes of determining AFSI. Proposed § 1.56A-20 would provide rules for computing AFSI resulting from partnership contributions and distributions (except for certain contributions or distributions of stock of a foreign corporation).
