LIST OF SUBSTANTIVE CHANGES AND ADDITIONS. PPC s 1065 Deskbook. Twenty-ninth Edition (October 2018)

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1 Route To: Partners Managers Staff File LIST OF SUBSTANTIVE CHANGES AND ADDITIONS PPC s 1065 Deskbook Twenty-ninth Edition (October 2018) Highlights of this Edition The following are some of the important new features of the 2018 Edition of PPC s 1065 Deskbook: Favorable accounting methods. The 2017 Tax Cut and Jobs Act (TCJA) greatly expanded the universe of taxpayers who are eligible to use the cash method, as well as those who are excepted from the requirements to apply the uniform capitalization rules, use IRC Sec. 471 rules to account for inventory, and use the percentageof-completion method for long term contracts. Taxpayers eligible to change to these favorable accounting methods because of the TCJA change can do so automatically. Qualified business income deduction (QBI). This new deduction, added by the TCJA, is intended to provide tax relief to businesses not benefitting from the reduction in the top corporate tax rate and is a major new provision with potentially widespread application. Much needed guidance provided by regulations issued in 2018 is covered in this Deskbook. Inflation-adjusted amounts. Each year, many amounts are adjusted for inflation. The text and examples have been updated to reflect the 2018 amounts. Expanded bonus depreciation deduction. The TCJA increased the first-year bonus depreciation percentage to 100% and expanded the definition of qualified property to include certain used property. Regulations issued in 2018 explain how these changes make bonus depreciation available in situations where it was previously denied, such as for partners who acquire an interest in partnership with a Section 754 election in effect, or when qualified property is contributed to or distributed from partnership. The regulations also provide guidance with respect to certain property placed in service after September 27, 2017, and before Updates to Form 1065 and Schedule K-1. There have been many changes in Form 1065 and Schedule K- 1 resulting from the TCJA. This Deskbook provides extensive coverage of changes to Form 1065, Schedule K, Schedule K-1 and their related instructions. In addition to these featured items, your Deskbook includes the following update items detailed below. CHAPTER 2 Contributions of Property or Services 1. Added a key issue that addresses the new holding period rule for carried interests added by the TCJA under IRC Sec Key Issue 2J t65p18sub -1-

2 CHAPTER 4 Accounting Methods 1. Updated for the increased $25 million average annual gross receipts threshold for the small taxpayer exception from using the accrual method of accounting. Noted that taxpayers meeting this exception are also exempt from maintaining inventories. Key Issue 4A 2. Explained new IRC Sec. 451(c) that provides rules for Key Issue 4B recognizing advance payments as income for accrual method taxpayers. 3. Added a discussion of the new financial statement Key Issue 4B conformity rule. 4. Added guidance on how to make accounting method Key Issue 4C changes resulting from TCJA changes. 5. Addressed the changes made by the TCJA to Key Issue 4D CHAPTER 6 Audit Rules, Amended Returns, and Due Diligence in Form 1065 Preparation CHAPTER 7 Trade or Business Income CHAPTER 8 Inventory and Cost of Goods Sold CHAPTER 9 Nonbusiness Income accounting for long-term contracts. 1. Updated the discussion on the centralized partnership audit regime for proposed regulations that were issued in August Added a discussion on how to calculate the imputed underpayment under the centralized partnership audit regime. 3. Updated the discussion on how to make a push-out election. 4. Added a discussion regarding the partnership representative and how that representative is designated. 5. Updated and added examples to the discussion on electing out of the centralized partnership audit regime for small partnerships. 6. Added a discussion on filing an administrative adjustment request (AAR) under the centralized partnership audit rules. 1. Updated the list of important provisions that might affect the correct determination of farm income or loss. 1. Noted that small taxpayers that meet the $25 million average annual gross receipts test are exempt from maintaining inventory. 2. Updated the discussion on the small taxpayer exception to the use of UNICAP for changes made by the TCJA. 1. Addressed the repeal of IRC Sec. 54C related to new clean renewable energy bonds. 2. Noted the new codes for Schedule K-1, line 11, Other income. 3. Noted the new line on Schedule K-1 for reporting dividend equivalents and the definition of such. Key Issue 6C Key Issue 7C Key Issue 8A Key Issue 8G Key Issue 9A Key Issue 9A Key Issue 9C -2-

3 CHAPTER 10 Installment Sales and 1. Noted the changes in individual income tax brackets for application of capital gain rates. Key Issue 10B Like-kind Exchanges 2. Discussed the impact of IRC Sec. 163(j) limiting the deduction of business interest on the installment sale interest charge rules. Key Issue 10D 3. Noted that for tax years beginning after 2017, the method for computing the annual inflation adjustment under IRC Sec. 1274A has changed. Key Issue 10H 4. Discussed the revised like-kind exchange rules that limit the application of IRC Sec to real property. Key Issues 10J and 10K 5. Noted that personal property included in a like-kind exchange is now boot and added an example illustrating this point. Key Issue 10J CHAPTER 11 Trade or Business Property Transactions CHAPTER 12 Debt Discharge Income and Foreclosures CHAPTER 13 Other Deductions CHAPTER 14 Taxes and Interest Expense 1. Expanded the discussion on when and how to complete Form 8949 (Sales and Other Dispositions of Capital Assets). 2. Updated the discussion on reporting like-kind exchanges to incorporate TCJA changes in IRC Sec Updated the capital gains discussion for TCJA changes made to IRC Sec related to selfcreated patents, inventions, models, or designs. 4. Added a new key issue that covers the new IRC Sec.1061 rules on carried interests. 5. Added a new key issue discussing deferral of gain recognition through investment in qualified opportunity funds (IRC Secs. 1400Z-1 and -2). 1. Added a discussion of a 2018 Tax Court decision that treated the short sale of property burdened by nonrecourse debt and the simultaneous discharge of that debt as a single transaction. The property securing the debt was deemed to have been sold for proceeds equal to the nonrecourse debt balance with the discharged debt treated as part of the sales proceeds. 2. Added a discussion of the TCJA provision that eliminates the ability of taxpayers to treat certain selfcreated intangibles as capital gain assets. 1. Updated the discussion on reporting salaries and wages to include the impact of the new employer credit for paid family and medical leave. 2. Updated the discussion on deducting guaranteed payments to incorporate the impact of guaranteed payments on the Section 199A business income deduction. 1. Updated the key issue on capitalizing interest expense for UNICAP to reflect changes made by the TCJA to the gross receipts test for small taxpayers. 2. Added a new key issue that discusses the business interest expense limitation under IRC Sec. 163(j). Key Issue 11A Key Issue 11A Key Issue 11A Key Issue 11B Key Issue 11F Key Issue 12A Key Issue 12C Key Issue 13A Key Issue 13B Key Issue 14F Key Issue 14G -3-

4 CHAPTER 15 Tax Depreciation and 1. Noted changes made by the TCJA to the ADS recovery period for residential rental property. Key Issue 15A Depletion 2. Updated for changes made by the TCJA to bonus depreciation, including: Key Issue 15B a. The recently issued proposed regulations providing guidance for bonus depreciation. b. Property that qualifies for bonus depreciation. c. Property that does not qualify for bonus depreciation. d. Original use and acquisition tests. e. Bonus depreciation following a like-kind exchange. f. Bonus depreciation for vehicles. g. Qualified improvement property. h. Bonus depreciation for partnership basis adjustments. 3. Updated for changes in Section 179 expensing made by TCJA, including: Key Issue 15F a. Increase in the amount allowed. b. Property that qualifies for Section 179. c. Section 179 deduction for vehicles. 4. Noted the availability of bonus depreciation for Key Issue 15H partnership basis adjustments. CHAPTER 16 Partnership Retirement Plans and Fringe Benefits CHAPTER 17 Travel and Entertainment Expenses 1. Updated for cost of living adjustments. 2. Updated for changes in fringe benefits from the TCJA. 1. Updated throughout the chapter for changes made to the ability to deduct entertainment expenses by the TCJA. 2. Added a discussion on changes made by the TCJA in the ability to deduct meals and entertainment. 3. Updated the discussion on claiming deductions for club dues and business gifts to reflect changes made by the TCJA. 4. Updated the discussion on deducting tickets to athletic events and skybox rentals. 5. Updated for cost of living adjustments for travel per diem amounts in Updated the 2018 inclusion amount for the annual lease value of company-provided leased automobiles. 7. Updated the 2018 SIFL rates for reporting compensation from personal use of employerprovided aircraft. Key Issues 16A and 16C Illustration 16-2 Throughout Key Issue 17B Key Issue 17C Key Issue 17D Key Issue 17E Key Issue 17F Key Issue 17G -4-

5 CHAPTER 18 Qualified Business Income Deduction (IRC Sec. 199A) Chapter 18 discusses the new qualified business income deduction under IRC Sec. 199A, which is available for tax years beginning after 2017 and before The following are the topics covered in this chapter. CHAPTER 19 Charitable Contributions CHAPTER 20 Schedule K-1, Capital Account Reconciliation with Schedules M-1, M-2, and M-3 1. Definition of qualified business income (QBI). 2. Definition of what constitutes a qualified business, how to allocate income and expenses to multiple businesses, and when businesses can be aggregated. 3. Definition of specified services trades or businesses and whether a QBI deduction can be taken for these businesses. 4. Deductible amounts for each qualified trade or business. 5. Computing the deduction. 6. Application of QBI rules to rental real estate and special rules that apply to agricultural and horticultural cooperatives and their patrons. 7. Information partnerships are required to report to their partners, as well as where this information is reported on Schedules K and K Noted the increase to a 60% limitation for cash donations to 50% charities. 2. Discussed suspension of contribution limitations for qualified contributions made for relief efforts in federally declared California wildfire disaster areas. 3. Noted additional cases addressing charitable contributions of conservation easements. 4. Addressed the final regulations issued in August 2018 related to substantiation of contributions. 5. Noted that proposed regulations require quid pro quo contributions to be reduced by the amount of state tax credit received (or expected to be received) by the taxpayer. Updated the discussion on book-tax differences for the following: 1. The disallowance of entertainment expenses by the TCJA. 2. Imputed underpayments made by the partnership under the centralized audit regime 3. The deferral of gains with qualified opportunity zone investments. Key Issue 18A Key Issue 18B Key Issue 18C Key Issue 18D Key Issue 18E Key Issue 18F Key Issue 18G Key Issue 19B Key Issue 19B Key Issue 19C Key Issue 19D Key Issue 19E Throughout Key Issue 20G Key Issue 20H -5-

6 CHAPTER 21 Partnership Passthrough Items 1. Noted the addition of new lines on page one of Form 1065 for reporting for the payment of partnership amounts due for interest under the look-back method for long-term construction contracts and the incomeforecast method of depreciation as well imputed underpayments made under the centralized audit regime. Key Issue 21A 2. Noted several new questions on Schedule B, including those that address: Key Issue 21A a. the centralized partnership audit regime; b. matters related to foreign income; c. the new limit on business interest expense; and d. investment in qualified opportunity funds. 3. Pointed out the many changes to codes for reporting information on Schedule K-1. Key Issue 21A 4. Updated the listing of where to report items on Schedule K-1 for new items and codes and changes made to prior year codes. Key Issue 21D 5. Added a discussion on the excess business loss limitation. Key Issue 21G 6. Updated the discussion on reporting foreign Key Issue 21H transactions for changes made by the TCJA. CHAPTER 22 Alternative Minimum Tax CHAPTER 23 Reporting Credits Allocated to Partners CHAPTER 24 Basis in the Partnership Interest (Outside Basis) CHAPTER 26 Making Valid Partnership Tax Allocations 1. Added the cite for proposed regulations to explain how the AMT depreciation amount is computed for assets subject to bonus depreciation. 2. Noted the TCJA change that will be effective beginning in 2021 with regard to amortization of research and experimentation (R&E) expenditures. 1. Updated the list of general business credits for changes made by the TCJA. 2. Updated for the TCJA changes to the rehabilitation credit. 3. Noted changes made by the TCJA to the R&E credit. 4. Added a discussion of the new employer credit for paid family and medical leave. 1. Noted that the new excess business loss limitation is applied at the individual taxpayer level and therefore does not limit the partner s basis in his or her partnership interest. 2. Added an explanation of how the TCJA changes in the treatment of partnership charitable donations and foreign taxes affect a partner s outside basis. 1. Expanded the discussion on partnership allocation anti-abuse rules. 2. Expanded the explanation of minimum gain chargeback rules for allocating nonrecourse deductions. Key Issue 22A Key Issue 22B Key Issue 23A Key Issue 23C Key Issue 23E Key Issue 23E Key Issue 24D Key Issue 24D Key Issue 26B Key Issue 26I -6-

7 CHAPTER 28 Allocations When Partner s Interests Change During the Year 1. Updated for the repeal of technical termination rules for tax years beginning after Key Issue 28A CHAPTER 29 At-risk Activities CHAPTER 31 Transactions between Partners and Partnerships CHAPTER 32 Transfers of Partnership Interests and Basis Adjustments CHAPTER 33 Distributions and Basis Adjustments CHAPTER 37 Death or Retirement of a Partner CHAPTER 38 Partnership Terminations, Mergers, and Divisions 1. Added information on the interaction of the basis, atrisk, passive loss, and excess business loss limitations. 1. Discussed qualified business income (QBI) deduction in relation to guaranteed payments. 2. Discussed new rules related to carried interest arrangements. 3. Noted that the IRS is proposing to withdraw Temp. Reg T(a)(2) and replace it with prior rules for allocating liabilities for disguised sale purposes. 4. Updated the discussion regarding the like-kind exchange rules for TCJA changes. 1. Updated for the change in holding period required for long-term capital gain treatment with respect to an applicable partnership interest (carried interest). 2. Updated information on the capital gains rates for Updated the definition of substantial built-in loss for changes made by the TCJA. 1. Added a discussion on Section 337(d) transactions. 2. Updated for final regulations related to distributions of stock in controlled corporations to a corporate partner. 1. Expanded the discussion on the income in respect of a decedent (IRD) rules and the effect of a deceased partner s successor-in-interest. 1. Noted that the technical termination rules were repealed by the TCJA for tax years beginning after Expanded explanation of how there can be differing tax results from an abandonment of a partnership interest and a sale of a partnership interest. 3. Expanded the discussion on the sale of a partnership interest in conjunction with an assets-over merger transaction. ELECTIONS 1. Updated the push-out election under the centralized partnership audit regime for guidance provided in new proposed regulations. 2. Updated the information included in the election out of the centralized partnership audit regime for small partnerships to note that new Schedule B-2 (Election Out of Centralized Partnership Audit Regime) can be used for making this election. CHECKLISTS 1. Updated both the long-form and the short-form 1065 preparation checklist to include items related to the TCJA changes. 2. Added a new checklist to use when addressing the qualified business income deduction. Key Issue 29G Key Issue 31A Key Issue 31A Key Issue 31D Key Issue 31F Key Issue 32A Key Issue 32A Key Issue 32C Key Issue 33A Key Issue 33A Key Issue 37D Key Issue 38A Key Issue 38B Key Issue 38C E211 E212 C102 and C103 C204-7-

8 WORKSHEETS 1. Added a new worksheet to calculate the business interest expense limitation under IRC Sec. 163(j). An interactive version of this worksheet is available on Checkpoint for subscribers of this product. W Added a new worksheet to calculate the qualified W138 business income deduction. An interactive version of this worksheet is available on Checkpoint for subscribers of this product. TABLES 1. Included a new table that summarizes partnership T629 liability sharing rules. 2. Updated for TCJA changes made to certain recovery T101 periods. 3. Added yearly depreciation percentages if 40% bonus T301 T305 depreciation is claimed. 4. Updated the table for 2018 capital gains rates. T610 OTHER PRACTICE 1. Updated the travel and business gifts client O305 AIDS confirmation for changes made by the TCJA. 2. Added a flowchart to illustrate the calculation of the qualified business income deduction. O406-8-