TAX TOPICS
New Partnership Tax Basis Reporting Requirements By Stephanie Morgan, CPA, MBA
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n January, the IRS published a second early draft of the 2020 instructions for Form 1065. The original early draft was released on October 21, 2020 with a 30-day request for comment that was to end on November 20 and with the intention of releasing final instructions in December. At the time of this writing, final instructions have not been published. Under the most recent draft instructions for tax year 2020, all partnerships must report each partner’s tax basis capital using the transactional method. Partnerships that have not previously used the tax basis method to maintain capital accounts may determine each partner’s beginning tax basis capital account balance using one of three methods: • the modified outside basis method, • the modified previously taxed capital method, or • the Sec. 704(b) method. This article discusses how the reporting requirements for partners’ capital accounts have changed over recent years and walks through each method for recalculating beginning tax basis capital.
Background Beginning in tax year 2018, the instructions for Form 1065 included a new tax basis capital reporting requirement for certain partnerships stating:
“If a partnership reports other than tax basis capital accounts to its partners on Schedule K-1 in Item L, and tax basis capital, if reported on any partner’s Schedule K-1 at the beginning or end of the tax year would be negative, the partnership must report on Line 20 of Schedule K-1, using code AH, such partner’s beginning and ending shares of tax basis capital.1” The 2018 instructions defined tax basis capital as: 1.) the amount of cash plus the tax basis of property contributed to a partnership by a partner minus the amount of cash plus the tax basis of property distributed to a partner by the partnership, net of any liabilities assumed or taken subject to, in connection with such contribution or distribution; plus 2.) the partner’s cumulative share of partnership taxable income and tax-exempt income; minus 3.) the partner’s cumulative share of taxable loss and nondeductible, noncapital expenditures.2 Draft instructions to the 2019 Form 1065 included the new tax-basis-only reporting requirement, but for all partnerships regardless of the balance, negative or otherwise, of the individual partner’s capital accounts. Due to concern that partnerships would not have adequate time to comply with the new reporting requirements, the IRS issued Notice 2019-66 to defer implementation to tax year 2020. Additionally, Today's CPA May / June 2021 9
