IRS Issues Draft 2019 Forms 1065, 1120-S, and Schedules K-1

(Parker Tax Publishing October 2019)

The IRS has issued draft 2019 tax returns for partnerships and S corporations. The drafts are intended to give tax practitioners a preview of the coming changes and to give software providers the information they need to update systems before the final version of the updated forms and schedules are released in December. Draft 2019 Form 1065; Draft 2019 Schedule K-1 (Form 1065); Draft 2019 Form 1120-S; Draft 2019 Schedule K-1 (Form 1120-S).

On September 26, the IRS issued drafts of the 2019 Form 1065, U.S. Return of Partnership Income, 2019 Form 1120-S, U.S. Income Tax Return for an S Corporation, 2019 Form 1065 Schedule K-1, Partner's Share of Income, Deductions, Credits, etc., and the 2019 Form 1120-S Schedule K-1, Shareholder's Share of Income, Deductions, Credits, etc. According to the IRS, changes were made to the forms and schedules in an effort to improve the quality of the information reported by partnerships and S corporation both to the IRS and to the partners and shareholders of such entities. The changes also reflect updates consistent with changes resulting from the Tax Cuts and Jobs Act. The IRS also said that the additional information requested in the draft Forms 1065 and Schedule K-1 is intended to aid the IRS in assessing compliance risk and identifying potential noncompliance while ensuring that compliant taxpayers are less likely to be examined. The IRS believes these changes to Form 1065 and Schedule K-1 will improve tax administration in the partnership arena, an area of critical importance to the IRS.

Over the past decade and a half, tax filings by partnerships have seen an increase. For calendar year 2004, about 2.5 million partnerships filed Form 1065; by calendar year 2017, that number had risen to more than 4 million, an increase of 59 percent. The rise in filings by partnerships was considerably greater than the rise in filing by C corporations and S corporations, combined, which rose about 14 percent over the same timeframe. This increase in filings, the IRS said, reinforces the need to improve the data available for the IRS's compliance selection processes.

On the draft 2019 Form 1065, the changes include:

(1) the addition of a checkbox on page 1 that allows the partnership to indicate if certain grouping or aggregation elections have been made;

(2) a revision of question 24 on page 3 regarding (i) the ownership by the partnership of a pass-through entity with current, or prior year carryover, excess business interest expense; (ii) whether the partnership's aggregate average annual gross receipts for the three preceding tax years exceeded $26 million and the partnership has business interest, and (iii) whether the partnership is a tax shelter (see instructions) and the partnership has business interest expense. If "Yes" to any, complete and attach Form 8990;

(3) the addition of question 27 at the bottom of page 3 which asks the partnership to enter the number of foreign partners subject to Code Sec. 864(c)(8) as a result of transferring all or a portion of an interest in the partnership or of receiving a distribution from the partnership; and

(4) the addition of question 28 at the bottom of page 3 which asks whether, at any time during the tax year, there were any transfers between the partnership and its partners subject to the disclosure requirements of Reg. Sec. 1.707-8;

(5) the addition on Schedule K, page 4, of a breakdown of guaranteed payments by amounts paid for services and amounts paid for the use of capital;

(6) item k on Schedule K, which in 2018 requested the Code Sec. 951A amount, is now reserved for future use; and

(7) reduction in the number of codes for box 17, Other Information, for indicating whether an item is related to Code Sec. 199A.

In addition, it's worth noting that, as in prior years, both the 1065 and 1120-S contain questions on page 3 asking if the entity made any payments during the year that would require the entity to file Form(s) 1099 and whether the entity did, or will, file the required Form(s) 1099.

On the draft 2019 Form 1120-S, the changes include:

(1) the addition of a checkbox on page 1 that allows a taxpayer to indicate if certain grouping or aggregation elections have been made;

(2) a revision of question 10 on page 2 regarding (i) the ownership of pass-through entities with excess business interest expense; (ii) whether the S corporation's aggregate average annual gross receipts for the three preceding tax years exceed $26 million; and (iii) whether the S corporation is a tax shelter and has business interest expense; and

(3) the elimination on page 3 of lines relating to foreign transactions in the Code Sec. 951A category.

On the draft Form 1065, Schedule K-1, changes include the following:

(1) the addition in Part II, Information About the Partner, of a box in Item H for taxpayers to indicate whether the partner is a disregarded entity, the addition of new line in Item L for the amount of other increases or decreases in a partner's tax basis capital account, and the addition of a new item N which asks for a partner's share of net unrecognized Section 704(c) gain or loss at the beginning of the year and at the end of the year;

(2) in Part III, Partner's Share of current Year Income, Deductions, Credits, and Other Items, instead of one box for guaranteed payments there are three boxes - one for guaranteed payments for services, one for guaranteed payments for capital, and one for total guaranteed payments, and two new boxes were added in item 21 and item 22 for the partnership to indicate whether the partner was engaged in more than one activity for at-risk purposes and/or more than one activity for passive activity purposes; and

(3) a reduction in the number of codes for box 20, Other Information, for indicating whether an item is related to Code Sec. 199A.

On the draft Form 1120-S, Schedule K-1, changes include the following:

(1) new items 18 and 19 in Part III, Shareholder's Share of Current Year Income, Deductions, Credits, and Other Items, which ask whether the shareholder was involved in more than one activity for at-risk purposes, and whether the shareholder was involved in more than one activity for passive activity purposes; and

(2) a reduction in the number of codes for box 17, Other Information, for indicating whether an item is related to Code Sec. 199A.

The IRS is now accepting comments for 30 days at IRS.gov/FormComments.

For a discussion of filing Form 1065, see Parker Tax ¶28,550. For a discussion of Form 1120-S, see Parker Tax ¶36,505.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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