Maintaining Partnership Capital Tax Basis Accounts is Now Mandatory

Earlier this year, the IRS issued changes to the Form 1065 instructions, requiring partners to disclose negative capital tax basis accounts as part of their on-going anti-abuse enforcement effort.  

The newly designed Schedule K-1 for the 2019 tax year requires partnerships to report partners’ capital accounting using tax basis as opposed to other methods, including generally accepted accounting principles (GAAP) for example. 

The IRS will be giving special attention to specific forms of abuse – primarily, a “bottom-dollar guarantee in which partners guarantee partnership debt that they will generally never pay.  This would artificially increase their tax basis in the partnership and allow them to take more deductions – a tax perk with virtually zero economic risk.”*  

We are aware that the majority of the partnerships that we serve have maintained their capital accounts on a book basis for years. This new capital tax basis reporting requirement will require considerable time and effort converting partners’ capital accounts from book to tax.

Tax planning will be essential as this has now become a highly time-sensitive project. 

Fees associated with this project will vary by the number of partners and the duration the partnership has been in existence.  We are happy to visit with you in advance if you wish; feel free to call in to Tax Manager Cristina Bucksbaum or Dennis Gardiner, in the Des Moines office (515-270-1446).

Please be aware that we will be reaching out to you in short order to gather detailed information concerning those partnerships for which we do not have the necessary information to prepare the Capital Tax Basis Accounts.  

* Quoted from Lydia O’Neal, reporter for Bloomberg Law