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Partnership Basis Reporting Changes

In September 2019, the IRS released a draft 2019 Form 1065 and Schedule K-1 with their respective instructions, suggesting that partnership capital accounts would have to report on the tax basis vs. GAAP or any other method of reporting. This change in capital account reporting meant that many partnerships would have to spend considerable amounts of time calculating, or re-calculating, capital accounts in order to comply with the tax basis reporting requirement.

Fortunately, in IRS Notice 2019-66, the IRS acknowledged that some taxpayers may not be able to comply with the requirement to report tax basis capital accounts in a timely manner for 2019. Therefore, the IRS postponed the revision to 2020.

What does this mean for you?

For tax year 2019, you are permitted to report members’ capital accounts by the same method as tax year 2018 or you may opt to change to a tax basis method. For most partnerships, that requirement is just an extension of the last year’s reporting method.

For example: If an organization previously reported its partners’ capital account on the GAAP method of accounting, that partnership can file in 2019 using the GAAP method capital account.

For tax year 2020, all partnerships will need to calculate and present tax basis capital accounts. This is not to say that you are prohibited from tracking partnership capital accounts in the partnership books in a method other than tax basis. The regulation simply requires that capital accounts on Schedule K-1 to be reported on the tax basis.

The process of calculating a partner’s capital account based on a tax basis, instead of the current method used, can be cumbersome and complicated. Many partnerships have decided to collaborate with public accountants to ease the process of converting to tax basis capital account reporting. If you have questings about your organization, how these changes impact you, or if you would like to know more about this topic, please contact your local Blue & Co. advisor.

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