IRS Adds Requirement for Tax Basis Partner Capital Information Reporting to Form 1065 Instructions

Note: On March 7 , 2019 the IRS provided temporary relief for partnerships unable to timely provide this information. See our article at this link.

An article published in Tax Notes Today on February 15[1] highlighted a change in the 2018 Form 1065 instructions that will impact partnerships reporting partners’ capital accounts on Schedule K-1 using other than tax basis capital account reporting.

The new instructions, found in the instructions for Schedule K-1, Item L in the Form 1065 instructions at page 30 reads as follows:

If a partnership reports other than tax basis capital accounts to its partners on Schedule K-1 in Item L (that is, GAAP, 704(b) book, or other), and tax basis capital, if reported on any partner's Schedule K-1 at the beginning or end of the tax year would be negative, the partnership must report on line 20 of Schedule K-1, using code AH, such partner's beginning and ending shares of tax basis capital. This is in addition to the required reporting in Item L of Schedule K-1.

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.

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Safe Harbor for Luxury Autos and Bonus Depreciation Provided by IRS

The IRS addressed a quirky interaction of bonus depreciation under IRC §168(k) and the luxury auto rules under IRC §280F in Revenue Procedure 2019-13. Absent this safe harbor method, taxpayers who opted not to elect out of §168(k) bonus depreciation for an automobile limited by §280F would find any basis in the automobile in excess of $18,000 would not be deductible until the end of the standard recovery period, which would begin in the seventh year after acquiring the vehicle.

Under the Tax Cuts and Jobs Act, a taxpayer is allowed to deduct 100% of the cost of qualifying assets in the year the asset is placed in service for assets placed in service between September 27, 2017, and January 1, 2023.[1] However, under the provisions most often referred to as the "luxury auto rules" a taxpayer's depreciation and/or §179 deduction for covered vehicles is capped at $10,000 for the first year.[2] This amount is adjusted annually for inflation.

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Suit Against TSA for Lost Tax Documents Fails Since It Was Actually a Claim for a Tax Refund

Traveling is always a bit stressful, but it’s even worse than normal if something that was in your checked baggage isn’t in there when you arrive at your destination.  In the case of Schlieker v. US Transportation Security Administration, DC Colorado, No. 1:17-cv-01284 the items that turned up missing were tax documents that Mr. Schlieker claimed cost him a $5,000 refund.

Mr. Schlieker had checked bags for a flight from Phoenix to Denver in February of 2016.  His complaint indicated that he had “multiple files, folders and paperwork” that related to his tax return for 2015 in his luggage when he checked it.  However, when he arrived in Denver he discovered that the paperwork was no longer in his bag.  Rather, he had a notice from the TSA that his bags had been opened and inspected.  He concluded the paperwork had simply not been repacked when the TSA completed its inspection of his bag.

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Examples of Situations Where Employers Can Recover Erroneous HSA Contributions Listed in Information Letter

In Information Letter 2018-33 the IRS provided some guidance on situations when an employee may recover amounts transferred by error to an employee’s health savings account (HSA).

As a general rule, an individual’s interest in an HSA is nonforfeitable.[1]  However, the IRS in Notice 2008-59 provided for limited circumstances where an employer who funds an employee’s HSA account in error can recover the funds.

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Taxpayers Using Impermissible Method Can Use Revenue Procedure 2018-60 to Convert Automatically to a Permitted Method

Rev. Proc. 2018-60 was released by the IRS to allow taxpayers to obtain consent to change from their current method of accounting to take into account the requirements of IRC §451(b)(1)(A), added by the Tax Cuts and Jobs Act, effective for tax years beginning in 2018.  But is that automatic change still available if the method the taxpayer had previously been using was one not allowed for tax purposes?

In CCA 201852019 the IRS Chief Counsel’s office decided the answer was yes.

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IRS Changes "Separate" to "Separable" in Describing Requirements for Separate §199A Trade or Business - Do We Care?

What difference can one word make?  That is a question being asked after the IRS published a corrected version of the final regulations under §199A after the IRS modified the preamble to change the word “separate” to “separable” when discussing the conditions under which a taxpayer may be seen to have two trades or businesses.

The IRS Guidewire email that announced the changes as follows:

These corrections include, among other edits, corrections to the definition and computation of excess section 743(b) basis adjustments for purposes of determining the unadjusted basis immediately after an acquisition of qualified property, as well as corrections to the description of an entity disregarded as separate from its owner for purposes of section 199A and §§1.199A-1 through 1.199A-6. The corrected draft has been submitted to the Federal Register for publication.

The corrections to the excess §743(b) basis adjustment portions of the regulations appear extensive at first glance, but do not appear to change the calculation of the amount ultimately.  Rather, the change simply shortens the description of the calculation.

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Ignorance of the Existence and Impact of Election to Waive Carryback Period Placed in Return By Preparer Does Not Allow Taxpayers to Escape Its Effect

The Eleventh Circuit Court of Appeals, in the case of Bea v. Commissioner, Case No. 18-10511, held that a married couple could not obtain relief from making an irrevocable election with their tax returns merely because they were not aware of the election.  Rather, the Court found that the taxpayer had signed and submitted a return that had the election on it, and the fact they failed to review the return before filing did not allow them to obtain relief.

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Simplified Inventory Election for Small Businesses May Be a Tax Disaster for Marijuana Businesses

An interesting article appeared in Tax Notes Today on February 1, 2019 that raised a question regarding whether a business that is deemed to be trafficking in a federally controlled substance might significantly increase its federal tax if it makes the election added by the Tax Cuts and Jobs Act to escape the provisions of IRC §471(a) and account for its inventory either:

  • By accounting for such inventory as non-incidental materials and supplies pursuant to Reg. §1.162-3, or

  • Conforms to such taxpayer’s method of accounting reflected in an applicable financial statement of the taxpayer with respect to such taxable year or, if the taxpayer does not have any applicable financial statement with respect to such taxable year, the books and records of the taxpayer prepared in accordance with the taxpayer’s accounting procedures.

This election is open to businesses that have average annual gross receipts of $25 million or less for the prior three years (adjusted for inflation) and which is not a tax shelter as defined by IRC §448(a)(3)..

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IRS Publishes Information on Issues Related to Tax Court and Government Shutdown

The IRS has issued a notice on their website (“IRS Update on Shutdown Impact on Tax Court Cases; Important Information for Taxpayers, Tax Professionals with Pending Cases”) dealing with issues that arise with taxpayers for whom the shutdown has created issues with their tax situation.  Although the shutdown has now ended (at least temporarily), many issues will continue for quite a period after operations resume at the Tax Court.

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W-2 Wage Calculation Revenue Procedure for §199A Released in Final Form by IRS

The final regulations under §199A state that the IRS may provide for methods of computing taxable wages.[1]  At the same time as the final regulations were issued, the IRS finalized a revenue procedure to provide for acceptable methods of computing W-2 wages.

Revenue Procedure 2019-11 provides for methods of computing W-2 wages for purposes of IRC §199A.  The revenue procedure was issued during 2018 in draft form, and the final version has no significant changes from the original proposed version.

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IRS Confirms Sequestration Reduction Will Not Apply to §53(e) Corporate Minimum Tax Credit Refunds

The IRS confirmed that AMT credit refunds under the Tax Cuts and Jobs Act will not be subject to reduction under sequestration in an announcement on the IRS website (Effect of Sequestration on the Alternative Minimum Tax Credit for Corporations (fiscal year 2019)).  However, claims for years beginning before January 1, 2018 by taxpayers making an election under IRC §168(k)(4) will be subject to a 6.2% sequestration reduction for claims processed on or after October 1, 2018 and on or before September 30, 2019.

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New York State Publishes Position on Requirements for Out of State Sellers to Collect Sales Tax

New York has published guidance on how it will handle out of state sellers following the Wayfair decision in Notice N-19-1.  The Notice provides:

A business that had no physical presence in New York State but has both made more than $300,000 in sales of tangible personal property delivered in the state and conducted more than 100 sales of tangible personal property delivered in the state in the immediately preceding four sales tax quarters is required to register as a sales tax vendor, and collect and timely remit the applicable state and local sales tax. 1 The sales tax quarters are: March 1 through May 31, June 1 through August 31, September 1 through November 30, and December 1 through February 28/29.

Note that, unlike South Dakota’s requirement to collect the tax if a taxpayer has over $200,000 in sales or 100 transactions, in this case, the seller has to have both $300,000 in sales and more than 100 sales in a year.  However, while New York’s standard is more forgiving here than South Dakota’s, the announcement is not all good news for out of state sellers.

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Limited Waiver of Underpayment of Estimated Tax Penalties Offered to Individuals on 2018 Taxes

Update (March 22, 2019) - The IRS has now revised this relief to drop the percentage to 80% from the 85% provided in the Notice discussed below. See Special 2018 Underpayment Penalty Relief Expanded to Apply to Those That Paid in At Least 80% of Total Tax Due.

The IRS has announced a somewhat modest waiver of underpayments of 2018 estimated taxes in Notice 2019-11.

Due to changes in the tax law under the Tax Cuts and Jobs Act, the IRS modified the withholding tables and calculations. However, many employees simply used the withholding allowances they had used in the past rather than going through the IRS withholding calculator.  As well, the calculator does not necessary properly take all situations into account.

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Supreme Court to Review Case Regarding When a State May Impose Its Income Tax on a Trust

The US Supreme Court has agreed to look at under what circumstances a state can impose its income tax on a trust by granting certiorari in the case of North Carolina Dept. of Revenue v. Kaestner Family Trust, Case No. 18-457.

Last July the North Carolina Supreme Court decided that the state had no right to impose its income tax on a trust that, while it had a North Carolina beneficiary, was established in New York, did not have a North Carolina trustee and had no property in North Carolina.  (See the prior article on Current Federal Tax Developments that discussed the original case along with another case on state taxation of trusts at Two States Find Their State’s Statutes for Taxing Trusts Violate Due Process Clause.)

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