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New Form 1065

Technical topics regarding tax preparation.
#1
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For 2020, tax basis capital accounts must be reported for partnership returns. Notice 2020-43 mentions a Modified Outside Basis Method. The capital account is reported in Item L of the K1s and should match the 1065 M-2. This Modified Method is basically a partner's outside basis less share of liabilities. Does anyone notice a reconciliation problem?

If the 1065 balance sheet is reported on the tax basis, Partner Capital Accounts should equal inside basis, but M-2 would equal outside basis.
 

#2
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The requirement to report Tax captal, if negative, has been around for two years. If you're preparing a 1065 and don't track inside tax capital, you should. You will have trouble determining things like 704(c) items and being able to properly advise your clients on tax consequences of various transactions.

It's my understanding that this change for 2020 does not require a tax basis balance sheet on Sch L of the 1065. The requirement is to provide tax capital and the basis on which you calculated it. Sch M-2 will probably have a reconciliation figure. If you've been properly tracking tax capital and reconciling it to whatever basis you have historically presented your Sch L, this shouldn't be difficult.
I'm still parsing through this since the final regs were just released, but I'm guessing most of my clients will report on the MOBM.
~Captcook
 

#3
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With Sch L and M2 both on inside basis, it all reconciled nicely. If M2 must be shown with outside basis, it won't. That seems to be the way the new form has it, whether expected or not.
 

#4
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That seems to be the way the new form has it


I don’t see it that way. Per the draft instructions for Sch M-2:

The balance at the end of the year should equal the total of the amounts reported as the partners’ ending capital accounts in item L of all the partners’ Schedules K-1.

So, if Sch L, Sch M-2 and the K1’s are all on the “tax basis” (transactional method), then all three of these things are in complete agreement
 

#5
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The question is about the Modified Method. What if inside tax basis and outside tax basis differ?
 

#6
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The question is about the Modified Method.


The question is muddled and ignores the draft Form 1065 instructions. Read this summary to get up to speed:

https://www.currentfederaltaxdevelopmen ... quirements
 

#7
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Actually, the question is about an inconsistency in the draft instructions. The Modified Method is tax basis except when it isn't? And then it doesn't reconcile? The blog summary seems to confirm it. Thanks for the link.
 

#8
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Actually, the question is about an inconsistency in the draft instructions.

The blog summary seems to confirm it.

You’d have to tell us where, specifically, the form instructions are inconsistent and where the blog summary confirms it…because I still don’t really follow what you’re saying. In cases where differences might exist, the draft instructions say to attach a reconciliation or not. Not sure how that’s an inconsistency in the draft instructions.
 


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