Partnership Basis Statement Requirement and Update

[MrMojo]

Hi!

Was there a new requirement that all partners need to have a Basis statement before filing their tax returns? Is it just for Partnerships?

Is there similar tax legislation for S-Corps?

There was a new law enactment for Partnerships to check the Capital Accounts when it's negative and how it may affect the partners starting in 2019/2020.

Is it Notice 2019-66? Reporting of Positive Tax Basis Capital Accounts not Required Until 2020 Partnership Tax Years

www.irs.gov/pub/irs-drop/n-19-66.pdf

Recall in some tax webinars that the speakers mentioned something about Losses reported on K-1s and that the shareholder/partner 'should' have a basis statement to clarify whether or not they are allowed that loss. But that clarification has been there for Years! Can't deduct losses without basis.

How does one 'correct' for Negative capital account? Esp. if it's a new client who can't find old partnership returns? And the old accounting/tax firms won't cooperative??

How does one 'correct' basis when Capital account is Negative but Basis worksheet, if available, shows  Possible balance? Does Not seem correct?

Negative Capital balances are shown on Form 1065 balance sheet from prior year.

Best action seems to give Zero for Beg Balance and start fresh when you take over for basis calculation.

The govt tax authorities can question the taxpayers and prior accounting/tax firms on their calculation on capital and partners' basis considering their lack of cooperation.

Thanks for your assistance!

[Terry53029]

Notice 2019-66 https://www.irs.gov/pub/irs-drop/n-19-66.pdf

[sjrcpa]

The taxpayer is responsible for maintaining records of their basis, not the partnership and not the tax return preparer.

Ideally, you get all the K-1s from original investment. Start with capital contribution, add all items of income and gain, subtract all items of loss and deduction, subtract distributions, etc. and consider their share of liabilities to arrive at their basis. 

Capital accounts, even tax basis capital accounts rarely = basis. A negative capital account is possible What do you think you need to correct?

Your beef is with the client with lousy records. You can get some back years 1065s from IRS.

Losses have always been limited to basis. The requirement to attach the basis computation is relatively new.

[Ephesians3-14]

I also don't think that Item L (Capital Account Analysis) includes the partner's share of nonrecourse liabilities, so watch out for that. The ending capital account may be negative but once you add in the partner's share of nonrecourse liabilities...POOF!....the taxpayer has enough basis. But not so fast....then if they have enough basis, it's on to the at-risk rules.

Does the partner have enough at-risk basis? The partner's share of nonrecourse liabilities do NOT count towards at risk basis (although there is an exception for qualified financing yada, yada, but's probably not applicable for your client). So check it out! Does he have at risk basis? If so, then you can pass go and deduct the losses on the K-1.

[MrMojo]

"Capital accounts, even tax basis capital accounts rarely = basis. A negative capital account is possible.."

New partnership client.

Negative capital accounts ~($200,000).

Old accountant provided a Partner's basis statement showing ~$150,000 positive basis.

Why the big discrepancy?

It's a relatively simple partnership with 2 rental properties.

Having said that...

Partner pulls all the money out each year.

Partnership has a long history and not very positive, Used to have many rental properties, some former properties were sold at losses or had issues esp. during the financial crisis ~2008~2012. Each property had loans on them which the partners signed responsibility for repayment. But they also took all the money from the cash account and loan accounts to live on, hence distribution issues!

Old accountant refuses to discuss anything and partner (couple) has ~10 yrs of returns even though partnership is closer to ~20 yrs old. They aren't on friendly terms.

Looks of issues when you start digging into the history of the partnership and partners so questioning much of the information esp. if all the distributions were recorded correctly and properly.

The taxpayer is responsible for basis tracking, in theory, but in reality, expects the tax pros to do that for them! 

Many tax software allow you to track basis especially if it's a new client since you have all the information. The issue is that some software did not have that capability back then or the accountant did Not use that basis tracking feature. You know the tax software has that feature if it generates a partner's basis statement.

[sjrcpa]

Old accountant provided a Partner's basis statement showing ~$150,000 positive basis. Why the big discrepancy?

Share of liabilities?

Your client purchased his interest from someone else? (Outside basis)

[MrMojo]

Basis statement doesn't state anything about sharing of liabilities.

Clients are a couple since the beginning.

IMHO, don't think the Older accounting firm did the yearly reconciliation properly over the years.