Partnerships will need to spend time determining the tax basis capital account to report on each partner’s Schedule K-1s, as well as computing and describing the items that affect the total tax basis capital on the Schedule M-2.

The use of the transactional approach method reflects significant accommodation by the IRS to taxpayers’ situations, but it may entail additional work on the part of partnerships, including performing calculations not previously done. However, solely for determining a partner’s beginning capital account for 2020, if a partnership did not use the tax basis method for 2019 and did not maintain capital accounts under the tax basis method, the partnership is permitted to use one of four methods - the tax basis method, the “Modified Outside Basis Method,” the “Modified Previously Tax Capital Method” or the Section 704(b) method. Additionally, the Schedule M-2 (Partners’ Capital Accounts) to the Form 1065 would align with the total tax basis capital account amounts of the partners reported on Item L of the Schedules K-1. This reporting requirement applies to all partnerships other than certain smaller partnerships whose total receipts for the tax year were less than $250,000 and whose total assets at the end of the tax year were less than $1 million (i.e., partnerships that answer “yes” to question 4 of Schedule B). The draft instructions require partnerships to use only the transactional approach for the tax basis method, which must be used beginning with the 2020 tax year (as opposed to GAAP, Section 704(b) or other), with some transition relief. However, after numerous comments, the IRS appears to be abandoning the two alternative methods in favor of using the transactional approach. 31, 2020 (for more details on Notice 2020-43, see our story, “ IRS proposes tax basis capital reporting methods”). 22, follow up on Notice 2020-43, which proposed to allow partnerships to use either the modified outside basis method or the modified previously taxed capital method to report partner capital accounts on Schedule K-1 to satisfy capital account reporting requirements for partnership taxable years ending on or after Dec.

Return of Partnership Income,” for tax year 2020 that require partnerships to use a transactional approach to report partner tax basis capital in Item L of the Schedule K-1.

The IRS has released an early draft of the instructions to Form 1065, “U.S.

Sample k1 tax form