CCH Software News - Current Guidance for Section 743(b) and Section 754 Adjustments on Schedule K-1, Item L and Schedule K-1 Tax Capital Reporting on Item L and Schedule M-2 for Partnership Returns using CCH Axcess™ Tax.

  • Article Type:
  • Documentation
  • Last Modified:
  • 11/05/2022

Objectives

Document an important CCH Axcess™ Tax email distributed to customers regarding changes to the partnership system for tax year 2020.
 

Environment

CCH Axcess™ Tax    
Partnership
1065
2020
Worksheet View
WSV

Details

At present, the IRS Form 1065 instructions have not been finalized, and we continue to wait for guidance on the presentation of Form 1065, Schedule K-1, Item L, and Schedule M-2, Analysis of Partners’ Capital Accounts. Below are items and input options to consider when preparing your partnership returns.
  • The partners’ prior year ending capital amounts will only be rolled forward to the 2020 input as the beginning capital amounts if one of these scenarios exists:
    • If the tax basis method was the basis method used in the prior year return.
    • If a non-tax basis method was used in the prior year return and the partner had their share of the negative ending tax basis capital amount reported under Schedule K-1, line 20 code AH.
    • If a non-tax basis method was used in the prior year return and in 2020, they have the option to use the ending capital amounts as the beginning capital amounts entered in:
      • Partners > General Options > Schedule K-1 Calculation Options > Other Calculation Options > Include the partners' prior year ending capital calculated using the non-tax basis methods as their beginning capital accounts
  • The default method for all returns will be the tax basis method. This can be changed to a different method using either:
    • The Return Configuration Set/Office Manager input
    • Partners > General Options > Schedule K-1 Print Options > Other Schedule K-1 Options > Partners' basis calculated using which method
    • Partners > Partner Information > Partner Summary Detail > Other Payments/Printing Percentage Overrides/Other Options > Partner Basis Method > Method used to calculate partner's capital
  • This year Schedule M-2, Line 3, Net income (loss) per books calculates the same amount that appears on Schedule M-1, line 9 (adjusted for nontaxable items) since Schedule M-2 is being calculated on a tax basis. In the past, the amount on Schedule M-2, Line 3 matched Schedule M-1, Line 1.
  • A Schedule K-1 statement is produced for each partner showing what basis method is used for each partner.
  • The Schedule M-2, line 1, balance at the beginning of the year amount is normally the sum of the partners beginning capital amounts but can be overridden using the input on:
    • L/M-1/M-2/M-3 > Schedule M-2 > Schedule M-2 overrides > Balance at beginning of year
  • The option to include the partners’ share of their beginning and ending liabilities amounts reported under schedule K-1, item K in the other increases/decreases line, depending on the tax basis method selected, is available on:
    • Partners > General Options > Schedule K-1 Calculation Options > Liability Calculation Options > Include the partner's share of liabilities in Schedule K-1, item L other increase (decrease) line
These entries are also included in the amount reported on Schedule M-2, Line 4 or Line 7:
  • An option the customer would need to select if they want to include the partners’ share of ending total assets amounts on Schedule L, line 14d in the other increases/decreases line, depending on the tax basis method selected, is available on:
    • Partners > General Options > Schedule K-1 Calculation Options > Other Calculation Options > Include the end of tax year total assets amount reported on Schedule L in Schedule K-1, item L other increase (decrease) line
These entries will also be included in the amount reported on Schedule M-2, Line 4 or Line 7:
  • Schedule M-2 and Schedule K-1, Item L, other increases/decreases lines include the following entries if present:
    • L/M-1/M-2/M-3 > Schedule M-2 > Schedule M-2 - Increases or Schedule M-2 - Decreases
      • These entries will only be included on the Schedule M-2 if the option code '5' (Schedule M-2 adjustment check box) is present on:
        • L/M-1/M-2/M-3 > Schedule M-2 > Schedule M-2 - Increases or Schedule M-2 - Decreases
  • By default, Schedule M-2, Line 3, Net income per books is the sum of the Schedule M-1, Line 9, Analysis of Net Income (Loss), Schedule K, Line 18a, tax-exempt interest income and Line 18b, other tax exempt income less the Schedule K, Line 18c, nondeductible expenses. The text “Net income (loss) per books” is misleading since Schedule M-2 is consistent with Schedule K-1, Item L and must be reported on a tax basis.
  • Guaranteed Payments for Services and Capital are included on Schedule K-1, line 4, and Item L, Current year net income (loss). If a different amount is needed for current year net income (loss) the following input is available
    • Current Year Net Income as an override
      • Partners > General Options > Schedule K-1 Calculation Options > Other Calculation Options > Use the partner information, current year net income (loss) entries as an override
    • Current year net income input
      • Then enter current year net income on Partners > Partner Information > Net Income Per Books
    • Entries on the Schedule L/M-1/M-2/M-3 > Schedule M-2 worksheets may also be used for increases and decreases to the Schedule K-1 or just to Schedule M-2
  • Schedule M-2, Line 3, Net Income (Loss) per Books may also be overridden with:
    • L/M-1/M-2/M-3 > Schedule M-2 > Schedule M-2 – Overrides > Net income (loss) per books
Changes Available on January 31

Schedule K-1, line 4 - Guaranteed payments for services and capital, by default automatically gets included in the calculation of the Item L, Current Year Net Income (Loss).
  • To exclude any of these amounts from Current Year Net Income (Loss) amounts, customers will need to select one of the available options on:
    • Partners > General options > Schedule K-1 Options > Other Calculation Options > Line 30
  • The Schedule M-2, line 3, Net income(loss) per books (amount shown on the partnership books used in maintaining the partners’ tax basis capital accounts for purposes of Schedule K-1) will also be affected when the options are present in the return.
Below is a list of the available options detailing how each option affects the Schedule M-2 and Schedule K-1.

Schedule K-1, Item L and Schedule M-2, line 3

The Schedule K, line 4 - Guaranteed payments for services and capital, will be automatically included in the calculation of the Schedule K-1, Item L, Current year net income(loss). The options available on Partners > General options > Schedule K-1 Options > Other Calculation Options > Line 30 will also affect the amounts reported on Schedule K-1, Item L.
  • Option 1: Include all guaranteed payments in current year net income amounts - This is the default option and will include all guaranteed payments in the calculation of the current year net income(loss).
  • Option 2: Exclude all guaranteed payments from Schedule K-1, Item L and Schedule M-2 - No guaranteed payments will be included in the calculation of the current year net income(loss).
  • Option 3: Exclude guaranteed payments for services from Schedule K, Item L and Schedule M-2 – The guaranteed payments for services will be excluded from the calculation of the current year net income (loss).
  • Option 4: Exclude guaranteed payments for capital from Schedule K, Item L and Schedule M-2 - The guaranteed payments for capital will be excluded from current year net income (loss).
Schedule K-1, line 11F- Section 743(b) Positive Income Adjustment, Line 13V -Section 743(b) Negative Income adjustments and Line 13W -Section 754 adjustments by default automatically get included in the calculation of the Item L, Current Year Net Income (Loss).
  • To exclude any of these amounts from Current Year Net Income (Loss) amounts, customers will need to select one of the available options on:
    • Partners > General options > Schedule K-1 Options > Other Calculation Options > Line 29
  • The Schedule M-2, line 3, Net income(loss) per books (amount shown on the partnership books used in maintaining the partners’ tax basis capital accounts for purposes of Schedule K-1), line 4 - Other Increases and line 6 - other decreases will also be affected when the options are present in the return.
Below is a list of available options detailing how each option affects the Schedule M-2 and Schedule K-1.

Schedule K-1, Item L

The Schedule K, line 11- Section 743(b) Positive Income Adjustment and Line 13d -Section 743(b) Negative Income adjustments and Section 754 adjustments will be automatically included in the calculation of the Schedule K-1, Item L, Current year net income(loss). The options available on Partners > General options > Schedule K-1 Options > Other Calculation Options > Line 29 (Interview Form 5A, Box 93) will also affect the amounts reported on Schedule K-1, Item L.
  • 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.
Schedule M-2

The Schedule K, line 11- Section 743(b) Positive Income adjustment, Line 13d -Section 743(b) Negative Income adjustments and Section 754 adjustments will be automatically included in the calculation of the Schedule M-2, line 3, Net income(loss) per books. The options available on Partners > General options > Schedule K-1 Options > Other Calculation Options > Line 29 will also affect the amounts reported on Schedule M-2.
  • Option 1: Include section 743(b) adjustments in current year income net income amounts - This is the default option and will include the section 743(b) adjustments in the calculation of the Schedule M-2, line 3, Net income(loss) per books.
  • Option 2: Exclude section 743(b) adjustment from item L - The section 743(b) adjustments will not be included in the calculation of the Net income(loss) per books. The Schedule M-2, line 9 ending capital amount will also change.
  • Option 3: Include Section 743(b) adjustment in other increase (decrease) – The section 743(b) adjustments will be included in the calculation of either the other increases amount on line 4 or the other decreases amount on line 7 depending on whether the section 743(b) income adjustments on Schedule K are positive or negative. The same amount will be excluded from the calculation of the line 3 - net income (loss) per books. These changes will also be reflected on the other increases and other decreases supporting statement.
  • Option 4: Exclude both section 743(b) adjustment and section 754 adjustments from item L - The section 743(b) and section 754 adjustments will be excluded from the calculation of the Schedule M-2, line 3, Net income(loss) per books. The Schedule M-2, line 9 ending capital amount will also change.
  • Option 5: Include both Section 743(b) and 754 adjustments in other increase (decrease) – The section 743(b) adjustments and 754 adjustments will be included in the calculation of either the other increases amount on line 4 or the other decreases amount on line 7 depending on whether the section 743(b) income adjustments on Schedule K are positive or negative and section 754 adjustments are present on Schedule K, line 13d. The same amount will be excluded from the line 3, Net income(loss) per books. These changes will also be reflected on the Schedule M-2, line 4, other increases and line 7 other decreases statement.
  • Option 6: Include Section 754 adjustments in other increase (decrease) – The section 754 adjustments from the Schedule K, line 13d other deductions amount will be included in the calculation of the other decreases amount on line 7 and excluded from line 3, Net income(loss) per books. These changes will also be reflected on the Schedule M-2, line 7 other decreases statement.
Changes Available on February 7

Schedule L, line 21, column (d)- Partners’ capital accounts, End of tax year is now calculated as follows:
Start: Schedule L, line 21(b), Beginning Partners’ Capital Accounts
Add: Schedule M-1, line 1, Net income (loss) per books,
Schedule M-2, Capital contributed – Cash and Property
Subtract: Schedule M-2, Distributions, lines 6(a) and 6(b) – Cash and Property
Total: Schedule L, line 21(d), Ending Partner’s Capital Accounts

Previously, Schedule L, line 21(d), Ending Partners’ Capital Accounts amount was calculated based on Schedule K-1, Item L, Partner’s Capital Account Analysis.
  • New inputs will be available to override the amounts for Contributions or Distributions if there is a difference between the book and tax amounts:
    • L/M1/M-2/M-3 > Balance Sheet > Partners’ Capital Accounts > Lines 2 and 3
  • A statement detailing the calculation of the End of Year amount for the Partners’ capital account can be produced with the following input:
    • L/M1/M-2/M-3 > Balance Sheet > Partners’ Capital Accounts > Line 1
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