The IRS has issued revised instructions to Form 1065, U.S. Return of Partnership Income, for the 2020 tax year which impacts partner capital accounts by changing reporting requirements for partnerships. These revised instructions have developed a process to streamline the reporting of quality information by partnerships to the IRS and to the capital accounts of its partners to help increase their compliance.

Person Completing 2020 Form 1065 based on the new partner capital accounts reporting requirements for partnerships

The reporting changes by the IRS state that beginning in tax year 2020 (filing season 2021) and going forward, partnerships will be required to report the capital accounts of their partners using the transactional approach for the tax basis method.

Prior to the 2020 tax year, partnerships were able to report the capital accounts of their partners using various accounting methods including tax basis, GAAP, Section 704(b), and other methods consistent with Form 1065 and its instructions for that year.

Under the tax basis method outlined in the revised 1065 instructions, partnerships will need to include the following on their capital accounts reporting:

  • Partner contributions
  • Partner’s share of partnership net income or loss
  • Withdrawals and distributions
  • Other increases or decreases using tax basis principles

In an effort to promote compliance of tax basis method reporting by partnerships, the IRS will provide penalty relief for the 2020 tax year. Partnerships will not be penalized for any errors when calculating and reporting the partners’ beginning capital account balances on Schedules K-1 if they “take ordinary and prudent business care” when following the revised Form 1065 instructions. This penalty relief will be provided along with the reasonable cause exception.

If you have any questions on how these capital accounts reporting changes will impact your partnership, please contact your Untracht Early advisor.