2020 Partnership 1065 Schedule L Balance Sheet, Line 21, Column d, partner's ending capital account is reporting on tax basis using CCH® ProSystem fx® Tax and CCH Axcess™ Tax?

  • Article Type:
  • QA
  • Last Modified:
  • 02/09/2021

Question

Why is Partnership return 1065 Page 5, Schedule L Balance Sheet, Line 21, Partners' capital accounts, column d,  now report Tax Basis method calculation, and not book, in 2020 system using CCH® ProSystem fx® Tax and CCH Axcess™ Tax?

Environment

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Answer

2020 Tax Preparation, as of  February 8, 2021 (CCH® ProSystem fx® Tax release 2020.02040 / CCH Axcess™ Tax  release 2020-2.4):

The software has changed to calculate as CCH development team anticipates will be clarified in the finalized instructions.
  • Returns calculated on, or after release 2020.02040 / 2020-2.4 can generate an itemized calculation statement behind Schedule L, line 21, column d.
    • To view the current calculation, please go to L/M-1/M-2/M-3 > Balance Sheet worksheet > Expand Section 9 - Partners' Capital Accounts > In Line 1 (ML-1, box 60.) - Produce statement for analysis of Schedule L, partners' ending capital accounts. 
  • The software now calculates Schedule L, line 21, column d, as follows:
    1. Schedule L, line 21, column a (accepts government form override) - Beginning of Year Partner Capital Account. 
    2. Add Schedule M-2, line 2a and 2b.
    3. Subtract Schedule M-2 line 6a and 6b.
    4. Add Schedule M-1, line 1 (calculated) / M-3, page 1, Part 1, line 11 - book / financial income
  • CCH Software development team is waiting on final clarification (guidance) from the IRS if there is additional change to Schedule L line 21 column d.

    Notes

    • An interpretation of 2020 1065 IRS draft instructions that the partnership balance sheet, end of year capital account, should report using GAAP / book/ or Other basis method of accounting.
      • Form 1065 instructions 2020 (draft only), page 55, indicates "balance sheets should agree with the partnerships books and records."
        • "Books and records" refers to how the records are kept. Books and records can be kept using tax, GAAP or other accounting methods.
          • One business may be accrual, and records income and expenses when services performed (even if no invoice submitted) and expenses when incurred (e.g. December electric is expensed in December although paid for in January).  
          • Another business may keep everything in an envelope and total income and expenses at the end of the year.  Likely a tax basis taxpayer.
      • Diagnostic 10318 will issue when the balance sheet input override is used to force Schedule L balance sheet, line 21, column d - Partners Capital Accounts, to reflect GAAP / book basis, especially if this amount differs from Schedule M-2 line 9 when reporting Tax basis.
        • The text of this diagnostic is also updated with release 2020.02040.
        • If book / tax differences are present in the return, then Schedule M-2 line 9 may be different than Schedule L line 21, column d, on tax software release 2020.02010 / 2020-2.1.
      • Schedule M-1, line 1 is the income per books.  Accrual, tax basis, special accounting or any other method you have used is your book method.  Schedule M-2, line 3, in 2020 is now the net income using the tax basis method of accounting.
        • "Book" refers to the books and records;  Quickbooks, a check register, an envelope with receipts, etc. are the books and records.
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