Reporting Tax Basis Capital Accounts on Partnership Tax Returns

[hankthefish]

How do I convert the K1 capital accounts to tax basis without changing Schedule L and M2 from book basis?

[jphandy]

Hank:

The IRS is advising on their draft regulations and forms that Box L, Schedule K-1 will no longer tie to M2 and the balance sheet. They recognize and now expect that. In effect, you now have to maintain "tax capital accounts" separately from M2.

Since Lacerte always connected the numbers from M2 to flow to the balance sheet and Box L, they are working on the programing to "disconnect" those numbers in the program.

Additionally, the IRS advises a one time plug to beginning Box L, to covert old capital to the required "tax capital" account.

The IRS is considering a waiver for 2020 and Lacerte is working on the programming now.

Joe Handy

[Lord Happy]

Happy day....after much argument in our office, which included staplers being wielded in threatening manners, I'd like to know the source for what you wrote.  Can you link to it, please?

[jphandy]

https://www.plantemoran.com/explore-our-thinking/insight/2021/01/partnership-tax-basis-capital-repor...

Beginning capital needs to be restated and for those partnerships with complex balances sheet capital accounts on Schedule L and M-2 will remain GAAP or 704(b). 

The regulation only requires Sch K-1 to be presented on the "tax capital method"

Check the Instructions to Form 106 also.

[Calneva]

Has Lacerte program been updated so that beginning capital accounts can be adjusted to reflect tax basis ?

[jphandy]

Calneva:

I have had 3 phone calls to Intuit, they do not see the problem that Schedule M-2, Schedule L and Schedule K-1 capital accounts are all programmed to link to each other. The problem with this; if you compute the "new" tax capital basis" amount and adjust beginning Schedule K-1. This forces M-2 and Schedule L to use those amounts. What if the audited book balance sheet is GAAP? You can not deal with this.

[Calneva]

If we adjust the beginning capital on Screen 29 Special Allocations to reflect tax basis capital for each partner, would that also adjust the value shown on page 5 M-2 line 1 as well as beginning capital shown on each K-1 ?  We can override Partner's Capital on the Balance Sheet Screen 24 to reflect the book value for capital and keep the balance sheet in balance on the Schedule L balance sheet on page 5 of the return. Would that work ?

[jphandy]

You can try that method. I believe all the overrides flow thru to each schedule

[Calneva]

That worked.  Thankfully I only had 3 years & 8 partner s to go back to restate capital to tax basis, but that input worked.

Thanks

[Calneva]

Follow-up question - when restating capital account to tax basis, do at risk suspended losses at the partner level get added back for purposes of determining the tax basis for a partner that is now reported as the opening tax basis capital on that partner's 2020 K-1 ?  In other words, prior year losses allocated to such a partner have resulted in partner having an accumulated negative capital account on the books of the partnership which was reported on his K-1 prior to 2020 as a negative capital account however the partner has not been able to claim those losses due to a lack of at risk basis and his tax basis (outside) is actually zero.  

[Calneva]

Got this reply from a firm Withum Smith & Brown, that instructs on the Strafford Pub. CPE site:

"No, you would not add those prior disallowed losses back to the tax capital.  Those are losses that have been previously allocated to the partner and reduced his tax capital at the time of allocation.  They will remain suspended until he has an amount at-risk, but the fact that they have not yet been deducted will not increase his tax capital."