The Internal Revenue Service today posted detailed reporting directions for certain passthrough entities and taxpayers reporting of partnership interests held in connection with the performance of services, often referred to as “carried interests”, in the form of frequently asked questions (FAQs).
Section 1061 was added to the Internal Revenue Code as part of the Tax Cuts and Jobs Act (TCJA). For taxable years beginning after December 31, 2017, section 1061 recharacterizes certain net long-term capital gains of a partner that holds one or more applicable partnership interests as short-term capital gains. The provision generally requires that a capital asset be held for more than three years for capital gain allocated with respect to any applicable partnership interest (API) to be treated as long-term capital gain. Proposed regulations (REG-107213-18) were published in the Federal Register on August 14, 2020. Final 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 final regulations to a taxable year beginning after December 31, 2017, provided that it consistently 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 FAQs contain sample worksheets that certain passthrough entities and taxpayers may be required to use in reporting “carried interests,” partnership interests held in connection with the performance of services for tax returns, filed after Dec. 31, 2021 in which a passthrough entity applies the final regulations.
In addition, the FAQs contain additional instructions for certain passthrough entities and taxpayers who though not required to file the sample worksheets must provide similar information and must disclose whether the information was determined under the proposed regulations or another method for tax returns filed after Dec. 31, 2021 for a taxable year beginning before Jan. 19, 2021.
A 2017 tax law change recharacterized certain net long-term capital gains of a partnership that holds one or more applicable partnership interest (APIs) as short-term capital gains. The provision generally requires that a capital asset be held for more than three years for capital gains allocated with respect to any API to be treated as a long-term capital gain.
The purpose of the FAQs is to provide guidance relating to both Passthrough Entity filing and reporting requirements and Owner Taxpayer filing requirements in accordance with Department of the Treasury regulations revised in TD 9945 (.pdf).
This updated reporting guidance will also be added to the next revision of Publication 541-Partnerships, which will be released in 2022.
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