16232: 1065 - Negative Tax Basis Capital Account Information

Starting in 2018, if the partnership reports the “Partner’s capital account analysis” in the “L” section of Schedule K-1 using a basis other than "Tax basis," and the capital balance reported on any partner's Schedule K-1 at the beginning or end of the tax year is a negative number, then the partnership must report on line 20 of Schedule K-1 – using code “AH” – each partner's beginning and ending shares of tax basis capital. This is in addition to the capital information reported in item L of Schedule K-1.

In Drake Tax, 

1. Return to screen K and click the Other information cont'd. tab.
2. Click the Other link under the AH Other Information line, at the bottom of the screen.
3. Enter a description and total amount to be reported.
   • Use the SA link to allocate amounts to the appropriate partner's Schedule K-1, line 20.

Limited Penalty Relief

The IRS has released information regarding penalty relief available for certain returns on which information about partners’ negative tax basis capital accounts for taxable years that began after December 31, 2017, but before January 1, 2019 was omitted. While the requirement to report basis existed for prior years, the additional section requiring reporting negative tax basis in box 20, code AH was not included in the 1065 Instructions until after the deadline for filing a 2018 calendar year partnership return. As such, some partnerships may have been unable to comply with this new requirement, so the IRS has offered penalty relief for certain qualifying partnerships. Per Notice 2019-20: 

"The IRS will waive penalties... if both the following conditions are met:

1. The Schedule K-1 or other applicable form or statement is timely filed, including extensions, with the IRS; is timely furnished to the appropriate partner, if applicable; and contains all other required information.
2. The person or partnership required to file the Schedule K-1 or other applicable form or statement files with the IRS, no later than one year after the original, unextended due date of the form to which the Schedule K-1 or other applicable form or statement must be attached, a schedule setting forth, for each partner for which negative tax basis capital account information is required:
   1. the partnership’s name and Employee Identification Number, if any, and Reference ID Number, if any;
   2. the partner’s name, address, and taxpayer identification number; and
   3. the amount of the partner’s tax basis capital account at the beginning and end of the tax year at issue."

This penalty relief only applies to taxable years that began after December 31, 2017, but before January 1, 2019. 

Penalty relief will only be available for one year after the un-extended due date of the 2018 return. For calendar year filers that due date would be 3/15/2020.

The Penalty relief statement is not a part of a 1065 return, but is generated and mailed separately. Refer to Notice 2019-20 for additional information and instructions for requesting penalty relief if the information was not provided with the original return filed. Do not file amended Schedules K-1.