Disregarded Entity Reporting Requirements

• December 5, 2020
• Carey M. Heyman, CPA

Last year, the IRS established reporting requirements for the 2019 Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc. for disregarded entities. While there is no statutory definition of the term, a disregarded entity is an entity that is recognized under applicable state (or other local) law, but is ignored for federal tax purposes. There are several types of entities that are considered to be disregarded entities for federal tax purposes:

1. Single-owner eligible entities that have not elected corporate treatment
2. Qualified S-Corporation subsidiaries
3. Qualified real estate investment trust subsidiaries
4. Grantor trusts (depending, of course, on the facts and circumstances)

According to the recently released draft 2020 instructions, the following information should be entered into Part II of the Schedule K-1 (Form 1065):

• Item E – The taxpayer identification number of the beneficial owner of the disregarded entity.
• Item F – The beneficial owner’s address.
• Item H2 – Check the DE box and enter the name and taxpayer identification number of the disregarded entity.

Earlier this year, practitioners had a lot of questions. Thankfully, the IRS issued guidance in March 2020 that is worth re-visiting here:

When a partner is a disregarded entity, does the entity type of the beneficial owner need to be provided?

Yes. If the legal owner of the partnership interest is a disregarded entity, the partnership will need to provide the beneficial owner’s entity type.

If a disregarded entity is the legal owner of the partnership interest, and that disregarded entity in turn is owned by another disregarded entity (which in turn may be owned by another disregarded entity), which disregarded entity should be listed?

If the partnership interest is owned by tiered disregarded entities, the partnership must report the information pertaining to the disregarded entity which is the legal owner of the partnership interest.

When the legal owner is a grantor trust and the grantor trust has a filing obligation, what information should the partnership report?

Notwithstanding any other tax return filing requirement, a wholly-owned grantor trust will be treated like a disregarded entity for the purposes of reporting the required information. Accordingly, where a grantor trust is the legal owner of a partnership interest, the grantor trust’s information will be reported in Item H-2. Items E and F should include information on the owner of the wholly-owned grantor trust.

With just a few weeks until filing season, real estate sponsors and general partners should reach out to their investors to re-familiarize them with the reporting requirements of disregarded entities. It is recommended that every effort be made to report complete and accurate information to the IRS.

Sources: IRS.gov, RIA Checkpoint

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