The transactional method can also be used to rebuild the tax capital accounts if all of the historical tax returns are readily available. However, certain adjustments may still be needed to the historical tax capital calculations to meet the new Schedule K-1 reporting requirement, including the exclusion of any Section 743(b) adjustments that may have been included in a partner’s capital account. Partnerships with historical partner tax capital information will experience an easier transition into the new reporting requirements.
Decreased by (i) the amount of money and tax basis of property distributed by the partnership to the partner and (ii) allocations of loss or deductions (including nondeductible expenses) made to the partner.Increased by (i) the amount of money and tax basis of property contributed by the partner to the partnership (less any liabilities assumed by the partnership) and (ii) allocations of income or gain to the partner (including tax-exempt income).Under this method, partners’ tax capital accounts are: Partnerships that have historically kept partner tax capital information have generally maintained partner tax capital using the transactional approach. Tax basis method (transactional approach) The same method must be used for all partners. However, if neither of the two statements are true, then beginning partner capital accounts for 2020 may be computed using one of four methods: (1) tax basis method, (2) modified outside basis method, (3) modified previously taxed capital method, or (4) Section 704(b) method.
The beginning partner capital accounts for 2020 must also be determined using the tax basis method if (1) partner capital accounts for the previous year were reported using the tax basis method, or (2) the partnership maintained capital accounts in its books and records using the tax basis method. The instructions change course from the methods described in Notice 2020-43, but some flexibility is offered on how the partners’ beginning capital may be determined. 22, 2020, state that the transactional approach is the tax basis method and must be used to determine ending partner capital accounts for 2020 and both beginning and ending capital accounts for future tax years. The draft Form 1065 instructions released on Oct. After considering the comments submitted in response to that notice, the IRS has now provided updated guidance on satisfying the tax basis capital requirement with the release of draft Form 1065 instructions for tax year 2020. In August 2020, the IRS issued Notice 2020-43, which describes two proposed methods for complying with the tax basis capital reporting requirement and requested comments. The IRS initially intended for tax basis capital account reporting to begin in 2019, but that was deferred until 2020 due to concerns about whether partnerships would be able to comply with the new reporting requirements. What happened with the tax basis capital account reporting? With those instructions in hand, it’s now time for taxpayers to work with their tax advisors and consider what actions should be taken to construct the appropriate capital accounts. The IRS has recently furnished draft Form 1065 instructions for the 2020 tax year, providing further details on satisfying the new reporting requirement. Partnerships are required to report partners’ capital on Schedule K-1 on the tax basis method for taxable years that begin on or after Jan.