Why would taxpayers receive a Section 163(j) disclosure on their K-1?To answer this question, we refer to the IRS guidance. In many cases, NONE of the K-1 recipients will be subject to the Section 163(j) limitation. Company subject to being classified by the IRS as a tax shelterAny investor in a company that is subject to Section 163(j) limitations has further reporting requirements on his or her individual tax return.You may be surprised to see these disclosures on your K-1 because your company does NOT meet the above requirements. Company revenue more than $25 million per year on average for the last three years When does Section 163(j) apply?Section 163(j) applies primarily in these situations: However, if Section 163(j) applies, the amount of deductible business interest expense in a taxable year could be limited.

Company B is NOT subject to Section 163(j) and its shareholders are Peter, Mary and Paul.Uh-oh. Company A is subject to Section 163(j) and its partners are Tom, Mary and John. Per the instructions to Form 8990:вЂњIf a pass-through entity is not required to file Form 8990 because it is a small business taxpayer, but a partner or shareholder is required to file Form 8990, the pass-through entity may be requested to provide certain information so that the partner or shareholder can complete their return.вЂќ

Bottom lineNeither the issuing company nor CPA firms like ours have any way of knowing what other investments partners may own.Because this information is unknown, disclosures should be provided at the entity level.Providing this disclosure on all K-1s ensures that all investors have the necessary information to correctly report Section 163(j) limitations on their individual tax returns when necessary.For clarification or if you have further questions on your Section 163(j) limitations and reporting requirements, contact Scot Goldring.

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