Form 1065 preparation alert

Written on Mar 18, 2019

By Lynn Nichols, CPA, OSCPA Tax Section Moderator

Instructions for preparation of a 2018 Form 1065 (Page 30, Item L) include a significant change requiring the return preparer to provide an analysis of a partner’s “negative tax capital account.” The form has not been changed so it will be easy to overlook this important requirement. Although the Service provides limited relief in Notice 2019-20, the preparer must still recognize the requirement and provide the Information. According to the IRS, highly leveraged partnerships that provide basis for depreciation with partnership debt, are those most likely to have partners with “negative tax capital accounts.” Adjustments must track through Section 1031 exchanges and any one of several partnership capital account adjustments that do not affect tax basis, such as Section 704(b) write-ups.

Failure to provide the required analysis means the return is incomplete and subject to penalties.