• The IRS released new instructions for capital reporting on partnership K-1s
  • You don’t need to worry: DSJCPA is prepared for change

In October 2020, the IRS released draft guidance regarding Form 1065 (US Return of Partnership Income). These new instructions will apply for the current 2020 tax year.

Except for certain small partnerships, ALL partnerships that did not previously report the capital accounts on a tax basis will be required to do so starting in the tax year 2020.  Taxpayers “must calculate partner capital accounts using the transactional approach for the tax-basis method” according to the IRS statement. This transactional approach references Schedule K-1 items of income, deduction, gain, loss, contribution, and distribution data. As such, a partner’s tax capital becomes a representation for their share of the partnership’s tax basis in its assets.

The tax-basis method is a change from prior years where partnerships have reported using various different methods to report capital. In order to transition to the new reporting requirement, the IRS requires that the partnership must restate the beginning capital balances for each partner. Three are several methods for doing so and while we won’t bore you with details of each method and related code sections, rest assured that our team is prepared and ready to handle this for your business. 

To encourage compliance, for the 2020 filing year only, the IRS has issued a penalty relief for errors that occurred while reporting partnership partners’ capital using the new method. As long as the reporter demonstrated “ordinary and prudent” care in following form instructions, errors are not subject to a penalty for this filing season.

Partnership calendar year filings are due March 15, 2021, unless granted an extension to September 15, 2021.

Rest assured, DSJCPA is prepared, as always, to adapt to this change and make it seamless for your partnership filing. Call our office at 516-541-6549 or visit our website for more news and updates.


Devin McQuillan
Associate, Creative Solutions

516-541-6549 | Email

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