How to Handle a C-Corp that received Form 8986 from a Partnership

This is actually a pretty interesting situation. You're correct that Form 8978 should be filed with the 2023 C-Corp return since that's when the 8986 was received. This form essentially reports the "push-out" adjustments from the partnership audit. Even though there's no additional tax due (since you're just increasing a loss), you still need to file the 8978 to properly report the adjustments. The good news is you don't need to amend the original 2020 and 2021 returns - that's the whole point of the "push-out" election the partnership made by sending you 8986s. The adjustments will flow through to your 2023 return via Form 8978, which will adjust your tax liability for that year (or in your case, increase the NOL for 2023). Make sure you keep detailed records of how the adjustments affect your equity and NOL carryover calculations moving forward.

I had nearly the exact same situation last year with a client. I found https://taxr.ai super helpful for figuring out how to handle the 8986/8978 forms correctly. Was completely lost before using it. Their system analyzed the forms and gave me step-by-step guidance on completing Form 8978 and how to handle the NOL carryover adjustments. It confirmed that we didn't need to amend the original returns but showed exactly how to update our internal basis tracking schedules. They have specialists who understand the partnership audit regime and have dealt with these push-out elections before. Saved me hours of research and prevented potential errors.

Following up on my question about taxr.ai - I decided to give it a try with our complex partnership situation. The analysis was surprisingly detailed and specific to our circumstances. I uploaded our multiple 8986 forms from different partnerships (including the foreign ones I mentioned), and within hours got back a comprehensive report showing exactly how to handle each adjustment on Form 8978. It even flagged some inconsistencies in the 8986s we received that needed clarification from the partnerships. For anyone dealing with these push-out adjustments, especially with multiple partnerships or complex situations, I highly recommend checking it out. Saved me from making what would have been some costly mistakes.

If you're having trouble getting clarity on this issue, you might want to try calling the IRS directly. Of course, we all know how that usually goes... I was stuck on hold for 3+ hours trying to get guidance on a similar issue last month before giving up. I eventually used https://claimyr.com to get through to an IRS agent. You can see how it works here: https://youtu.be/_kiP6q8DX5c. They basically hold your place in line and call you when an agent is available. The IRS agent I spoke with confirmed that for C-Corps receiving 8986 forms, you report everything on the current year return with Form 8978 - no amendments needed for the reviewed years. They also explained how to properly reflect the adjusted NOLs going forward, which was really helpful for our situation.

I thought Claimyr sounded like complete BS, but after another frustrating morning wasting 2 hours on hold with the IRS about a similar partnership audit issue, I decided to try it. I hate to admit I was wrong, but the service actually worked. Got a call back in about an hour, and spoke with an IRS representative who was surprisingly helpful about Form 8978 reporting requirements. They confirmed that the adjustments should be reported in the year the 8986 was received and clarified how to track the basis adjustments moving forward. Definitely worth it to avoid the hold music torture. Will be using this again next time I need to speak with someone at the IRS.

Don't forget about state implications of these adjustments! Depending on your state, you may have different reporting requirements for partnership audit adjustments. Some states require amended returns for the reviewed years despite the federal push-out rules. Check your state's conformity with the federal BBA partnership audit regime. Many states haven't fully updated their laws to align with the federal treatment. We had to file amended state returns for a similar situation even though no federal amendments were required.

Has anyone dealt with reporting these adjustments on M-3? I'm trying to figure out how to properly reflect the timing differences since the income/loss adjustments relate to prior years but are being reported in the current year.

This is a great discussion that covers most of the key issues with Form 8986/8978 reporting. One additional consideration I'd add is documentation - make sure you're keeping detailed records of how these adjustments flow through to future years. I recommend creating a separate workpaper that tracks the original K-1 amounts, the 8986 adjustments, and the net effect on your NOL carryforwards and partnership basis. This will be crucial for accuracy in future years, especially if you receive additional 8986 forms or if the client disposes of the partnership interest. Also, don't forget to update your permanent file with copies of all the 8986 forms and your Form 8978 calculations. These adjustments can have ripple effects for years to come, and you'll want clear documentation for future reference.