for live program only capital accounts: 704(b) vs. gaap...

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Capital Accounts: 704(b) vs. GAAP vs. Tax Basis:

Comparing and Contrasting Annual Allocations

WEDNESDAY, AUGUST 5, 2020, 1:00-2:50 pm Eastern

FOR LIVE PROGRAM ONLY

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August 5, 2020

Capital Accounts: 704(b) vs. GAAP vs. Tax Basis

Nancy L. Langdon, Managing Director

PwC

[email protected]

Megan Stoner, Senior Manager

PwC

[email protected]



Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY

THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY

OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT

MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR

RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons,

without limitation, the tax treatment or tax structure, or both, of any transaction

described in the associated materials we provide to you, including, but not limited to,

any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are

subject to change. Applicability of the information to specific situations should be

determined through consultation with your tax adviser.

Capital Accounts: § 704(b) vs. GAAP vs. Tax Basis:Meeting New Tax-Basis Capital Reporting Requirements

PwC Washington National TaxMergers & Acquisitions

Megan Stoner Nancy LangdonSr. Manager Managing Director

August 2020

PwC

Capital Accounts: 704(b) vs. GAAP vs. Tax Basis August 2020

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Agenda

1. Partnership Capital Accounts -- An Overview

2. GAAP Capital Accounts• Relative authority• IFRS and similar methods• Maintenance

3. Section 704(b) Capital Accounts• Respecting partners' agreed-upon allocations• Revaluations and restatements• Maintenance

4. Tax Capital Accounts• Defining the undefined• Maintenance• Negative tax capital

5. Reporting Issues• Tax capital & negative tax capital reporting: Notice 2019-20, Form 1065

FAQs on Negative Tax Basis Capital Account Reporting Requirements, Notice 2019-66 and Notice 2020-43

• Other reporting changes on K-1s and • Partnership Books and Records

Partnership Capital Accounts:

An Overview

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What are capital accounts?

• Understanding the basic methods of accounting for business transactions is key to smooth business operations.

• Various types of capital accounts exist:

– for federal tax reporting purposes, for accounting purposes, for financial reporting purposes, etc.

– each type is maintained differently and measures different things, depending on the purpose for which such accounts are established.

• Partners’ capital accounts play a fundamental role in the determination of the economic relationship among the partners.

Partnership Capital Accounts – An Overview

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What are capital accounts?

• Our focus is on three types of capital accounts:

– GAAP basis

– Sec. 704(b)

– Tax basis

Partnership Capital Accounts – An Overview

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Start GAAP Capital Account(+ / -) GAAP to Tax Differences

= Tax Basis Capital Account(+ / -) Sec. 704(c) Adjustments

= Sec. 704(b) Capital Account

• GAAP Income is the typical starting point.

• Determine taxable income by adjusting for “M-1” items.

• Determine Sec. 704(b) income (economic income) by adjusting for differences between tax basis and Sec. 704(b) basis.

• Sec. 704(b) basis may not equal tax basis b/c of property contributed w/ values different than tax basis (i.e., Sec. 704(c) property) and Sec. 704(b) revaluations.

• Differences between Sec. 704(b) and tax basis are addressed through Sec. 704(c) allocations.

• GAAP capital may not equal Sec. 704(b) capital.

GAAP vs. Tax vs. Sec. 704(b) Capital Accounts

GAAP Basis Capital Accounts

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• GAAP capital accounts are maintained based on GAAP rules, as defined by the Financial Accounting Standards Board (“FASB”).

• GAAP apply only to partnerships that are publicly traded and registered investment partnerships. However, many partnerships are required by auditors, lenders, or other regulatory bodies to maintain records and accounts in accordance with GAAP. Thus, these partnerships also report their financial statements in accordance with GAAP.


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• The method used to account for an investment depends on the degree of influence the investor can exert over the investee’s operating and financial policies. These methods are not elective, but management discretion exists in determining whether the investor’s ownership interest meets “significant influence” (equity) or “control” (consolidation).

• Consolidation (ASC 810): Investor controls another entity through ownership of a majority (more than 50%) of its outstanding voting stock or through control as determined by ASC 810.

• Equity Method (ASC 323): Investor has ability to exercise significant influence over operating and financial policies, even though investor holds 50% or less of the voting stock (also applies to investments in joint ventures).

• Mark-to-Market (ASC 320): Investor lacks ability to significantly influence the investee’s financial and operating policies. [This assumes investment in publicly traded securities or otherwise readily determinable fair value. Furthermore, this is subject to recent changes in accounting guidance.]


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• GAAP capital accounts may reflect FMV if a transaction takes place that requires purchase accounting adjustments, for example, where there’s a change in majority owner of the business. This is similar to Sec. 704(b) capital accounts, but the rules for when such accounts are adjusted to reflect FMV are different for GAAP and Sec. 704(b) purposes.

• GAAP capital accounts have limited impact on tax basis and Sec. 704(b) capital accounts, but as a practical matter are often the starting point for these other accounts.

• The IRS will not allow a partnership to file a tax return using the GAAP basis of accounting. The IRS requires the financial statement to be converted to tax basis when filing Form 1065.


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Other methods of maintaining capital accounts:

• Modified GAAP

– In practice, some businesses apply GAAP principles but don’t strictly adhere to GAAP.

• International Financial Reporting Standards (“IFRS”)

– international standard developed by Int’l Accounting Standards Board (“IASB”) used in more than 110 countries around the world, including EU and many Asian and South American countries.

Other Methods for Maintaining Capital Accounts

Section 704(b) Capital Accounts

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Partnership Allocations in General

What are “partnership allocations”?

• a division of each item of income, gain, loss, deduction and credit of the partnership among the partners

– the items allocated are Sec. 704(b) income, not taxable income

• Many partnership agreements require that taxable income/loss be allocated in the same manner as Sec. 704(b) income/loss

• Partners’ Sec. 704(b) income/loss allocations are not always equal to cash distributions received from the partnership

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Allocations of Income, Gain, Loss and/or Deductions

Allocations are determined in accordance w/ partnership agreement:

• Sec. 704(a) allows partners to determine the manner in which they share in partnership income, gain, loss, and deduction pursuant to the terms of the partnership agreement.

• The IRS will generally respect allocations of these items made pursuant to the partnership agreement if the allocations have “substantial economic effect” (or “SEE”).

• If an allocation lacks substantial economic effect, the allocation is disregarded and each partner’s share is determined in accordance with such partner’s interest in the partnership (or “PIP”), taking into account all facts and circumstances.

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Substantial Economic Effect of Allocations

The SEE requirement is intended to ensure that tax consequences of partnership operations inure to the benefit or detriment of the partners that are economically at risk – in other words, tax must follow economics.

Example: A and B each contributed $1,000 to form partnership AB. Partnership experienced a loss of $1,000 in Y1. Partnership agreement allocates the loss to A and provides that liquidating distributions are split equally between A and B. The loss allocation to A does not have economic effect since A did not in fact suffer a $1,000 economic loss.

Under the Sec. 704(b) regulations, allocations are considered to have SEE if:

1) they satisfy the “basic test” for economic effect;

2) they satisfy the “alternative test” for economic effect; or

3) they satisfy the “economic effect equivalence” test.

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Substantial Economic Effect – Basic Test

Under the basic test for substantial economic effect, the partnership agreement must satisfy three requirements:

1) the partnership must maintain partners’ capital accounts in accordance with the Sec. 704(b) capital accounting rules;

2) upon liquidation, the partnership must make liquidating distributions in accordance with the partners’ positive capital account balances; and

3) the partners must be unconditionally obligated to restore a deficit capital account (a deficit restoration obligation or “DRO”) balance following a liquidation of the partnership interests.

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Substantial Economic Effect – Alternative Test

Under the alternative test for economic effect, the partnership must satisfy these requirements:

1) Satisfy the first two requirements under the basic test for economic effect;

2) The partnership agreement must contain a qualified income offset provision (requires an immediate income allocation to restore a partner’s negative capital account caused by an unexpected distribution); and

3) The allocation must not cause or increase a deficit balance in the capital account of the partner receiving the allocation.

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SEE – Economic Effect Equivalence Test

Under the economic effect equivalence test for economic effect:

If the basic and alternate tests are not met, an allocation will still be deemed to have economic effect if, at the end of the partnership tax year, a liquidation would produce the same economic results to the partners as if each requirement under the basic test had been met.

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Calculating Sec. 704(b) Income and Loss

1. Begin with taxable income

2. Add back tax amount for Sec. 704(c) items

• Inventory

• Depreciation and amortization

• Gain/loss on sale of assets

• Contingent liabilities (i.e., non-tax liabilities)

3. Add/subtract Sec. 704(b) amount for Sec. 704(c) items

• Depreciation and amortization

• Gain/loss on sale of assets

• Revaluation gain

4. Add/subtract tax-exempt income and non-deductibles to arrive at the partnership’s net or bottom-line Sec. 704(b) income or loss

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Calculating Sec. 704(b) Depreciation

• For computing tax depreciation of depreciable property contributed to a partnership, the partnership steps into the shoes of the contributing partner and must recover the transferred tax basis over the remaining recovery period.

• Generally, Sec. 704(b) depreciation is computed using the same recovery period used to compute tax depreciation.

• However, if the remedial method is used for Sec. 704(c), then Sec. 704(b) depreciation is computed in two steps:

1. The amount of Sec. 704(b) basis which equal the adjusted tax basis of the contributed property is recovered in the same manner as tax depreciation (Sec. 704(b) = tax component); and

2. The Sec. 704(b) basis which exceeds the adjusted tax basis of the contributed property is recovered over a new depreciable life (BIG component).

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Allocating Sec. 704(b) Income and Loss

1. The partnership’s net or “bottom-line” income or loss is allocated among the partners based on their economic agreement (as reflected in the partnership agreement).

2. An allocation to a partner of a share of partnership net or “bottom line” income or loss shall be treated as an allocation to such partner of the same share of each item of income, gain, loss, and deduction that is taken into account in computing such net or “bottom line” income or loss.

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Maintenance of Sec. 704(b) Capital Accounts

The Sec. 704(b) capital account generally should reflect a partner’s equity in the partnership.

• The Sec. 704(b) capital account maintenance rules provide that the capital account is increased to reflect:

– amount of cash and/or net fair market value (FMV) of property contributed to the partnership;

– partner’s allocable share of partnership income/gain.

• The capital account is decreased to reflect:

– amount of cash and/or net FMV of property distributed;

– partner’s allocable share of partnership loss/deduction.

• A partner’s Sec. 704(b) capital account generally cannot go negative,unless there’s a DRO or the negative amount is required to be restored under a minimum-gain chargeback provision.

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Example: Joe contributes cash of $100,000 and equipment with a FMV of $500,000 and a tax basis of $200,000 to a partnership.

During the year, Joe’s share of:

• Taxable income before special allocations equal $100,000.

• Sec. 704(b) and tax deductions from Sec. 704(c) property equals $25,000 and $10,000, respectively.

• Tax exempt income equals $5,000.

• Non-deductible expenses equals $2,500.

• Cash distributions equals $20,000.

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704(b) Tax 704(c)

Beginning Equity - - -

Contributions 600,000 300,000 300,000

Distributions (20,000) (20,000) -

Income before special allocations 100,000 100,000 -

704(c) Deductions (25,000) (10,000) (15,000)

Revaluation Gains - -

Tax Exempt Income 5,000 5,000 -

Non-Deductible Expense (2,500) (2,500) -

Ending Equity Before Tax Distributions 657,500 372,500 285,000

Cumulative Tax Distributions - - -

Ending Equity 657,500 372,500 285,000

Joe

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Sec. 704(b) Capital Account Revaluations

• Generally partnerships do not adjust Sec. 704(b) capital accounts for unrealized appreciation or depreciation.

• Partnership may revalue assets and restate partners’ Sec. 704(b) capital accounts to reflect each partner’s economic share of underlying assets at FMV when certain events occur.

• Permissible revaluation events include: (1) contributions of money/property by new or existing partner; (2) distributions of money/property to a partner as consideration for a partnership interest; (3) grant of partnership interests in exchange for services; and (4) issuance of non-compensatory options.

• Sec. 704(b) revaluations are intended to ensure that prior appreciation or depreciation does not shift vis-a-vis the historic partners and incoming partners.

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Why do we need Sec. 704(b) Capital Accounts?

Need to know Sec. 704(b) capital account balances in order to determine:

• loss allocations (Sec. 704(b) capital accounts generally can not go negative when another partner’s Sec. 704(b) capital account is positive);

• liquidating distributions (if a safe harbor agreement);

• allocation of Sec. 704(b) income, deduction, gain and loss (if partnership agreement calls for targeted allocations);

• allocation of nonrecourse deductions;

• to determine successors’ beginning capital accounts;

• to allocate reverse Sec. 704(c) gain/loss amounts.

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Sec. 704(b) Capital Accounts: Common Issues

Some common issues that arise with respect to maintaining capital accounts are:

– differences between GAAP and tax capital accounts

– contributions of non-negotiable notes by partners

– distributions of partnership notes to partners

– contributions of property subject to nonrecourse debt – minimum gain issues

– revaluations of capital accounts

– Sec. 704(c) allocations

– successor capital accounts

Tax Capital Accounts

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A partner’s tax capital account represents its equity as calculated using tax principles, not based on GAAP, Sec. 704(b), or other principles.

• A general principle of subchapter K is that tax allocations follow Sec. 704(b) allocations. Historically, this rule has guided taxpayers in determining how tax capital accounts should be maintained. See Treas. Reg. Sec. 1.704-3(b) and 1.704-1(b)(1)(vii).

• No definition for partnership tax capital accounts in Internal Revenue Code or Regulations thereunder.

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A partnership maintains both Sec. 704(b) capital accounts and tax capital accounts.

• Differences between Sec. 704(b) and tax capital accounts arise due to different treatment of items for Sec. 704(b) purposes vs. tax purposes.

• Examples of items that affect basis differently for tax purposes include depreciation deductions and accrued expenses that are not deductible for tax purposes.

• A partner’s tax capital account may go negative as long as the partner has outside basis to cover it (e.g., outside basis from allocations of partnership debt).

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A partner’s outside tax basis is not the same as a partner’s tax capital account. Outside basis is important because:

• A partner’s ability to take partnership losses on an individual income tax return is limited if outside tax basis is zero.

• A partner’s outside basis may not go negative.

• If a partner receives a distribution of cash or property that exceeds the partner’s outside basis, the excess is taxable income to the partner.

• Gain or loss recognized on a sale of a partnership interest is calculated by reference to the partner’s outside basis. If the cash/other consideration exceeds the partner’s outside basis, partner recognizes gain on sale of the interest that’s reported on his/her individual income tax return.

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Tax Capital vs. Outside Basis

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Increases:

Decreases:

Section 704(b) Capital

• FMV of property contributed, including money

• share of Sec. 704(b) income/gain

• Positive Sec. 704(b) revaluations (book-ups)

• FMV of distributed property, including money

• share of Sec. 704(b) losses/deductions

• Negative Sec. 704(b) revaluations (book-downs)

Tax Basis Capital

• Tax basis of property contributed, including money

• share of taxable income/gain

• Amt. of partnership liabilities assumed by partner (treated as contribution)

• Tax basis increases under Sec. 734(b) or Sec. 743(b)

• Tax basis of distributed property, including money

• share of tax losses/deductions

• Amt. of partner liabilities assumed by partnership (treated as distribution)

• Decreases in tax basis under Sec. 734(b) or Sec 743(b)

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Tax Basis Capital vs. Sec. 704(b) Capital Accounts

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Outside Basis vs. Tax Capital vs. Sec. 704(b) Capital

Item Outside Basis Tax Capital Sec. 704(b) Capital

↑ Contributions Tax Tax FMV

↓ Distributions Tax Tax FMV

↑ Income Tax Tax § 704(b)

↑ Tax Exempt Income Tax Tax § 704(b)

↓ Deductible losses and expenditures

Tax Tax § 704(b)

↓ Depreciation/Gain Tax Tax § 704(b)

↓ Nondeductible expenses

Tax Tax § 704(b)

↑ Revaluation Gains N/A N/A § 704(b)

↑↓ Liabilities – All Tax N/A N/A

↑↓ 743(b) Adjustment Tax N/A N/A

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A partner’s tax capital account can be negative when its outside basis in the partnership is zero or positive.

– Example: A and B each contribute $100 to a partnership and the partnership borrows $800 to buy depreciable property for $1,000. Under Sec. 752, the partnership liability is allocated 50/50 — or $400 apiece — to the partners. With their $100 cash contributions and $400 shares of debt, the partners each have tax capital accounts of $100 and outside bases of $500.

• If the partnership recognizes $1,000 of tax depreciation on the qualified property, which is allocated equally to A and B, the partners would both have negative tax capital accounts of $400, based on their $100 cash contributed minus the $500 share of depreciation.

• However, their outside bases would be zero because the $500 of depreciation would offset their previous total outside bases of $500.

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Negative Tax Capital Accounts

Capital Account Reporting Issues & Requirements

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Contributions of Appreciated Property: Section 704(c) February 19, 2020

Beginning w/ 2018 tax year, partnerships reporting partners’ capital on a method other than the tax basis method were required to report partners’ tax capital accounts at both the beginning and the end of partnership’s taxable year if either amount was negative with respect to the partner.

On March 7, 2019, Notice 2019-20 was released providing penalty relief for partnerships that file and furnish Schedules K-1 but fail to report info about partners’ negative tax capital accounts for 2018 partnership tax years.

On April 5, IRS released Form 1065 Frequently Asked Questions (FAQs) explaining how to determine partners’ tax capital accounts and providing a safe harbor approach based on partners’ outside bases in partnership interests.

In fall of 2019, draft 2019 tax forms and instructions expanded partner tax capital reporting to require all partnerships to report all partners’ tax capital accounts using the tax basis method.

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Tax Basis Capital – New Reporting Requirements

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IRS webpage, “Form 1065 Frequently Asked Questions” addresses “Negative Tax Basis Capital Account Reporting Requirements” and answers the following 8 questions:

1. What is a partner’s tax capital account?

• A partner’s tax capital account represents its equity as calculated using tax principles, not based on GAAP, Sec. 704(b), or other principles.

2. How do partnerships calculate a partner’s tax capital account?

3. How can a partner’s tax capital account be negative when the tax basis of its interest in the partnership (outside basis) is zero or positive?

4. Do revaluations of partnership property affect a partner’s tax capital account?

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Tax Basis Capital Reporting – Form 1065 FAQ’s

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IRS webpage, “Form 1065 Frequently Asked Questions” (continued):

5. What is the tax capital account of a partner who acquired its partnership interest by transfer from another partner?

6. Is there a safe harbor approach for determining whether a partnership has an obligation to report negative tax capital account information?

7. Must partnerships that satisfy all four of the conditions provided in question 4 on Schedule B to the Form 1065 comply with the requirement to report negative tax capital account information?

8. What is the procedure for complying with the requirement to report negative tax capital account information for tax year 2018?

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IRS webpage addressing FAQ’s on Form 1065 further provides that:

…“Partnerships may calculate a partner’s tax capital account by subtracting the partner’s share of partnership liabilities under Sec. 752 from the partner’s outside basis (safe harbor approach).”

If a partnership elects to use this safe harbor, the partnership must report:

…“the negative tax basis capital account information as equal to the excess, if any, of the partner’s share of partnership liabilities under Sec. 752 over the partner’s outside basis.”

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IRS received numerous comments indicating both that there’s no clear definition of the tax basis of accounting for reporting purposes and that many taxpayers would be unable to prepare returns either at all for 2019 or not until much later than partners expected to receive K-1s.

In response, on Dec. 11, 2019, IRS released Notice 2019-66 postponing requirement to report partners’ shares of partnership capital on tax basis method until taxable years beginning on/after Jan. 1, 2020. The notice indicated future guidance would provide a definition of partner tax capital.

As a result, for 2019, partnerships must report partner capital accounts consistent with reporting requirements in 2018 forms/instructions (i.e., may continue to report using tax basis, Sec. 704(b) basis, or GAAP basis and must disclose method used), including requirement to report negative tax capital accounts on partner-by-partner basis.

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Tax Basis Capital Reporting – Notice 2019-66

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On June 5, 2020, IRS issued Notice 2020-43, in which it proposed two new methods that satisfy the tax capital reporting requirements and requested comments on those proposed approaches (in lieu of defining “tax basis capital” as anticipated in Notice 2019-66).

The proposed methods are:

1) the Modified Outside Basis Method; and

2) the Modified Previously Taxed Capital Method.

The proposed methods are intended to be the only methods that meet the tax capital reporting requirement for taxable years ending on/after Dec. 31, 2020.

One of the two proposed methods must be used, but partnerships may change between methods by attaching a disclosure describing the change to each partner’s beginning and ending capital account balance.

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Tax Basis Capital Reporting – Notice 2020-43

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Under the “Modified Outside Basis Method” the partner’s tax capital is determined as follows:

• Either the partnership or a partner will determine their outside basis in the partnership interest;

• Subtract the partner’s Sec. 752 share of liabilities from that outside basis to arrive at the partner’s tax capital amount.

Partners may provide their own outside basis to the partnership, in writing, within 30 days of year-end. Partnership can rely on this information unless clearly erroneous.

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Notice 2020-43: Modified Outside Basis Method

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Under the “Modified Previously Taxed Capital Method,” the partnership must calculate a hypothetical liquidation of the partnership using FMV, GAAP or Sec. 704(b).

Previously taxed capital is equal to:

• The amount of cash the partner would receive on liquidation, plus

• The amount of tax loss allocated to the partner from the hypothetical sale, less

• The amount of tax gain that would be allocated to the partner from the hypothetical sale.

A partnership using this method must include a statement to this effect and must also disclose the method used to determine the net liquidity value of the partnership.

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Notice 2020-43: Modified Previously Taxed Capital

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The IRS and Treasury Department specifically requested comments on the following topics --

(i) whether the 2 methods described in the Notice should be modified or adopted;

(ii) whether an ordering rule should apply to basis used in determining partnership’s net liquidity value (i.e., use of FMV is required, but if not readily available then Sec. 704(b), and, if the partnership does not maintain Sec. 704(b) capital, GAAP is required, etc.);

(iii) how, if at all, the reporting requirement should be modified to apply to publicly traded partnerships under Sec. 7704;

(iv) whether the Transactional Approach, or similar method, should be permitted for meeting the reporting requirement and, if recommended, what additional guidance would be necessary; and

(v) whether and in what circumstances limitations should be imposed on partnerships to change from one method to another (i.e., whether there should be a limit on how many times the method can be changed over a period of years), including compliance with such rules in the case of the merger of partnerships using different methods.

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Notice 2020-43: Specific Request for Comments

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New tax basis reporting requirements have been problematic for many.

• administrative burdens

• uncertainty

• lack of relevant definitions in code and regs

Some partnerships may have been in existence for many years and may have had a taxpayer as a partner for decades. Prior to the new rules, a partner—not the partnership—was responsible for maintaining a calculation of his tax basis in the partnership. If the partnership or tax preparer had not previously kept a calculation of each partner’s tax basis, then catching up the calculation to 2020 could be a cumbersome process.

Important to begin the process of transitioning to accounting for partners’ tax basis as early as possible.

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Reporting Issues/Requirements

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1) The 2019 K-1 requires that negative tax capital accounts must be reported (puts an additional burden on liability allocations, Sec. 704(c), basis adjustments, and overall capital account maintenance).

2) Previously, a partnership was only required to report the built-in gain or loss associated with the contribution of property (“forward” allocations under Sec. 704(c)) in certain circumstances. The 2019 K-1 requires reporting the partner’s share of net unrecognized Sec. 704(c) gain or loss at both the beginning and end of the tax year, as well as the net income/loss effect for all Sec. 704(c) adjustments.

3) The 2019 K-1 includes a new check box to indicate whether a partner’s share of partnership liabilities includes liabilities from a lower-tier partnership. Typically, liabilities from a lower-tier partnership are allocated to the partners of the upper-tier partnership in accordance with the partners’ interests in the partnership, whereas direct recourse liabilities of the upper-tier partnership may be allocated differently.

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Some New K-1 Information Disclosures for 2019

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(continued)

4) The 2019 K-1 provides two new line items to report positive and negative Sec. 743(b) basis adjustments separately with a “schedule” in the footnotes showing the “computation” of a partner’s net adjustment. The instructions also require Sec. 743(b) adjustments to be reported separately for each trade or business and, in the case of multiple adjustments, to require a schedule listing the assets to which the adjustments relate.

5) The 2019 K-a require additional Sec. 751 gain/(loss) disclosures.

6) Form 1065 modifies an existing question on Sch B that describes when a partnership must file a Form 8990, Limitation on Business Interest Expense Under Sec. 163(j). The responses provide that entities with no business interest expense and no current or prior-year carryover excess business interest expense do not need to file a Form 8990.

7) Tax capital account reporting is now mandatory.

8) Others….

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Some New K-1 Information Disclosures for 2019

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Proper maintenance of books and records requires maintenance of:

• cumulative, period-by-period, recording of each partner’s and the partnership’s inside tax capital accounts;

• cumulative period-by-period historical Sec. 704(b) income allocations and current period Sec. 704(b) income allocations;

• cumulative summary of ownership detailing total interests issued by class and on a partner-by-partner basis; and

• copies of Partnership Agreement(s) and all amendments, contribution agreements, side letters, etc.

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Partnership Books & Records

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Other components of partnership books and records include:

• Outside Basis Schedule – tracking outside basis adjustments and allocation differences, as well as partner-by-partner debt allocations on an annual basis;

• Liability Allocations – particularly when Sec. 704(c) is implicated, the allocations under Sec. 752 become more challenging;

• Profits Interest Grants – can impact allocations in any given period and going forward; should be tested for compliance under the revenue procedures; may implicate a revaluation of capital accounts.

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Partnership Books & Records

for live program only capital accounts: 704(b) vs. gaap...

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