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IRS Revises Instructions for Use of Tax Basis Method on Partner Capital Reporting Form 1065

For the tax filing year 2020, you should be aware of an update to the instructions for filing Form 1065, U.S. Return of Partnership Income, that requires partnerships to report capital accounts to partners on Schedule K-1.

Here’s what you need to know:

Partnerships filing Form 1065 for tax year 2020 are to calculate partner capital accounts using the transactional approach for the tax basis method.

This update to the instructions is part of a larger effort by the IRS to improve the quality of the information reported by partnerships. According to the IRS, most partnerships are already reporting using the tax basis method, however, requiring all partnerships to use this method allows them to more frequently request consistent and useful tax information from partnerships.

There will be some penalty relief:

According to the IRS, “to promote compliance with using the tax basis method described in the revised instructions, the Treasury Department and the IRS intend to issue a notice providing additional penalty relief for the transition in tax year 2020. The notice will provide that solely for tax year 2020 (for partnership returns due in 2021), the IRS will not assess a partnership a penalty for any errors in reporting its partners’ beginning capital account balances on Schedules K-1 if the partnership takes ordinary and prudent business care in following the form instructions to calculate and report the beginning capital account balances.”

For more specifics on the updates to the instructions for filing your Form 1065, please visit the IRS website here, or contact your usual KSBarlevi manager.