Tax Capital Account Reporting Requirements

• November 21, 2020
• Carey M. Heyman, CPA

In 2019, the Internal Revenue Service (IRS) released a Frequently Asked Questions memorandum, which described how a partnership should determine a partner’s tax capital account and outlined a safe harbor approach based on a partner’s outside basis in a partnership. After a significant freak-out by practitioners, the IRS deferred the implementation of the proposed tax capital reporting requirements…until now.

So why the push? The IRS and the Department of the Treasury believe that a consistent framework for all partnerships to comply with the tax capital account reporting requirement will aid the IRS in administering the tax law, and consistency will ultimately reduce complexity of the preparation of partnership returns.

The IRS recently released draft Form 1065 instructions, which directed taxpayers to use the transactional approach to comply with the tax capital reporting requirements for tax years beginning on or after January 1, 2020.

If partners’ capital accounts were reported using a method other than the tax basis method in 2019, such as GAAP or Section 704(b), but capital accounts using the tax basis method were separately maintained, each partner’s beginning capital account must be reported using the tax basis method for tax years beginning on or after January 1, 2020.

If the tax basis method was not previously used in 2019 and capital accounts using the tax basis method were not separately maintained, each partner’s beginning capital account must be refigured using one of the following four methods for tax years beginning on or after January 1, 2020: (1) transactional tax basis method, (2) modified outside basis method, (3) modified previously tax capital method, or (4) Section 704(b) method.

Source: IRS.gov

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