On Dec. 22, 2017, President Donald Trump signed into law the bill known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, the most comprehensive overhaul of the Internal Revenue Code in 31 years. That date, however, did not signify the end of the tax reform process, but rather the beginning. With the statute settled, the responsibility next fell to Treasury to begin its work on volumes of interpretive regulations, to Congress to identify and draft technical corrections, and to the IRS to amend forms and instructions. It is this final, administrative part of the process that seems to receive the least attention, but creating and amending pages and pages of forms and instructions to implement the many revisions to the law contained within the TCJA is a vital part of the process, particularly with tax filing season underway.
Below is a list of changes made to the Partnership Schedule K-1 that accompanies Form 1065, U.S. Return of Partnership Income, for 2018. At first glance, it may not appear as though there are many major differences from 2017; however, there are a few new items that practitioners must be aware of.
Part II, Item K: Partnership share of liabilities
A partner's share of liabilities is expanded to include beginning amounts of debt as well as the ending amounts that were previously required to be reported.
This change doesn't stem from TCJA changes, but is a welcome change for taxpayers and practitioners. Proper basis tracking is important for partners, and this change will assist in that process.
Part II, Item L: Partner's capital account analysis
Though the format of Item L is the same on the face of the Schedule K-1, new reporting requirements have been added to the instructions for certain scenarios. Partnerships who report other than tax basis capital accounts to its partners in Item L and have negative tax basis capital at either the beginning or end of the year are now required to report such amounts on line 20, code AH.
Because partnerships may not have been able to timely comply with this new requirement for 2018 filings, Notice 2019-20 provides for temporary Secs. 6722 and 6698 penalty relief related to omissions of negative tax basis capital information if certain conditions are met. Penalty relief applies only to taxable years beginning in 2018, and an amended K-1 is not required to be filed for relief to be granted.
The IRS released an FAQ found here that gives more information on this topic, provides a safe harbor calculation, and also states that partnerships satisfying the conditions in question 4 on Schedule B of the Form 1065 are not required to report a negative tax basis capital statement because the partnership is not required to complete Item L of Schedule K-1.
Box 6c: Dividend equivalents
Dividend equivalents are informational items for non-U.S. persons who are generally required to treat dividend equivalents as U.S.-sourced income. The partnership instructions note that ordinary dividends reported in box 6a do not include the amount of equivalents in box 6c.
Box 11: Other Income (loss)
Code F. Section 951A income: Sec. 951A refers to the new global intangible low-taxed income (GILTI) provision of the TCJA, which requires a U.S. shareholder of any controlled foreign corporation (CFC) to include in gross income the shareholder's GILTI for the tax year.
Code G. Section 965(a) inclusion: Sec. 965 is more commonly referred to as the transition, or repatriation, tax brought by the TCJA, requiring certain U.S. persons to pay a reduced tax on previously untaxed earnings held offshore. The Sec. 965(a) inclusion is a starting point to calculate that tax, and the IRS has provided guidance on this subject. The Sec. 965 tax information was initially reflected on 2017 K-1s in other income and expense statements; however, now there is a line item specifically reserved for this use.
Code H. Subpart F income other than GILTI and transition tax items: Foreign income is intended to be GILTI or Subpart F income. This is a complex new area of tax law and entity structure may need to be reevaluated to ensure the best tax outcome in relation to these new foreign rules.
Box 13: Other deductions
Code K. Replaced: TCJA temporarily repealed miscellaneous itemized expenses subject to 2% adjusted gross income floor, and the use for this code has been changed. It is now for excess business interest expense; an amount on this line in 2018 triggers the filing of new Form 8990, Limitation on Business Interest Expense.
Codes T–V: These codes were previously used for reporting information for eligible partners to calculate the Sec. 199 domestic production activities deduction (DPAD), which was repealed by the TCJA, and are currently reserved for future use (i.e., there is nothing here this year). Taxpayers whose fiscal tax year began before 2018 may still be able to take the DPAD. Certain specified agricultural or horticultural cooperatives with tax years beginning after 2018 may qualify for a deduction under Sec. 199A(g); if so a statement will be provided under Box 13, Code W.
Code W, Other Deductions:
Miscellaneous itemized deductions formerly deductible under Sec. 67 as subject to 2% of AGI floor are now reported here. Reminder that these are still deductible by C corporations and certain states.
Code X. Section 965(c) deduction: This deduction is commonly called the "participation exemption" and reduces the Box 11G transition tax gross income inclusion, which effectively lowers the transition tax rate on unrepatriated earnings.
Box 16: Foreign transactions
Codes D and E: The IRS added codes designated for Sec. 951A GILTI category foreign gross income and foreign branch category gross income sourced at the partnership level.
Codes K and L: Codes were added for Sec. 951A GILTI deductions and foreign branch category deductions allocated and apportioned at the partnership level to foreign source income.
Codes P and Q: Total foreign taxes paid, and foreign taxes accrued are now codes P and Q, respectively.
Codes U–W are new:
U: Sec. 951A(c)(1)(A) tested income — This income amount is needed for calculating GILTI and the GILTI deemed-paid foreign tax credit.
V: Tested foreign income tax — This is also part of the equation to calculate deemed-paid foreign tax credit. Foreign income taxes paid or accrued by a CFC that are attributable to tested income.
W: Section 965 information — Preparers have additional reporting related to the effects of the transition tax on the foreign tax credit. New Form 965, Inclusion of Deferred Foreign Income Upon Transition to Participation Exemption System, is required for taxpayers having included in income amounts under §965 for the 2017 or 2018 tax year.
Box 20: Other information
Codes Z through AD QBI deduction: Information necessary to compute a business owner's qualified business income deduction under Sec. 199A — or the "passthrough deduction" as it has come to be known — is reported here. Sec. 199A allows for a deduction of up to 20% of qualifying business income, REIT dividends, and publicly traded partnership (PTP) income. This information is used in part to determine the final potential deduction; for 2018, worksheets are included in the Form 1040, U.S. Individual Income Tax Return, instructions or in Publication 535, Business Expenses, to calculate to the final deduction amount.
Z: Section 199A income
AA: Section 199A W-2 wages
AB: Section 199A unadjusted basis
AC: Section 199A REIT dividends
AD: Section 199A PTP income
Codes AE and AF. Information for limitation on business interest expense: This information is used on Form 8990 to compute the current year business interest expense deduction under Sec. 163(j) and disallowed interest expense that can be carried forward to the next year.
AE: Excess taxable income
AF: Excess business interest income
Code AG. Gross receipts for Section 59A(e): Sec. 59A is a new Code section from the TCJA called the base erosion and anti-abuse tax (BEAT), which essentially serves as a new minimum tax. Information reported here will determine if the taxpayer met a three-year average annual gross receipts test of at least $500 million to be subject to the BEAT.
Code AH. Other information: Code Z from prior years' Schedules K-1 is replaced by this code. It is used to report various other information needed by the partner to properly report the activities of the partnership on the partner's return, including any information needed to comply with the limitation on excess business losses under Sec. 461, and calculation information related to FDII and GILTI deduction..
Amie Kuntz, CPA, is a corporate tax manager at Midland National Life Insurance Company in West Des Moines, Iowa. For comments about this article or suggestions of topics for other articles, please contact Sally Schreiber, senior editor, at Sally.Schreiber@aicpa-cima.com.