The Internal Revenue Service (IRS) has recently made a change in the way partnerships are evaluated for tax purposes. This comes in the wake of millions of partnership returns reportedly filed with a large errors that had previously been met with disinterest by the IRS. The experts at CPA Accounting & Tax Services help explain what you need to know to ensure your business is meeting the new partnership requirements.
What’s New? The Income Tax Basis Method
For the 2019 tax year, you must use the “tax basis method.” In previous years, if you reported a partner’s capital account using any other method (i.e. Generally Accepted Accounting Principles “GAAP,” section 704(b), K-1, etc.) you were compliant. However, under the tax basis method, you must figure each partner’s capital account for the partnership’s tax year using the transactional approach.
There is a very good chance that an income tax basis capital account plus your share of the liabilities will be your basis. Unless, for example, you bought the partnership interest from somebody else. As this has not been a requirement in the past, there is not much guidance as to how tax basis capital accounts should be maintained. As another example, even if capital accounts are maintained on a tax basis, they still may not equal a partner’s basis due to transactions that take place outside the partnership.
To circumvent any issues, your tax partner may be able to put what is on the K-1 together with other pieces of information in order to come up with the tax basis on a partnership return. In this way gains and losses can be recognized and properly recorded for IRS purposes.
Let us guide you through the changing IRS requirements on partnerships that affect you and your business. Contact the professionals at CPA Accounting & Tax Services to help guide you through tax season and beyond. We specialize in Business Accounting Services, Individual Tax Services, International Tax Services, Tax Planning and Tax Resolution Services. We have offices in Orlando, Florida and service clients worldwide. Find out how we can serve all of your accounting needs by contacting us today.