Why isn't 1065, page 5, Schedule M-2, Line 3 and 1065, Schedule K-1, Item L, calculating the same as prior years in a 2020 Partnership return?

  • Article Type:
  • QA
  • Last Modified:
  • 06/17/2021

Question

Why isn't Schedule M-2 line 3 and Schedule K-1 Section L calculating the same as in prior years in a 2020 1065 return?

Environment

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Answer

For tax year 2020, the IRS has made changes to the M-2 and Section L of the Schedule K-1. These items are now calculated using tax basis. The Schedule M-2, Line 3 is now derived from the total of all partner Schedule K-1's > Section L > Current Year Income (Loss) > Expand > Total to item L, Current year net income/loss.

The following inputs can be used to adjust Schedule K-1 Item L, Current Year Income (Loss) and Schedule M-2, Line 3:
  1. Go to Income/Deductions > Schedule K Other Income / Deductions worksheet.
  2. Expand Section 16 - Summary of Sch K Items and Sch M-1, M-2, and M-3 Adjustments (Interview Form K-3).
  3. In Column Class Code (Select Detail > Line 1) select NDE, NTI, ICR, or DCR as applicable.
  4. In Column Amount (Select Detail > Line 4), input the applicable adjusting entry.
  5. Calculate the return.
The following inputs can be used to override Schedule K-1, Item L, Current Year Net Income only:
  • Input Override:
    1. Partners > General Options worksheet.
    2. Expand Section 2 - Schedule K-1 Calculation Options.
    3. In Line 19 (Interview Form 5A  box 61) - Use the partner information, current year net income (loss) entries, as an override, select the checkbox.
    4. Go to Partners > Partner Information worksheet.
    5. In Column Capital Accounts - Net Inc. Per Books (Select Detail > Expand Section 2 - Partner's Capital Account > In Line 4 (Interview Form K-1, boxes 137-155) - Current net income (loss)), input the expected amount for the partner Schedule K-1, Item L, Line Current Year Net Income (Loss).
    6. Repeat step 5 for all applicable partners.
    7. Calculate the return.
  • Schedule K-1 Overrides (There is no Interview Form equivalent):
    1. Partners > Schedule K-1 Overrides worksheet
    2. Select Detail
    3. Expand Section 1 - Federal State Code and Partner Name.
    4. In Line 1, Federal, State or City Code, select FD.
    5. In Line 2 - Partner number, input applicable partner number.
    6. Expand Section 3 - Partner's Capital Account Analysis.
    7. In Line 3 - Current year net income (loss), input expected amount for the partner Schedule K-1, Item L, Line Current Year Net Income (Loss).
    8. Add a new sheet for additional partners.
    9. Repeat steps 3-8 for all applicable partners.
    10. Calculate the return.
The following inputs are available to adjust Schedule M-2 Line 3 only:
Input override:
  1. Go to L/M-1/M-2/M-3 > Schedule M-2 worksheet.
  2. Expand Section 3 - Schedule M-2 - Overrides.
  3. In Line 8 (Interview form ML-1, Box 30) - Net income (loss) per books, input applicable amount.
    • This input was implemented with CCH® ProSystem fx® Tax release 2020.02010 / CCH Axcess™ Tax release 2020-2.1.
  4. Calculate the return.
Government Form / Line (Pink) Override
  • Government form (Pink) override of Schedule M-2 line 3 will stay after calculating the return.

Notes:

  • Government form overrides on Schedule K-1 > Section L > Current year net income line, will not affect Schedule M-2 line 3.
  • Permanent items, such as municipal bond interest, disallowed meals, non-deductible expenses should increase or decrease the tax basis.  
  • Temporary items, such as differences in depreciation or accounts receivable/cash receipts will eventually zero out and should not impact tax basis.
  • Non-taxable Income (NTI) and Nondeductible expenses (NDE) are included in Schedule K-1, item L, line Current Year Net Income (Loss) per 1065 instructions, page 31.

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