New Form 1065 Requirement: Computing Tax Basis Capital Accounts

Author: Greg White

Beginning in 2020 Form 1065, we’ve got a new reporting requirement. Capital accounts as shown on Form K-1 will have to be reported on a tax basis (as opposed to GAAP or §704(b)). We’ll cover the issues you need to know:
• How do you compute tax basis capital accounts for this purpose?
• What do you do if you lack sufficient information to compute the current capital account balances?
• Which partnerships will not be subject to this requirement?

Publication Date: September 2020

Designed For
Practitioners advising partnership clients.

Topics Covered

• Issue: K‐1 Capital Accounts Reporting Issue
• Why Does IRS Want Tax Basis Capital Accounts?
• Risk of Not Reporting: Tax Basis Capital Accounts
• General Rule: Adjusted Basis Partnership Interest
• Computing Basis Partnership Interest
• IRS Proposal: Tax Basis Capital Accounts with a "Twist"
• Notice 2020‐43 ‐‐ Two Methods: Compute Tax Basis Capital
• "Modified Outside Basis Method"
• "Modified Previously Tax Capital Method"
• Method 2: Project Out Partnerships Basis
• Choosing a Method
• Form 1065
• Should You Include Disclaimer? On K‐1?
• Escape Hatch
• Comments on Notice 2020‐43
• Will You Use Tax Basis Capital Account? When Filing Partner's Return?
• Keep an Eye Peeled

Learning Objectives

• Identify partnerships subject to the new rules
• Identify how to compute partnership capital accounts
• Recognize how to navigate complex issues (Sec. 743 step ups, etc.)
• Recognize how to determine the adjusted basis in partnership interests

Level
Update

Instructional Method
Self-Study

NASBA Field of Study
Taxes (1 hour)

Program Prerequisites
Basic understanding of Form 1065.

Advance Preparation
None