Penalty Relief for Capital Account Reporting on Schedule K-1

Post Date: 3/18/19
Last Updated: 3/19/19


Cross References
- Notice 2019-20

A partner's capital account is reported in Part II, Item L of Schedule K-1 (Form 1065). In prior years, the instructions for Schedule K-1 were silent on what to report for Item L. The following instructions were added to the 2018 version of the IRS instructions for Schedule K-1:

"If a partnership reports other than tax basis capital accounts (i.e., GAAP, section 704(b), book, or other) to its partners in Item L, and tax basis capital, if reported on any partner's Schedule K-1 at the beginning or end of the tax year would be negative, the partnership must report on line 20 of Schedule K-1, using code AH, such partner's beginning and ending shares of tax basis capital. This is in addition to the required reporting in Item L.

For Item L, "tax basis capital" means (i) the amount of cash plus the tax basis of property contributed to a partnership by a partner minus the amount of cash plus the tax basis of property distributed to a partner by the partnership, net of any liabilities assumed or taken subject to, in connection with such contribution or distribution; plus (ii) the partner's cumulative share of partnership taxable income and tax-exempt income; minus (iii) the partner's cumulative share of taxable loss and nondeductible, noncapital expenditures."

The IRS recently provided penalty relief for taxpayer's who fail to report the above information on Schedule K-1. The penalty relief applies to the failure to furnish correct payee statements penalty (IRC §6722) and failure to file partnership return penalty (IRC §6698).

In general, a partnership may report partner capital to a partner using tax basis, Generally Accepted Accounting Principles (GAAP), section 704(b) book, or some other method. Beginning with the 2018 tax year, the instructions for Form 1065 requires a partnership that does not report tax basis capital accounts to its partners to report, on line 20 of Schedule K-1 using code AH, the amount of such partner's tax basis capital both at the beginning of the year and at the end of the year if either amount is negative.

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