IRS Releases Various Draft 2023 Partnership Tax Forms
As we transition into the second half of 2023, the Internal Revenue Service (IRS) has commenced the release of draft tax forms for the current year. We will be focusing on the draft versions of the 2023 partnership tax forms that have been recently disseminated by the IRS. The pertinent forms under consideration are:
While the practical application of these draft forms may be somewhat restricted due to the absence of corresponding draft instructions for 2023, they nonetheless provide valuable insights. Even in their draft state, these forms can offer preliminary indications regarding potential modifications to the reporting requirements set by the IRS for partnerships in 2023.
Form 1065, “U.S. Return of Partnership Income”
Although the majority of the 2023 draft Form 1065 mirrors its 2022 counterpart, an alteration can be found in Schedule B’s “Other Information” section. This change pertains to queries about elections under Internal Revenue Code (IRC) Section 754 and the related adjustments under IRC Sections 734(b) and 743(b).
The questions pertaining to these provisions continue to be housed in Question 10, but the 2022 version required an attachment of statements if a current year basis adjustment under IRC Sections 734(b) and/or 743(b) was necessitated.
The 2023 draft provides that the precise amounts of these adjustments will need to be disclosed directly on lines within the Question 10 segment of Schedule B. The first two sections relating to this can be found on page 2 of the draft Form 1065:
The remaining two portions of Question 10 found on page 4.
Even though the attachment of statements for these adjustments is still necessary, the total adjustments are now required to be disclosed directly on Form 1065. This new inclusion on the form itself should facilitate the IRS’s ability to use these numbers during return analyses, enabling a more efficient identification of potential issues that might warrant further inquiry during an examination.
In addition, the IRS has introduced two new questions to occupy the space previously designated for Question 29’s “Reserved for future use” line on the 2022 Form 1065. The first of these new questions seeks information regarding whether the partnership is obliged to file the newly introduced Form 7208, titled “Excise Tax on Repurchase of Corporate Stock.” This form was initially released in its draft version on June 8, 2023.[4]
The first two sections of the question are found on page 3 of the draft Form 1065:
With the next two sections on page 4:
The second new question may already be familiar to seasoned tax professionals. The digital asset question, previously found on the 2022 Form 1040, will now make an appearance on Form 1065 as well, albeit not on the first page.
Schedule K-1, “Partner’s Share of Income, Deductions, Credits, etc.”
Alterations in the 2023 draft Schedule K-1 are identifiable in Part II, specifically in Sections J and K. In the 2022 form, Section J asked whether a decrease in a partner’s share of profit, loss, or capital was attributable to a sale or an exchange of partnership interest. However, it did not inquire which of the two events had transpired.
The 2023 draft of Schedule K-1 now requires the partnership to specify whether the decrease was the result of a sale or an exchange.
In May 2023, we posted an article[5] about Kristen Parillo’s article in Tax Notes Today[6] in which Adrienne Mikolashek, the IRS Deputy Associate Chief Counsel for Passthroughs and Special Industries, revealed at the American Bar Association Section of Taxation meeting that the 2023 Schedule K-1 (Form 1065) would undergo revisions. Specifically, it was stated that the form would separately report a partner’s share of recourse liabilities, including debt restoration obligations and partner debt guarantees.
However, the draft K-1 does not mandate the disclosure of specific amounts related to debt restoration obligations or partner debt guarantees. Instead, it introduces a checkbox to indicate if any portion of the partners’ reported share of liabilities is subject to a guarantee or other payment obligation by the partner.
The draft does include a note stating “See instructions.” This suggests that additional guidelines may require a schedule detailing the precise amounts of such items to be attached to Schedule K-1. However, until the instructions for the 2023 form are released, this remains speculative.
Schedule K-3 (Form 1065), “Partner’s Share of Income, Deductions,Credits, etc.—International”
The initial modification in the 2023 draft Schedule K-3 is the elimination of a checkbox that was utilized in the 2022 version for the provision of additional information to the partner. Specifically, in the 2022 Schedule K-3, checkbox 7 signified that attachments related to Form 8858, "Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs)," would accompany Schedule K-3.
In the 2023 draft of Schedule K-3 (Form 1065), this previously utilized checkbox is grayed out, indicating the attachment’s removal from the form’s list of requirements.
The subsequent modification is observed in Part II (Foreign Tax Credit Limitation), specifically Section 2 (Deductions) concerning interest. In the 2022 version of Schedule K-3, the columns for U.S. source, foreign branch category income, passive category income, general category income, and Other were grayed out, indicating they were not applicable.
In the 2023 draft of Schedule K-3, these columns are no longer grayed out but are instead open to accept entries on each line.
The final revisions are located in Part XIII, titled "Foreign Partner’s Distributive Share of Deemed Sale Items on Transfer of Partnership Interest." The 2022 Schedule K-3 included the following information:
In the 2023 draft, three additional lines have been introduced, effectively replacing the previously designated "Reserved for future use" lines.
[1] 2023 Form 1065 (June 23, 2023 Draft), June 23, 2023, https://www.irs.gov/pub/irs-dft/f1065--dft.pdf (retrieved June 29, 2023).
[2] 2023 Schedule K-1 (June 14, 2023 Draft), June 14, 2023, https://www.irs.gov/pub/irs-dft/f1065sk1--dft.pdf (retrieved June 29, 2023)
[3] 2023 Schedule K-3 (June 21, 2023 Draft), June 21, 2023, https://www.irs.gov/pub/irs-dft/f1065sk3--dft.pdf (retrieved June 29, 2023)
[4] Form 7208 (Draft as of June 8, 2023), June 8, 2023, https://www.irs.gov/pub/irs-dft/f7208--dft.pdf (retrieved June 29, 2023)
[5] Ed Zollars, CPA, “Imminent IRS Changes to Schedule K-1 Seek to Refine Debt Reporting and Partner Obligations,” Current Federal Tax Developments, May 13, 2023, https://www.currentfederaltaxdevelopments.com/blog/2023/5/13/imminent-irs-changes-to-schedule-k-1-seek-to-refine-debt-reporting-and-partner-obligations (retrieved June 29, 2023)
[6] 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 June 20, 2023)