The section of the partnership K-1 delineating partners’ share of debts of the partnership may be subject to modifications with the anticipated release of the 2023 draft version of Schedule 1065 Schedule K-1. A recent article penned by Kristen Parillo and published in Tax Notes Today on May 9, 2023,[1] provides coverage of a session held on May 5, 2023 at the American Bar Association Section of Taxation meeting. During the meeting, Adrienne Mikolashek, the IRS Deputy Associate Chief Counsel for Passthroughs and Special Industries, reportedly highlighted these prospective changes to the Schedule K-1.

The 2022 iteration of Schedule K-1, Form 1065, featured three lines that categorized a partner’s share of debts into recourse, qualified non-recourse, and non-recourse. As reported in the article, the IRS plans to subdivide the recourse liability category in 2023, thereby distinctly identifying debt restoration obligations and partner debt guarantees.

Ms. Parillo’s article conveys Ms. Mikolashek’s rationale for this revision as follows:

According to Mikolashek, the reason for revising the form to separately report a partner’s share of recourse liabilities from deficit restoration obligations or partner debt guarantees “is to not only get better information reporting from the IRS’s perspective, but also to do the partners a service so that they are fully aware of this obligation, as the partnership might consider that the partners should have an obligation to pay.”[2]

The article also notes that the IRS intends to publish the draft version of this form for public comment this fall.[3]

Advisers are encouraged to anticipate the forthcoming draft K-1 this fall, along with the comprehensive instructions that the IRS will issue elucidating the agency’s expectations for each line item. This shift will spotlight the approach adopted by those preparing partnership tax returns in managing debt allocations.

Additionally, the impending modifications and corresponding instructions should underscore the fact that it’s not appropriate for multiple partners to lay claim to the same dollar of debt when determining their basis in their respective interests, with the erroneous assumption that debts guaranteed by all partners create a basis equivalent to the total debt amount for each partner. Similarly, a deficit restoration obligation should not be misinterpreted as a feature that bestows an unlimited basis against which a partner can offset a loss.

[1] Kristen A. Parillo, “ABA Section of Taxation Meeting: IRS to Tweak Schedule K-1 Reporting of Recourse Debt,” Tax Notes Today Federal, May 9 2023, https://www.taxnotes.com/tax-notes-today-federal/information-reporting/aba-section-taxation-meeting-irs-tweak-schedule-k-1-reporting-recourse-debt/2023/05/09/7gnl0 (subscription required, retrieved May 13, 2023)

[2] Kristen A. Parillo, “ABA Section of Taxation Meeting: IRS to Tweak Schedule K-1 Reporting of Recourse Debt,” Tax Notes Today Federal, May 9 2023

[3] Kristen A. Parillo, “ABA Section of Taxation Meeting: IRS to Tweak Schedule K-1 Reporting of Recourse Debt,” Tax Notes Today Federal, May 9 2023