In efforts to refine debt reporting and partner obligations, the IRS will implement changes to Schedule K-1 this coming fall.

The IRS plans to release a draft of the updated version for Schedule 1065 Schedule K-1 with modifications delineating partners’ share of debts.

On May 5, 2023, in a meeting of the American Bar Association Section of Taxation, the IRS Deputy Associate Chief Counsel for Passthroughs and Special Industries, Adrienne Mikolashek, reportedly discussed prospective changes to Schedule K-1.

What does this mean?

Currently, Schedule K-1, Form 1065, categorized a partners’ share of debts into:

• Non-Recourse
• Qualified Recourse
• Recourse

The IRS is planning to divide the recourse liability category and clearly identify debt restoration obligations and partner debt guarantees.

What’s the reasoning behind this change?

Per Mikolashek, this change will 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.”

While draft versions of forms are subject to change, we encourage you take this opportunity to review your partnership or LLC debt obligations to determine which partners have personal guarantees versus debt restoration obligations.  Please contact your tax professional with any questions you may have.