Purpose of Reporting Guidance
section 1061 was added to the Internal Revenue Code as character of the Tax Cuts and Jobs Act ( TCJA ). For taxable years beginning after December 31, 2017, section 1061 recharacterizes sealed net long-run capital gains of a partner that holds one or more applicable partnership interests as short-run capital gains. The provision broadly requires that a capital asset be held for more than three years for capital addition allocated with esteem to any applicable partnership interest ( API ) to be treated as long-run das kapital amplification. Proposed regulations ( REG-107213-18 ) were published in the Federal Register on August 14, 2020. final examination regulations ( TD 9945 ) were published in the Federal Register on January 19, 2021. Owner Taxpayers and Passthrough Entities may rely on the proposed regulations for taxable years beginning before January 19, 2021 ( the date final regulations were published in the Federal Register ), provided they follow the proposed regulations in their entirety and in a consistent manner. An Owner Taxpayer or a Passthrough Entity may choose to apply the concluding regulations to a taxable year begin after December 31, 2017, provided that it systematically applies the final section 1061 regulations in their entirety to that year and all subsequent years. Owner Taxpayers and Passthrough Entities must apply the final regulations to taxable years beginning on or after January 19, 2021 ( the date final regulations were published in the Federal Register ) .
The function of the FAQs is to provide Passthrough Entity file requirements and report, and Owner Taxpayer file requirements in accordance with Treas. Reg. part 1.1061-6. See TD 9945 for specific rules, including the definitions of capitalize terms used in these FAQs .
1. What information does a Passthrough Entity need to report to its API Holders? (added November 3, 2021)
A Passthrough Entity is required to attach Worksheet A PDF to the API Holder ‘s Schedule K-1 for tax returns filed after December 31, 2021 in which a Passthrough Entity applies the final regulations under TD 9945. A Passthrough Entity means a partnership, trust, estate, S pot described in section 1.1061-3 ( b ) ( 2 ) ( i ), or a passive foreign investing company described in department 1.1061-3 ( b ) ( 2 ) ( two ). The Passthrough Entity must provide the information in Worksheet A to each API Holder, including an Owner Taxpayer, as an attachment to the Schedule K-1 for the applicable imprint, notating the proper box and code. For the Form 1065, U.S. Return of Partnership Income, it is box 20, code AH. For the Form 1120S, U.S. Income Tax Return for an S Corporation, it is box 17, code AD. For the Form 1041, U.S. Income Tax Return for Estates and Trusts, it is box 14, code Z .
See section 1.1061-6 ( c ) for the section 1061 report rules of a regulated investment company ( RIC ) and a veridical estate investment trust ( REIT ). In the casing of RICs and REITs the information will be furnished in joining with the Form 1099-DIV, Dividends and Distributions.
section 1.1061-6 ( five hundred ) permits a passive voice alien investing company ( PFIC ) with esteem to which the stockholder is an API Holder who has a certified elect fund election ( as described in section 1295 ( a ) ) in consequence for the taxable year to provide extra information to the stockholder to determine the amount of the stockholder ‘s inclusion body that would be included in the API One Year Distributive Share Amount and the API Three Year Distributive Share Amount. If the PFIC furnishes this information to the stockholder, the stockholder must retain a replicate of this data along with the other information required to be retained under section 1.1295-1 ( farad ) ( 2 ) ( two ) .
A Passthrough Entity that is not required to and does not choose to apply the final regulations to tax returns filed after December 31, 2021 for a taxable class beginning before January 19, 2021, must attach a worksheet to the API Holder ‘s Schedule K-1 that contains similar information as Worksheet A PDF, and must disclose whether the information was determined under the propose regulations or another method acting .
Calculation and Reporting for the API One Year Distributive Share Amount and API Three Year Distributive Share Amount by a Passthrough Entity
- Section 1061 Worksheet A PDF
2. How does an Owner Taxpayer calculate the amount that is treated as short-term capital gain under section 1061? (added November 3, 2021)
An Owner Taxpayer is the person who is topic to Federal income tax on the Recharacterization Amount, and could be an individual, estate, or trust. An Owner Taxpayer uses the information provided by all the Passthrough Entities in which it holds an API, immediately or indirectly, to determine the amount that is recharacterized as short-run capital reach under section 1061 ( a ) and ( five hundred ) for a taxable class. For tax returns filed after December 31, 2021 in which the Owner Taxpayer applies the final regulations under TD 9945, Worksheet B PDF must be used to determine the total of the Owner Taxpayer ‘s Recharacterization Amount. Worksheet B, along with Tables 1 PDF and 2 PDF are to be attached to the Owner Taxpayer ‘s tax render .
An Owner Taxpayer that is not required to and does not choose to apply the final regulations to tax returns filed after December 31, 2021 for a taxable class beginning before January 19, 2021, must attach worksheets to its render that contain similar information as Worksheet B PDF and Tables 1 PDF and Table 2 PDF, and must disclose whether the data was determined under the propose regulations or another method acting.
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Calculation and Reporting of Recharacterization Amount by the Owner Taxpayer
3. After calculating the Recharacterization Amount, how does an Owner Taxpayer properly report amounts on Schedule D (Form 1040 and Form 1041) and on Form 8949? (added November 3, 2021)
An Owner Taxpayer includes long-run and short-run API Gains and Losses on Schedule D ( Form 1040 and Form 1041 ) and on Form 8949, Sales and early Dispositions of Capital Assets, as if section 1061 does not apply. In addition, if the Owner Taxpayer has a Recharacterization Amount as computed in line 7 of Worksheet B, and/or any amounts resulting from the application of section 1061 ( five hundred ) ( transfer of an API to a associate person ) in telephone line 8 of Worksheet B ( see department 1.1061-5 ( coulomb ) ), the Owner Taxpayer will increase the report short-run capital addition by listing as a transaction identified as “ section 1061 Adjustment ” on Form 8949, Part I, line 1, column ( a ) and entering the amount from line 9 of Worksheet B as proceeds ( column ( five hundred ) of the Form 8949 ) and zero as basis ( column ( e ) of the Form 8949 ). The Owner Taxpayer will make match entries on form 8949, Part II, occupation 1, to reduce the reported long-run capital gain by listing as a transaction identified as “ department 1061 adaptation ” in column ( a ) of the Form 8949 and entering zero as proceeds ( column ( d ) of the Form 8949 ) and the sum from wrinkle 9 of Worksheet B as basis ( column ( e ) of the Form 8949 ) .
4. How does the Owner Taxpayer report collectibles gain and unrecaptured section 1250 gain? (added November 3, 2021)
Pending further steering, if the Owner Taxpayer sells an API and recognizes collectibles addition or loss or unrecaptured incision 1250 reach, or if a Passthrough Entity reports that collectibles gain or loss or unrecaptured section 1250 addition is treated as API Gain or Loss, the Owner Taxpayer must use a fair method to compute the amount of the inclusion body of collectibles gain and/or unrecaptured section 1250 addition in the Recharacterization Amount that is calculated in Worksheet B .
If the Owner Taxpayer has received an API One Year Distributive Share Amount and an API Three Year Distributive Share Amount that includes collectibles derive or loss and/or unrecaptured section 1250 derive from a Passthrough Entity, the Owner Taxpayer should include those amounts on lines 1 and 4, respectively, of Worksheet B .
On production line 10 of Worksheet B, the Owner Taxpayer must report the entire come of collectibles gains for the taxable year that the Owner Taxpayer has with esteem to any pastime in a Passthrough Entity ( Passthrough Interests ) that it owns. It must besides report the total of collectibles gain that is recharacterized as short-run capital gain under section 1061 and the total of collectibles gain that is not recharacterized and that is included in the 28 % Rate Gain Worksheet ( see line 18 of the Schedule D ( Form 1040 ), or line 18c of the Schedule D ( Form 1041 ) ). Collectibles gain or loss that is API Gain or Loss and is included in the calculation of the Recharacterization Amount, but not recharacterized, must be included in the 28 % Rate Gain Worksheet. Collectibles profit or loss with obedience to a Passthrough sake that it is treated as Capital Interest Gain or Loss must besides be included in the 28 % Rate Gain Worksheet.
similarly, on line 11 of Worksheet B, the Owner Taxpayer must report the sum amount of unrecaptured section 1250 gain for the taxable class that the Owner Taxpayer has with respect to any Passthrough Interests that it owns. It must besides report the amount of unrecaptured section 1250 gain that is recharacterized as short-run das kapital amplification under section 1061 and the amount of unrecaptured section 1250 profit that is not recharacterized and that is included in the Unrecaptured section 1250 Gain Worksheet ( see line 19 of the Schedule D ( Form 1040 ), or line 18b of the Schedule D ( Form 1041 ) ). Unrecaptured section 1250 profit or loss that is API Gain or Loss and is included in the calculation of the Recharacterization Amount, but not recharacterized, must be included in the Unrecaptured section 1250 Gain Worksheet. Unrecaptured section 1250 reach or personnel casualty with esteem to a Passthrough Interest that is treated as Capital Interest acquire or loss must besides be included in the Unrecaptured part 1250 Gain Worksheet .
Reporting Example for Worksheets A and B.
Owner Taxpayer M, an individual, holds an API in XYZ partnership and receives a Schedule K-1 with Worksheet A attached from XYZ partnership for the tax year 2021, that contains a long-run capital addition of $ 55,000 on box 9a of the Schedule K-1. Taxpayer M did not dispose of an API in 2021. The follow is a summary of Worksheet A that XYZ partnership attached to Taxpayer M ‘s Schedule K-1 : pipeline 4 has an API One Year Distributive Share Amount of $ 55,000 and line 7 has an API Three Year Distributive Share Amount of $ 20,000 .
Taxpayer M reports a $ 55,000 long-run capital derive from XYZ partnership on Schedule D ( Form 1040 ), line 12. Taxpayer M chose to follow the concluding regulations under TD 9945 in cooking of his 2021 tax return and prepares and attaches Worksheet B to his form 1040. Worksheet B has a One year Gain Amount on line 3 of $ 55,000, a Three year Gain Amount of $ 20,000 on line 6, a Recharacterization Amount on telephone line 7 of $ 35,000, a section 1061 Adjustment on line 9 of $ 35,000. In addition to reporting the long-run capital gain of $ 55,000 on Schedule D ( Form 1040 ), course 12, Taxpayer M reports on form 8949, Part I, line 1, a short-run capital amplification of $ 35,000, and on Part II, line 1, long-run capital passing of ( $ 35,000 ). Both Form 8949 items are described in column ( a ) as “ department 1061 alteration. ”