Section 754 schedule L and K1

Technical topics regarding tax preparation.
#1
anepcar  
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I have a new client that brought me their tax returns from last year, their CPA had made the section 754 election: The step up basis are being presented on their schedule L and the partners capital account on their K1. Based on what I have read, this is an entry that is made by the partner being impacted by this election and should not affect the companies books. The partnership only shows the depreciation on the step up basis on line 13 with code V.


Any feedback is appreciated.

C.Pena CPA, TX
 

#2
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Based on the reading I did when I worked on my first 754 election recently, the articles I read were saying that whether to change the books is optional. I figured I would, I felt like that would make things easier.
 

#3
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Partner's Capital accounts are now required to be reported on the tax basis method. Any §754 adjustments should no longer be reported in the partner's Capital accounts on the K-1.

If you go to page 31 of the 2021 Instructions for Form 1065 :https://www.irs.gov/pub/irs-pdf/i1065.pdf
you will see that
Note: Section 743(b) basis adjustments are not taken into account in calculating a partner's capital account under the tax basis method.


Partnership returns and capital accounts were to be corrected starting in 2020 if the tax basis method was not being used.

Also see IRS Notice 2021-13: https://www.irs.gov/pub/irs-drop/n-21-13.pdf
 

#4
lckent  
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Michaelstar wrote:Any §754 adjustments should no longer be reported in the partner's Capital accounts on the K-1.


I believe that adjustments under Sec 734(b) are to be included in tax capital, just to make things even more confusing.
CPA, Retired
 

#5
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:cry:
lckent wrote:
Michaelstar wrote:Any §754 adjustments should no longer be reported in the partner's Capital accounts on the K-1.


I believe that adjustments under Sec 734(b) are to be included in tax capital, just to make things even more confusing.


That is, indeed, correct. I've continued to present Sch L with the 743(b) adjustment included, but capital shown on Sch L and Sch M-2/K-1 are different
~Captcook
 


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