Report Tax Capital, if K-1 capital is NOT on Tax basis

Technical topics regarding tax preparation.
#1
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I just discovered today that the following paragraph is in the 2018 1065 instructions.

If a partnership reports other than tax basis capital accounts to its partners on Schedule K-1 in Item L (that is, GAAP, 704(b) book, or other), and tax basis capital, if reported on any partner's Schedule K-1 at the beginning or end of the tax year would be negative, the partnership must report on line 20 of Schedule K-1, using code AH, such partner's beginning and ending shares of tax basis capital. This is in addition to the required reporting in Item L of Schedule K-1.


I have not been doing this. I understand why they want this, of course.

Did anyone else know this was in the instructions?
~Captcook
 

#2
JAD  
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I did. What I don't understand is that hasn't it always been the partner/shareholder's responsibility to track basis? I'm not worried about my returns. I do wonder about some of the K-1s I receive where I have been tracking basis since the beginning of time. How is the partnership supposed to know that information, especially if there have been sales of partnership interests among partners, outside of the partnership. Also, I haven't looked into it, but I wonder if there are any exceptions for small partners. For example, I receive K-1s where there is no capital account analysis, which I assume is because the partnership meets the requirements to not disclose the balance sheet, M-1, etc.
 

#3
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Yes, it is the partner's responsibility to track basis.
That said, Tax capital isn't the same as basis. In a partnership, allocated debt increases basis. Additionally, in the absence of a 754 election, outside basis may differ from inside basis.
The instructions aren't asking for basis; it asks for Tax Capital, which is a partnership based dynamic.

The article I read went on to say that without this item reported, the 1065 would be considered incomplete and the penalties are, essentially, the same as a late filed return.

Just a little frustrated I didn't hear about this change from any other editorial source and that the IRS didn't make a bigger deal about it...given the consequences they've attached.
~Captcook
 

#4
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I'm sure that "tax basis capital" is not [is not always] the same thing as partner's outside tax basis in this scenario. Yes, it might be, but doesn't have to be. Some of us may instinctively equate the two; watch out!

[posted while the Capt was posting, too...]
 

#5
JAD  
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Agreed. My terminology was sloppy. My main point was that this is a lot to ask of the partnership after assigning the responsibility to this type of calculation to the partner for all of these years.
 

#6
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CaptCook wrote:Just a little frustrated I didn't hear about this change from any other editorial source and that the IRS didn't make a bigger deal about it...given the consequences they've attached.


It's the quiet ones you've got to be careful of!

I heard about this a couple weeks ago on Ed Zollars' podcast (Current Federal Tax Developments). I'd suggest that pretty much any tax professional at this point needs to subscribe and listen to the weekly episodes, which are usually about a half hour long.
 

#7
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Was not aware of this, but glad I already track/report on tax basis for K1s.
 

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Just a little frustrated I didn't hear about this change from any other editorial source and that the IRS didn't make a bigger deal about it...given the consequences they've attached.


Who attached these consequences – the author of the article or the IRS?

Either way, it’s a joke to think this is important. I wouldn’t lose any sleep over it…
 

#9
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Missingdonut, I read an article forwarded to me from Zollars, which is probably the support for his podcast.

Jeff, I just like to be out in front of these things. That's what bothers me the most.
~Captcook
 

#10
makbo  
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I've got a partnership (two blood relatives) where they started with the 704(b) book stuff in the initial year, I even have a worksheet and all that good stuff -- one partner contributes property with built in gain (BIG), and there are three mind-numbing ways to account for it, remedial this or that. Anyway, after a number of years I'm pretty sure the non-contributing partner has received enough special depreciation allocations to offset the BIG, so I'm just unchecking the 704(b) box, turning off the special depreciation allocation, and making my life easier. :P I'm confident the partner basis worksheets are OK, at least as of this year.
 

#11
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Revisiting this thread because an S corp I prepare got a K-1 from a big 4 a couple of months ago with a Line 20 footnote statement showing beginning negative tax basis capital of 63 million and ending tax basis capital of 59 million.

can't say it surprises me but for purposes of calculating distributions in excess of the S corp's basis wouldn't I net the ending negative balance against the 33 million ending balance of non recourse liabilities shown on the K-1 to S corp, Schedule K "Partner's share of liabilities" to get 59-33 = 26Mill ltcgain at the S corp level?

(the beginning balance of non recourse liabs was 99 million)

Did some states conform to this reporting?
 

#12
JAD  
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That's the way I see it...731(a) gain of $26M.

But if the debt is NR, don't you also have at-risk issues? Those issues would have been applicable to prior years also.
 

#13
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don't think there's an at risk issue, because the LLC K1 to the S corp has shown huge income for years. Initially there was a loss and I did suspend the loss until a subsequent year.
 

#14
JAD  
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I don't get it. Then how did the S corp have beginning tax basis capital of ($63M)?
 

#15
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the 63mill negative was the ending 12 31 17 amount. They had 99mill of non recourse liabs. Ordinary income was about 50 mill. Distribs were about 60 mill. they havent had losses in years.
 

#16
JAD  
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Ok, I'm starting to wonder if I've missed something really, really basic.

NR liabilities don't count for the at-risk calculation, right?

So if the 99M of liabilities at 12/31/17 were NR, then how could the (63M) not have been limited by the at-risk rules?
 

#17
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You're not missing anything :)

could well be that back in the day, before the IRS audit of the S corp and a separate IRS audit of the main shareholders about a year ago, a loss was taken at the S corp level that probably should not have. Makes sense that the loss should have limited at the S corp level and not the shareholder level. If I recall correctly, I limited the loss at the shareholder level to their basis in the s corp shares. and shareholders did have some years with distributions in excess of their basis in s corp shares. But huge income in subsequent years plus growth of s corp share of LLC liabs would have eliminated excess distributions.

yup, messy. and I really wish big 4 who originally designed the setup of the llc and an accounting change from cash to accrual anticipated the effect of distributions in excess at the LLC level.
 


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