Partnerships filing Form 1065 for tax year 2020 (tax returns due in 2021) must calculate partner capital accounts using the tax-basis method. Under this method, partnerships report partner contributions, share of partnership net income or loss, withdrawals and distributions, and other increases or decreases using tax-basis principles. Prior to the new rule, partner capital accounts could be reported using other methods such as GAAP.
The IRS will grant penalty relief for the transition to the new rules in 2021. As part of the relief, the IRS will not assess penalties for any reporting errors in a partnership’s partners’ beginning capital account balances as long as the partnership reasonably and in good faith follows the form instructions to calculate and report the beginning capital account balances. The relief will apply only for the 2020 tax year.
Note: In order to be compliant to the new tax rules, our firm will be calculating the partner tax capital account balances for any and all partnership clients’ that do not already have this information readily available.