Form 1065 Tax Basis Capital Methods for 2020

Transactional Approach and Three Alternative Methods for Partners' Beginning Capital

Note: CLE credit is not offered on this program

Recording of a 110-minute CPE webinar with Q&A


Conducted on Tuesday, February 9, 2021

Recorded event now available

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Program Materials

This webinar will update practitioners on the latest tax basis capital reporting requirements. Our panel of experts will discuss the transactional approach for tax basis capital and the three alternative methods for calculating beginning tax basis capital, both added to the instructions for Form 1065, U.S. Return of Partnership Income, for the year 2020. They will also provide examples and tips for tax professionals to calculate and comply with these mandated reporting requirements.

Description

Following the release of IRS Notice 2020-43 on Tax Capital Reporting, the IRS admitted it received numerous comments but no practical alternative approaches to assist with partnerships' tax basis capital reporting requirements for partners. In response, the IRS released an early draft of Form 1065 with instructions stating that partnerships can use the transactional approach for the tax basis method.

Although welcomed by tax practitioners, this does not eliminate the burden of calculating beginning tax basis capital for partners whose balances were maintained using an alternative method in prior years. Here, the instructions provide three alternative methods to calculate this beginning balance: modified outside basis method, modified previously taxed capital method, or the Section 704(b) method. Partnerships with less than $250,000 in sales and $1 million in assets (those able to omit completion of Schedule L, M-1, and M-2) are not required to report capital account changes in Item L of the Schedule K-1. All other partnerships are required to report partners' tax basis capital on their 2020 partnership returns.

The IRS has agreed to offer penalty relief if the partnership takes "ordinary and prudent business care in following the form instructions to calculate and report the beginning capital account balances." However, properly handling beginning capital when a partnership interest is transferred is not addressed in the instructions. Tax practitioners preparing partnership returns need to understand the current requirement to report tax basis capital for all partners to comply with the latest guidelines, avoid penalties, and properly report tax basis gains and losses.

Listen as our panel of partnership veterans explains what is known to-date about tax basis capital account reporting, including the transactional approach in the current Form 1065 instructions, as well as steps practitioners can take to streamline compliance with these latest guidelines.

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Outline

  1. Tax basis capital reporting
  2. IRS Notice 2020-43
  3. Transactional approach
  4. Methods for computing beginning capital
  5. Section 754 transactions
  6. Transfers of interests, sales, and other issues
  7. Examples

Benefits

The panel will cover these and other critical issues:

  • Calculating beginning tax basis capital for partners' using the modified outside basis method
  • Using the transactional approach to calculate annual partnership capital account changes
  • Practical solutions for handling common issues in converting balances to tax basis
  • The interplay of IRS Notice 2020-43 and other guidance for reporting capital balances with Form 1065 instruction guidelines

Faculty

Clayman, Jeffrey
Jeffrey Clayman, CPA, JD, LLM

Tax Senior Manager
Withum Smith+Brown

Mr. Clayman has over 18 years of public accounting experience with a focus on for-profit businesses in many different...  |  Read More

Lovett, Brian
Brian T. Lovett, CPA, JD

Partner
Withum Smith+Brown

Mr. Lovett has extensive experience serving the tax needs of both public companies and closely-held businesses,...  |  Read More

Taylor, Ian
Ian Taylor, CPA, MST

Senior Tax Manager
Withum Smith+Brown

Mr. Taylor focuses on the taxation of closely-held partnerships and S corporations in the manufacturing and real estate...  |  Read More

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