Clarifications for Disregarded Entity Reporting and section 743(b) Reporting

 

Disregarded Entity Reporting

FAQ 1. Q. When a partner is a disregarded entity (DE), does the entity type of the beneficial owner need to be provided in Item I1 on the Schedule K-1 (Form 1065)?

A. Yes. If the legal owner of the partnership interest is a DE, the partnership provides the beneficial owner’s entity type in Item I1.  For example, Corporation A owns 100% of DE X.  DE X owns 50% of partnership AB.  On the partnership’s Schedule K-1, the partnership would check the box in Item H2 to note that the legal owner is a DE. The partnership would also provide the DE’s TIN (if applicable) and the DE’s name.  In Item I1, the partnership would report that the beneficial owner is a corporation. 

FAQ 2. Q. If a DE is the legal owner of the partnership interest, and that DE in turn is owned by another DE (which in turn may be owned by another DE, etc.), which DE should be listed in Box H-2?

A.  If the partnership interest is owned by tiered DEs, the partnership must report in box H-2 information pertaining to the DE which is the legal owner of the partnership interest. 

FAQ 3. Q.   In a case where the legal owner is a grantor trust and the grantor trust has a filing obligation, what information should the partnership report in Box H-2?

A.  Notwithstanding any other tax return filing requirement, a wholly owned grantor trust will be treated like a DE for purposes of reporting the information required by Box H-2.  Accordingly, where a grantor trust is the legal owner of a partnership interest, the grantor trust’s information will be reported in Box H-2. Items E and F should contain information on the owner (under Subpart E of Subchapter J) of the wholly owned grantor trust. 

Section 743(b) Reporting

FAQ 4. Q. What are some examples of how the partnership should report section 743(b) adjustments for purposes of lines 11 and 13 of Schedule K-1 (Form 1065)?

Example Q4-1 
Partner A of Partnership AB has a section 743(b) positive adjustment of $15,000 relating to a 15-year intangible asset (Asset X), and a section 743(b) positive adjustment of 3,000 relating to 5-year equipment depreciated under the straight-line method (Asset Y).  For tax year 2019, A is allocated $1,000 of depreciation for the section 743(b) adjustment for Asset X, and $600 of depreciation for the section 743(b) adjustment for Asset Y.  The partnership would allocate depreciation expense related to the section 743(b) adjustment of $1,600 depreciation for Partner A and would report that expense on Schedule K-1 (Form 1065), line 13, code V.

Example Q4-2
Assume the same facts as Example Q4-1, except that Partner A had a negative section 743(b) adjustment in the same amounts for the same assets.  The partnership would allocate income of $1,600 to Partner A, and would report that income on Schedule K-1 (Form 1065), line 11, code F.

Example Q4-3
Partner A of Partnership AB has a positive section 743(b) adjustment of $15,000 relating to a 15-year intangible asset (Asset X), and a negative section 743(b) adjustment of $3,000 relating to 5-year equipment depreciated under the straight-line method (Asset Y).  For tax year 2019, A is allocated $1,000 of depreciation expense for Asset X, and $600 of income relating to the negative section 743(b) adjustment attributable to Asset Y. On Schedule K-1 (Form 1065), line 13, code V, Partnership AB reports $400 depreciation expense for Partner A. 

FAQ 5. Q.  What are some examples of what should be reported on Schedule K-1 (Form 1065), line 20, code AH, relating to section 743(b) adjustments?

Example Q5-1
Assume the same facts as the example in Example Q4-1, except that both Asset A and Asset B have been depreciated for 2 years and there is a remaining adjusted tax basis for the section 743(b) adjustment of $13,000 for Asset X, and $1,800 for Asset Y. The partnership reports the information below for Partner A on Schedule K-1 (Form 1065), line 20, code AH, and groups the assets using the balance sheet categories.

Remaining section 743(b) adjustment:
Buildings and other depreciable assets     $1,800
Intangible assets                                                  13,000 

Example Q5-2
Assume the same facts as Example Q5-1, except that Partner A had only Asset X that had a section 743(b) adjustment. The partnership reports the information below for Partner A on Schedule K-1 (Form 1065), line 20, code AH, using the balance sheet categories.

Remaining section 743(b) adjustment:
Intangible assets  $13,000