Capital account reporting changes

New capital account reporting requirements for 2020

Taxpayers should begin formulating a plan to ensure compliance with new capital account reporting requirements for 2020.

The IRS released draft Form 1065 instructions on Oct. 22, 2020, which now require partnerships to report each partner’s Schedule K-1 capital on the tax basis method for tax years beginning on or after January 1, 2020. In prior years, other methods such as GAAP, section 704(b) and tax basis were allowable, but the draft instructions clearly state that the “transactional approach” is now the only acceptable method of tax basis capital account reporting.

Key takeaways

The tax basis method must be used to calculate beginning capital account balances for 2020 if either (1) prior year partner capital accounts were reported using the tax basis method or (2) capital accounts in the partnership’s books and records are maintained using the tax basis method. If these statements do not apply, a partner’s beginning capital account may be refigured using the tax basis method, modified outside basis method, modified previously taxed capital method, or section 704(b) method for 2020 reporting purposes only. In addition, each partner’s beginning capital account balance must be determined using the same method.

Transitioning to the tax basis method will likely be complex for many organizations that have not previously reported capital accounts using that approach. Although the IRS stated penalty relief will be provided if the partnership “takes ordinary and prudent business care in following form instructions,” taxpayers should begin working with their trusted tax advisor to determine what capital account reporting method is currently being used and to formulate a plan to ensure compliance with this new tax-basis method reporting mandate.

For more information

To learn more about the change, contact Eric Thummel using the information below.

Eric Thummel

Senior Vice President
Tax Services
Construction Industry Team Leader

Eric has more than 20 years of public accounting experience and leads the firm’s construction industry team. His experience goes well beyond providing compliance services. Eric assists closely held, family owned and private equity clients with tax saving strategies, multi-state taxation, complex income allocations, succession planning, and mergers and acquisitions.

Eric attended Wichita State University where he earned his bachelor’s in accounting and a master’s of professional accountancy. He is a certified public accountant who serves as president on the board of the Greater Wichita Area Construction Financial Management Association chapter. He’s also a member of the Agribusiness Council of Wichita, the Kansas Livestock Association, the KSCPA and the AICPA.

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