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Tax Basis Method Capital Reporting Requirement and What It Means to You

Anchin Real Estate UpdateNovember 4, 2020

Tax Basis Method Capital Reporting Requirement and What It Means to You

The IRS recently released a draft of the 2020 Partnership Instructions, which once again included the requirement to report partners’ capital on the Tax Basis Method.  Similar requirements were included in the original draft of the 2019 Partnership instructions, which the IRS back tracked on in Notice 2019-66. The IRS agreed with commentators that the requirement would be burdensome or the information did not exist in certain cases, and partnerships would not have sufficient time to recreate the information in time to include on their 2019 partnership return.  The notice did indicate that the requirement to report partners’ shares of partnership capital on the tax basis method will be effective for the 2020 tax year.

This tax basis capital reporting requirement is no small undertaking and may require a review of all prior year tax returns and Schedule K-1s starting from the partnership's inception. It could also require the partnership to accurately reflect transfers, assignments and sales of partnership interests in that time period. Many businesses, private investment funds such as hedge funds, private equity funds and funds of funds will undoubtedly be adversely affected since they have generally maintained partners’ capital accounts on a GAAP basis and were generally not required to keep track of each partner’s tax basis.

In prior years, partnerships had the option to report partner’s capital on Schedule K-1 on either the tax basis, GAAP basis, 704(b) book basis or other basis. The draft 2020 instructions eliminate these options and require the partnership to report each partner’s capital account on the tax basis. If you reported the partners’ capital account on the tax basis method for 2019, you will be able to use the ending 2019 amounts as your starting point for 2020. If you did not report on the tax basis method, you will be required to refigure the beginning tax basis method under one of four methods prescribed in the instructions. Whichever method is selected, it must be used for each partner and only used for the 2020 beginning tax basis amount. Recalculating these amounts will take time on top of gathering all of the historical information needed.

Please contact your Anchin Relationship Partner with any questions. We stand ready to help you plan effectively and to navigate through these reporting requirements. We will update you as more information or additional guidance is issued.

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