THE NEW SCHEDULE D

Have you heard about the new Schedule D?  I first learned of the change from a table-mate at the recent NJ-NATP Annual Meeting.

For as long as I have been preparing 1040s (since February of 1972) individual capital transactions were reported on Schedule D.  Part I was for short-term gains and losses and Part II was for long-term activity.  A supplemental Schedule D-1 was later created if more room was needed to list transactions.

Individual transactions, short-term and long-term, will now be listed on a new Form 8949 – Sales and Other Dispositions of Capital Assets.  The new Schedule D will be a summary of the Form 8949 entries.  There is no more Schedule D-1. 

The change comes because, as per “The Emergency Economic Stabilization Act of 2008”, beginning with tax year 2011 brokers must report on Form 1099-B the cost basis of any common or preferred stock, exchange-traded funds (ETFs), American Depositary Receipts (ADRs) and Real Estate Investment Trusts (REITs) purchased on of after January 1, 2011.

For future reference, effective January 1, 2012, information about mutual funds and dividend reinvestment plans will also be recorded and reported, and effective January 1, 2013, options, fixed income, and any other security otherwise not included in the previous tax years must be recorded by the brokerage and reported to the IRS.

This is a great new requirement.  When fully phased in it will save tax preparers lots of time during the season.  I have always said that one of the biggest problems I face in preparing returns is determining a cost basis for investments sold by clueless clients.

It is also good for the IRS to have this information provided by the broker.  In my 40 tax seasons I have never seen the Service question the cost basis for a stock sale.

I hope that the regulations for satisfying this requirement, and the brokerage software programs, will make sure that 20 years from now, when a taxpayer sells a stock purchased in 2011, the cost basis reported on Form 1099-B will correctly reflect the effect of all subsequent mergers, spin-offs, etc. 

In addition to short and long term, capital transactions reported on Form 8949 will also be broken down into three categories –

(A)  gains and losses with the cost basis reported on Form 1099-B,

(B)  gains and losses with no cost basis reported on Form 1099-B, and

(C)  gains and losses for which no Form 1099-B was received.

A separate Form 8949 must be completed for each of the above categories.

While a draft of the forms are available, there are no draft of the instructions available yet – so I could not learn more about the Form 8949, such as what is the “Code” that goes in box (b).   

I have several clients whose capital transactions for the year take up as many as 50 pages of a supplemental Profit and Loss report included in the brokerage firm’s Consolidated Year-End package.  In such a case I create my own supplemental schedule, which I attach to the return, by “cutting and pasting” the P+L, with the totals carried forward to the Schedule D. 

I wonder how the new 2011 Consolidated Statement will deal with the changes.  Will Form 1099-B report the cost basis for all sales for which the broker has the information in their system, or just for investments purchased in 2011?  Will the Profit and Loss report identify and summarize transactions in the above three categories? 

I am worried that the new procedure may add hours to the prep time for clients with already time-consuming multi-page “cut and paste” Schedule D (and now Form 8949) schedules.   

TTFN