2020 partner tax basis capital account reporting

| 10/29/2020
Partner tax basis capital account reporting required for 2020

2020 was a challenging year for business owners. The COVID-19 pandemic and subsequent lockdowns forced many businesses to go remote, furlough employees, and apply for PPP loans to stay afloat. For many businesses, owners had to shut down operations permanently. All these factors add several complexities to the 2020 tax season, especially to partnerships.

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.”

What is partner’s capital account basis and how does it work?

Partner capital account basis measures the equity investment in the partnership.

The instructions on Form 1065 require partnerships to report partner capital accounts using a tax basis method. The instructions generally also require the use of a single approach — the transactional approach — to determine 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 due to partnership liabilities and partner-specific adjustments.

Stay ahead of partner capital account reporting rules with help from Crowe

A news release announcing the draft instructions states that penalties will not be assessed for errors in reporting partner beginning capital account balances on Schedule K-1s if the partnership takes ordinary and prudent business care in following the form instructions to calculate and report the beginning capital account balances. According to the news release, penalty relief is in addition to reasonable cause relief that might apply for incorrect reporting of a partner beginning capital account balance.

The new partner capital account reporting rules are effective for the current tax year. As a result, partnerships should review their capital account methodology to ensure their reporting will be compliant when they file their 2020 Schedule K-1s in 2021, which are due March 15, 2021, for calendar-year partnerships not requesting an extension.

Need guidance on how to prepare a partner capital account or execute your tax basis calculation? Crowe can help you navigate this complex tax season for your partnership. We use a unique combination of deep industry specialization, artificial intelligence, data analytics, and machine learning to support your needs.

Learn more about Crowe Tax Services and stay up to date with Crowe Tax News Highlights.

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Sharon Jones
Sharon Jones
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Phil Malnar