The IRS released an early draft of the instructions to Form 1065, U.S. Return of Partnership Income, for tax year (TY) 2020. The draft included revised instructions for partnerships required to report capital accounts to partners on Schedule K-1 (Form 1065). The draft instructions are intended to give tax practitioners a preview of the changes before the final version is released in December.
The revised instructions indicate that partnerships filing Form 1065 for TY 2020 are to use the transactional approach for the tax basis method. Under the tax basis method outlined in the instructions, partnerships report partner contributions, the partner’s share of partnership net income or loss, withdrawals and distributions and other increases or decreases using tax basis principles as opposed to reporting using other methods such as GAAP. Partnerships that did not prepare Schedules K-1 under the tax capital method for 2019 or otherwise maintain tax basis capital accounts in their books may determine each partner’s beginning tax basis capital account balance for 2020 using either:
- the Modified Outside Basis Method;
- the Modified Previously Taxed Capital Method; or
- the Code Sec. 704(b) Method, including special rules for publicly traded partnerships.