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February 2019

Business Interest Limitation Under 163(j)—Unresolved Issues

On Feb. 21, AICPA sent a letter to the IRS requesting guidance on many areas associated with Section 163(j). These include:

 

1.        Definition of interest expense

2.       Aggregation/consolidation of groups

3.       Allocation rules

4.       Ordering rules, including whether Section 163(j) is a method of accounting

5.       Interaction between Sections 163(j) and 108 (discharge of indebtedness)

6.       Partnership related items—tiered partnerships, disposition of partnership interests

7.       International items

8.       Small business relief from tax shelter definition

 

Some of these items only affect a small number of taxpayers, but some affect a great many taxpayers. The letter is comprehensive with 51 pages. All practitioners with affected clients should be aware of the major issues during this filing season.

https://www.aicpa.org/content/dam/aicpa/advocacy/tax/downloadabledocuments/20190221-aicpa-comments-sec-163j-prop-regs.pdf

 


Section 199A Resource Listing

By Julie Dale, CPA-Austin

The Tax Cuts and Jobs Act enacted in 2017 included new Section 199A to provide a potential tax reduction to qualified businesses operating as flow-through entities. A more in-depth discussion of the mechanics of the deduction can be found in the article entitled, The Qualified Business Income Deduction, published on the TXCPA website on Feb. 13, 2019. This deduction is currently available for tax years 2018 to 2025.

Guidance Issued

The IRS guidance required surrounding this new deduction is substantial. The IRS declined to issue any tax forms specifically for the calculation of this deduction in 2018. Below is a summary of recent primary guidance issued. These items include examples that will be useful in verifying accuracy of the computations involved with this deduction.

  1. Final Regulations (page numbers referenced below are for the corrected version as drafted at date of the article’s publication):
  2. Regulation Section 1.199A-1, Operational rules, page 156
  3. Regulation Section 1.199A-2, Determination of W-2 wages and unadjusted basis immediately after acquisition of qualified property, page 176
  4. Regulation Section 1.199A-3, Qualified business income, qualified real estate investment trust (REIT) dividends, and qualified publicly traded partnerships (PTP) income, page 197
  5. Regulation Section 1.199A-4, Aggregation, page 205
  6. Regulation Section 1.199A-5, Specified service trades or businesses and the trade or business of performing services as an employee, page 217
  7. Regulation Section 1.199A-6, Relevant passthrough entities (RPEs), PTPs, trusts, and estates, page 239
  8. Regulation Section 1.643(f)-1, Treatment of multiple trusts, page 248
  9. Notice 2019-7 for rental real estate safe harbor
  10. Revenue Procedure 2019-11 for wage calculation and qualified property

Section 199A on Information Returns

A variety of information returns will include Section 199A data. Below is a listing of a few forms you may regularly see with this information included:

  1. Form 1099-DIV
  2. Form 1099-PATR
  3. Schedules K-1

There are other forms that should be considered in evaluating eligibility for the Section 199A deduction even though there is no specific information regarding the deduction included on the forms. The most common examples will be Form 1099-MISC, Form 1099-K or other documents provided by a sole proprietor. These forms may contain income that qualifies for the deduction, but additional analysis is necessary.

2019 Form 8995

On Feb. 13, 2019, the IRS issued a draft version of 2019 Form 8995, Qualified Business Income Deduction Simplified Computation. Although this is a 2019 tax form, it may serve as a template for the simplified computation. For an expanded discussion of this form, see the Tax Adviser article published recently.

Form Instructions and Publications

The IRS has issued instructions for forms, publications and FAQs that reference Section 199A:

  1. Form 1040 Instructions
  2. Form 1041 Instructions
  3. Form 1065 Instructions
  4. Form 1120S Instructions
  5. Publication 535, Business Expenses
  6. Publication 5318, What’s New for Your Business – Tax Reform 2018
  7. Qualified Business Income Deduction FAQs

Guidance Remaining

There may be additional guidance issued, so this area should be monitored closely for modifications and expanded information to come during this tax season. If questions should arise during tax season that appear to be unanswered, please consider posting your question in TXCPA Exchange to see if others have run across similar concerns. This may be a valuable resource to learn more about this deduction as tax season unfolds.

 


New Reporting Requirement on Partnership Basis Could Trap Partnership and Partners

William Stromsem, CPA, J.D., Assistant Professor, George Washington University School of Business

There is a new and little-noticed requirement for the analysis of partner’s capital accounts that can bring stiff penalties on the partnership for failure to comply and can bring problems for individual partners if the partnership does comply. In the analysis of partner’s capital accounts, if the partnership reports to its partners on other than the tax basis (e.g., GAAP, Section 704(b) book or other), and that report shows a negative beginning or ending balance, then this must be disclosed on the Schedule K-1. Specifically, line 20 of the K-1 must include code AH and report the partner’s beginning and ending capital account on the tax basis. 

Failure to comply can result in a large fine for the partnership. The penalty is $195 per partner per month for up to a year (that is up to $2,340 per partner for whom the negative basis is not reported). This seems particularly harsh in that the new requirement is buried on page 30 of the new 2018 Form 1065 instructions that many partnerships may have missed in preparing the K-1s.  

Compliance may result in further IRS inquiry into the partner’s tax situation, because the IRS may suspect that the negative basis resulted from an artificial inflating of the basis of property or other contributions to the partnership or may reflect other abusive tax shelter schemes. 

The instructions describe the term “tax basis capital” account to distinguish when there is a GAAP or other report that requires the disclosure.

Practitioners should review this requirement with their partnership clients to allow them to file amended K-1s and reduce the partnership’s penalty exposure and to allow them to advise partners of possible increased IRS scrutiny.  

https://www.irs.gov/pub/irs-pdf/i1065.pdf

 

 


Opting Out of CPAR, But Naming a Partnership Representative

By David Donnelly, CPA-Houston

 

There is an apparent inconsistency between Form 1065 and IRC Section 6223 regarding electing out of the centralized partnership audit regime (CPAR) and designating a partnership representative (PR). 

 

The form is clear that if the partnership elects out of the CPAR, no PR can be designated. Most software will not allow this without an override and some software does not even allow an override.

 

Section 6223(a) clearly states that, “Each partnership shall designate (in the manner prescribed by the Secretary) a partner (or other person) with a substantial presence in the United States as the partnership representative who shall have the sole authority to act on behalf of the partnership under this subchapter.”

 

However, Section 6221(b)(1)(A) states that, “This subchapter shall not apply with respect to any partnership for any taxable year if…the partnership elects the application of this subsection for such taxable year.”

 

The election is an election out of all of Subtitle F, Subchapter C “Tax Treatment of Partnership Items,” which includes Section 6223; so, if 6223 does not apply, no PR can be, nor needs to be, designated.

 

If the partnership then elects out of the CPAR, the pre-TEFRA (Tax Equity and Fiscal Responsibility Act of 1982) or non-TEFRA audit rules apply. Pre-TEFRA, there was no designation of a “tax matters partner” (TMP) or PR. Presumably, in the case of a partnership audit, the IRS will contact the partnership itself and begin audit proceedings with respect to its partners. Alternately, the IRS could audit partners individually regarding the partnership items on the partners’ returns. In a conversation with Treasury personnel, it was stated that ”it depends on the facts and circumstances.” 

 

Evidently, naming a PR when electing out of the CPAR is like naming a TMP for a non-TEFRA partnership. The IRS has historically ignored the named TMP in a non-TEFRA partnership audit.

 

Since the election out of the CPAR is made annually and a partnership could become ineligible for the election, it is still a good practice for the partnership agreement to include procedures for designating a PR.