Partnership Capital Reporting
The draft instructions for the 2019 version of Form 1065, U.S. Return of Partnership Income, indicated that partnerships were required to report a partner’s capital account analysis (reported in Part L of Schedule K-1) on the tax basis. For 2018 and earlier tax years, partnerships were permitted to report a partner’s capital account using the tax basis, generally accepted accounting principles (GAAP), section 704(b) book basis or some other method, and Schedule K-1 for these earlier tax years had checkboxes for an entity to indicate which basis was used to compute the partner’s capital account analysis.
In Notice 2019-66, the IRS has indicated that the requirement to use the tax basis to report a partner’s capital account analysis has been delayed for one year, and it will not apply to tax returns covering tax years that began during 2019. To the extent that such entities do not use the tax basis to prepare the partner’s capital account analysis, the entities must use the same basis that they used for the 2018 tax year.
While other bases can be used to report the partner’s capital account analysis, the 2019 version of Schedule K-1 does not have checkboxes in Part L to indicate which basis was used to prepare the analysis.
To the extent that an entity uses a basis other than the tax basis for the partner’s capital account analysis, if a partner’s capital account on the tax basis was negative at the beginning or end of the tax year, the partnership must report the partner’s beginning and ending shares of tax basis capital on the other information line of Schedule K-1 (i.e., Line 20) using code AH. This reporting requirement is the same as the one that applied for the 2018 tax year.
Entities should plan to implement the new requirement to use the tax basis for the partner’s capital account analysis for tax years beginning on or after January 1, 2020.