– Instructions for Form 1065, U.S. Return of Partnership Income
The IRS has released the draft version of the Form 1065 instructions for 2020 partnership returns. The new instructions reflect the requirement to report a partner’s capital account using the tax basis method rather than GAAP, section 704(b), or other accounting methods.
The instructions state that if there is any question on how to report a partnership event or transaction, the event or transaction should be accounted for in a manner generally consistent with figuring the partner’s adjusted tax basis in its partnership interest, without regard to partnership liabilities, taking into account tax basis rules, and by reporting the amount on the line for other increases or decreases. The partner’s ending capital account as reported using the tax basis method in item L (Schedule K-1) might not equal the partner’s adjusted tax basis in its partnership interest. Generally, this is because a partner’s adjusted tax basis includes the partner’s share of partnership liabilities, as well as partner specific adjustments. Each partner is responsible for maintaining a record of the adjusted tax basis in its partnership interest.
The instructions also explain that if a partner’s capital account last year was reported using a method other than the tax basis method, the beginning capital account for this year must be modified to equal the tax basis amount. The instructions explain how to modify the beginning capital account to determine what it should be under the tax basis method.
Once the beginning tax basis amount is determined, partner contributions, the partner’s share of partnership net income or loss, withdrawals and distributions, and other increases or decreases are reported using tax basis principles.