743 and 754 depreciation reducing Current Year Net Income on the Schedule K-1 item L in a Partnership 1065 return using CCH® ProSystem fx® Tax and CCH Axcess™ Tax.
- Article Type:
- Problem Resolution
- Last Modified:
- 11/05/2022
Symptoms
CCH® ProSystem fx® Tax and CCH Axcess™ Tax systems include IRC Section 743(b) and 754 deductions in the Schedule K-1 Section L, line Current Year Net Income (loss) calculation, as it did in prior years of the tax software.
Environment
CCH® ProSystem fx® Tax
CCH Axcess™ Tax
1065
Partnership
2020
2021
CCH Axcess™ Tax
1065
Partnership
2020
2021
Cause
N/A
Resolution
Sch K-1, Item L, Current Year Net Income (Loss) is including 743(b) and 754 deductions.
Beginning with tax year 2020, the IRS has added a note to Form 1065 instructions indicating "743(b) basis adjustments are not taken into account in calculating a partner's capital account under the tax basis method." Development is in the process of updating the program to reflect these instructions. This is projected to be included on release 2020.02030. Until an option is added, or an updated calculation is added to the software, we can override the Current Year Net Income (Loss) to reflect the correct amount, or input an adjusting entry which will affect partner capital account Current Year Net income line.
A new field was included on release 2020.02030 / Axcess 2020-2.3:
Options above can be set as a system default for all returns assigned to an CCH® ProSystem fx® Tax Return Group and CCH Axcess™ Tax Return Configuration Set:
Beginning with tax year 2020, the IRS has added a note to Form 1065 instructions indicating "743(b) basis adjustments are not taken into account in calculating a partner's capital account under the tax basis method." Development is in the process of updating the program to reflect these instructions. This is projected to be included on release 2020.02030. Until an option is added, or an updated calculation is added to the software, we can override the Current Year Net Income (Loss) to reflect the correct amount, or input an adjusting entry which will affect partner capital account Current Year Net income line.
A new field was included on release 2020.02030 / Axcess 2020-2.3:
- Go to Partners > General options worksheet
- Expand Section 2 - Schedule K-1 Calculation Options.
- In Line 29 ( Interview Form 5A, Box 93) - Code to include or exclude section 743(b) adjustments or both from Schedule K-1, item L and Schedule M-2, select from the following options:
- Option 1 - Include section 743(b) adjustments in current year net income amounts – This is the default option and will include the section 743(b) adjustments in the calculation of the current year net income(loss).
- Option 2 - Exclude section 743(b) adjustment from item L – The section 743(b) adjustments will not be included in the calculation of the current year net income(loss). This would also be reflected on the current year net income and increase/decrease supporting statement where the other income or other deduction amount would change.
- Option 3 - Include Section 743(b) adjustment in other increase (decrease) – The section 743(b) adjustments will be included in the calculation of the other increase (decrease) amount and excluded from the calculation of the current year net income(loss). These changes will also be reflected on the current year net income and increase/decrease supporting statement where the other income or other deductions amount will also change and the section 743(b) adjustments will be reported as separate items under the other increase/decrease items.
- Option 4 - Exclude both section 743(b) adjustment and section 754 adjustments from item L The section 743(b) adjustments will be excluded from the calculation of the other increase (decrease) amount and current year net income(loss).
- Option 5 - Include both Section 743(b) and 754 adjustments in other increase (decrease) – The section 743(b) and 754 adjustments will be included in the calculation of the other increase (decrease) amount and excluded from the current year net income(loss). These changes will also be reflected on the current year net income and increase (decrease) supporting statement.
- Option 6 - Include Section 754 adjustments in other increase (decrease) – The section 754 adjustments from line 13w will be included in the calculation of the other increase (decrease) amount and excluded from the calculation of the current year net income(loss). These changes will also be reflected on the current year net income and increase/decrease supporting statement.
- Calculate the return.
Options above can be set as a system default for all returns assigned to an CCH® ProSystem fx® Tax Return Group and CCH Axcess™ Tax Return Configuration Set:
- ProSystem fx® Office Manager > Configure Applications / CCH Axcess™ Dashboard > Application Links > Return Configuration Sets.
- Select the relevant Office Group / Return Configuration Set.
- Select Miscellaneous Options.
- In Field Reserved for future use 2, input applicable of Options 1-6 listed above.
- Select OK / Save and Close, to save this change.
- The option code will be the default selected the next time a return assigned to the Return Group / Return Configuration Set is opened and calculated.
Notes:
- The system has never automatically increased book income for 754 and 743(b) depreciation. A manual input must be made to this effect, as the system will assume the tax depreciation is the same as book until we tell it otherwise.
- In 2019 and prior, we could add 743(b) / 754 depreciation back into partner book income, by using DP-2 with state code of BK (Book), and a zero to Current Depreciation, and a Code to Force of at least option 1.
- We also have the option of L/M-1/M-2/M-3 > Book Amounts (Schedule M-1/M-3 worksheet Line 2 (Interview Form L-3 box 73) depreciation to input an amount of 754 depreciation back to book income, or inputting the actual book depreciation on L-3 box 91, and letting the system calculate the difference.
- In tax year 2019 and prior, the above notes would have normally adjusted the partner ending capital account. However, in 2020 system, because Sch K-1 Section L is on Tax Basis, it doesn't interact with Schedule M-1 / M-3.
- In 2020 software and prior, we could also make a miscellaneous item input: Interview form K-3 Either input as an M-2 increase with Class Code ICR, of the 754 amount in total and specially allocate using partner number or ratio ID, or make an input to the K-3 with either a negative amount coded as NDE, or a positive amount coded as NTI, either to a partner or allocated using ratio ID special allocation. Currently there is nothing automatic that occurs in the return with the step-ups in basis.
Additional Information
- What are the basics of a IRC Section 754 in a 1065 return using worksheet view?
- What are the basics of IRC Section 754 in a 1065 return using interview view?
- How do I input Section 743(b) Adjustments in a 1065 return using CCH® ProSystem fx® Tax CCH Axcess™ Tax worksheet view?
- How do I input Section 743(b) Adjustments in a 1065 return using CCH® ProSystem fx® Tax interview forms?
| Solution Id | 000203400/000119903 |
|---|---|
| Direct Link |
