Due to concerns that partnerships may not be able to comply with its new mandate for the way they should report partners’ capital accounts, the IRS has postponed the requirement for reporting partners’ shares of partnership capital on the tax-basis until 2020. (See Notice 2019-66).
Under old law, partnerships could report partners’ capital on a GAAP, tax, book or other specified basis. Beginning with 2020 tax returns, partners’ capital accounts must be reported on the tax basis. This is likely to mean significant changes for companies that report financials on a GAAP or book basis and don’t calculate or track a partner’s tax capital, according to financial experts. At times, some firms prepared the partnership returns, ignoring the computations or not preparing them properly. But, since the IRS didn’t require it unless there was a sale or other transaction that needed the tax basis, it was generally ignored, tax experts agree.
For 2019, taxpayers should continue to report capital accounts under methods deemed acceptable for 2018, including tax basis, Sec. 704 (b), GAAP, or another reasonable method.
Going forward, partnerships must produce all available tax records from the outset of the partnership to the current period, the IRS now says. Preparing the basis calculations can be tedious and requires a great deal of time. If past returns or records aren’t available, the partnership must sit down with its tax preparer and find alternative ways to get the necessary documents.
Clearly, this change has caused concern for partnerships and tax advisors alike. Financial professionals are seeking extensions, but, according to industry experts, it seems the IRS will continue with tax basis for partnerships.
If your business is a partnership, reach out to us for assistance in determining the best way to calculate your tax obligations and prepare the partnership’s returns. We are here to help!