Draft Schedule K-1, Form 1120S Consolidates §199A Information to a Single Code for 2019

Glen Birnbaum, CPA[1] posted on Twitter a note that the IRS’s draft Form 1120S K-1 form for 2019 has reduced the number of codes for items related to §199A from 5 codes that existed on the 2018 form to just one for the current years.

The draft released by the IRS on July 25 has the following items listed for codes for line 17, other information:

2019 IRS Draft Schedule K-1 Codes for Line 17, Other Information

2019 IRS Draft Schedule K-1 Codes for Line 17, Other Information

Note that code V refers not to a number, but rather to “information” related to the §199A deduction.

The 2018 version of the form referred to five specific pieces of information:

2018 Schedule K-1 Codes for Line 17, Other Information

2018 Schedule K-1 Codes for Line 17, Other Information

Why has the IRS decided to do this?  Likely because the information that a relevant passthrough entity (RPE, which is the term used in the §199A regulations for partnerships, S corporations and trusts with §199A income that is being passed through on Schedule K-1) should be presenting on the information return often is far more than simply the five items listed on the 2018 set of codes.

In the article on the expansion of IRS’s frequently asked questions posted here earlier in 2019,[2] the IRS provided the following guidance in question 28 that clearly required more information than could be provided if a K-1 only gave information for those five codes:

A28. The pass-through entity is required to provide the owners QBI information necessary for the owner to compute the deduction. If the entity only has ordinary income from a single trade or business, it may be appropriate to reflect one QBI amount. Items from a pass-through entity are required to be separately stated due to the potential of unique treatment on one or more owners’ returns. Items not included in current year taxable income are not included in QBI. Therefore, additional details will also need to be provided for the owners. If for example, in addition to ordinary income the owner is allocated a section 179 deduction, since the 179 deduction may be limited, the detail would be required in order for the owner properly to determine the current year QBI.[3]

The revised instructions for 2019 for the S corporation Schedule K-1 were not yet available at the time this article was written, but presumably they will require the S corporation to provide all necessary information for the shareholder to calculate the Section 199A qualified business income deduction.


Information for 2019 Form 1120-S Schedule K-1 Code V

SAB Enterprises, Inc. is an S corporation with a single shareholder.  The corporation has a single trade or business.  It has various items of qualified business income and deductions.  The net qualified business income related to items not subject to shareholder level calculations (aside from basis and at risk limits) is $42,000. 

The business of the corporation is not a specified service trade or business.  The business had unadjusted basis of assets immediately after acquisition of $450,000 as of the end of the year, and it paid $140,000 of W-2 wages.

The corporation also has $14,000 of §179 expense claimed on the return that is related to qualified business income and paid health insurance premiums of $12,000[4] that were included in the shareholder’s W-2 potentially allowable as a self-employed health insurance deduction and were deducted in calculating the $42,000 of QBI referred to above.

The corporation will provide the following information related to QBI on the K-1 for line 17 , code V:

The single qualified business of SAB Enterprises is not a specialized service trade or business.

Net QBI not including item subject to separate limitations at the shareholder level is $42,000.  The $14,000 of §179 expense and the $12,000 of self-employed health insurance related to the shareholder are both expenses related to SAB trade or business and, to the extent the shareholder is determined to be able to deduct those items, will reduce QBI from SAB for the shareholder.

Allocable UBIA for the shareholder is $450,000 and the shareholder’s allocation of W-2 wages is $140,000.

At the time this article was written the IRS has not yet released the draft Form 1065 Schedule K-1 for 2019, but it seems likely the same change will be made to that form along with the Schedule K-1 that will accompany Form 1041 for 2019.

[1] https://twitter.com/GlenBirnbaum/status/1155821911756218368?s=20, July 29, 2019

[2] Ed Zollars, “IRS Greatly Expands Frequently Asked Questions for §199A on Website - And S Corporation Owners Aren't Going to Like the Final Answer,” Current Federal Tax Developments website, April 20, 2019, https://www.currentfederaltaxdevelopments.com/blog/2019/4/20/irs-greatly-expands-frequently-asked-questions-for-199a-on-website-and-s-corporation-owners-arent-going-to-like-the-final-answer, retrieved July 29, 2019

[3] https://www.irs.gov/newsroom/tax-cuts-and-jobs-act-provision-11011-section-199a-qualified-business-income-deduction-faqs, Last reviewed or updated July 16, 2019, retrieved July 29, 2019, Answer 28

[4] Question 33 of the FAQ referred to above provided that the self-employed health insurance deduction in this case reduces QBI a second time if it is ultimately allowed as a deduction.