IRS Issues Draft Form 1065 Instructions; Tax Basis Capital Accounts Will be Required for 2020

On Oct. 22, the IRS issued an early draft of the instructions for Form 1065. The instructions require tax basis capital account reporting for each partner, unless the partnership meets all four requirements to not complete the Schedule L. 

If a partnership did not maintain tax basis capital accounts for 2019, they may determine each partner’s tax basis capital account by using one of three methods: the modified outside basis method, the modified previously taxed capital method or the Section 704(b) method. These methods are described in the instruction. Although the three allowed methods may be problematic, this is a better solution than tracking a partner’s capital account from the inception of the partnership using the transactional method.

TXCPA’s Federal Tax Policy Committee commented on the proposed requirements in July, expressing to the IRS that individual partners should ultimately be responsible for tracking their own basis.

https://content.govdelivery.com/accounts/USIRS/bulletins/2a73bea

https://www.tscpa.org/docs/default-source/comment-letters/federal-tax-policy/2020/tax-capital-reporting-july-2020.pdf?sfvrsn=12d4dcb1_2

Comments

[Patty Wyatt]

Thank you for your comment, Sheila. We have made the correction.

[Sheila Owen]

I thought that the draft instructions say that partnerships that have total receipts less than $250,000, total assets at the end of the year of less than $1,000,000, timely file and furnish Schedule K-1s and do not (and are not required to) file Schedule M-3 are excepted from reporting the partner's capital account on Item L of Schedule K-1. That would exempt a lot of small partnerships. Agree?