On Oct. 22, the IRS released an early draft of the instructions for Form 1065, “U.S. Return of Partnership Income,” for tax year 2020, which includes rules for partnerships to calculate and report each partner’s capital account balance for 2020 on a Schedule K-1, “Partner’s Share of Current Year Income, Deductions, Credits, and Other Items.”
The instructions require partnerships to report partner capital accounts using a tax basis method. Reporting a partner’s capital account under any other method, such as using GAAP or Section 704(b), no longer will be permitted.
The instructions generally also require use of a single approach – the transactional approach – for purposes of determining tax basis. Under the transactional approach tax basis method outlined in the instructions, partnerships report partner contributions, the partner’s share of net income or loss, withdrawals and distributions, and other increases or decreases using tax basis principles.
A partnership is required to report a partner’s beginning balance of tax capital in a manner generally consistent with figuring the partner's adjusted tax basis in its partnership interest, without considering any IRC 743(b) basis adjustments. The instructions acknowledge that the partner's ending capital account as reported using the tax basis method might not equal the partner's adjusted tax basis in its partnership interest as a result of partnership liabilities and partner-specific adjustments.