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Capital Accounts: 704(b) vs. GAAP vs. Tax Basis, Comparing and Contrasting Annual Allocations

Meeting Tax-Basis Capital Reporting Requirements

Note: CLE credit is not offered on this program

Recording of a 110-minute CPE webinar with Q&A

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Conducted on Tuesday, October 1, 2024

Recorded event now available

or call 1-800-926-7926

This course will address calculating and maintaining partners' capital account balances under 704(b), GAAP, and tax basis reporting requirements. Our panel of partnership experts will explain the importance of each method, compare and contrast annual recording differences for each, and discuss how to properly maintain these capital account balances for each partner. They will also offer insights into utilizing the transactional approach outlined in the instructions for Form 1065.

Description

Properly maintaining partners' capital accounts may be the most critical aspect of partnership taxation. Tax advisers must make accurate distributions, both liquidating and annual, reporting the entity's and taxing partners' financial positions properly. Understanding the differences in each reporting method is a must for tax practitioners working with partnerships and LLCs. Generally speaking, all three methods are necessary for partnership accounting.

Section 704(b) accounts reflect a partner's economic interest in the entity, GAAP balances report balances that comply with accounting board requirements, and tax basis balances reflect a partner's capital balance under federal income tax principles.

Reporting differences between these methods can include the value of the contributed property, depreciation methods, allocations of income, losses, debt, Section 754 elections, and more. Although the IRS attempted to define tax capital connected with new reporting requirements, no definition exists in the Code or regulations. To add to the confusion, the IRS requires that partnerships disclose partners' tax capital account balances on the partners' Schedule K-1.

Listen as our panel of partnership taxation veterans explains respecting partners' allocations under 704(b), the significance of negative capital, maintaining balances under GAAP and IFRS, and determining tax capital balances to comply with recent reporting obligations.

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Outline

  1. Partnership capital accounts: an overview
  2. GAAP
    1. Relative authority
    2. IFRS and similar methods
    3. Maintenance
  3. 704(b)
    1. Respecting partners' agreed-upon allocations
    2. Revaluations and restatements
    3. Maintenance
  4. Tax
    1. Defining the undefined
    2. Subchapter K and 704(b)
    3. Maintenance
  5. Reporting issues
    1. Negative tax capital
    2. Tax basis capital
    3. Handling differences in capital account basis

Benefits

The panel will review these and other vital issues:

  • Respecting partnership allocations and 704(b)
  • Reconciling other methods to tax basis capital
  • Revaluations and restatement of capital accounts under 704(b)
  • Schedule K principles and their application to 704(b) and tax capital account reporting
  • Implications of negative tax capital accounts
  • Determining tax basis capital to meet recent requirements

Faculty

Alfonsi, John
John T. Alfonsi, CPA
Managing Director
Cendrowski Corporate Advisors

Mr. Alfonsi has 25 years of tax consulting, business valuation, litigation support and forensic accounting experience....  |  Read More

Kramer-Andrew
Andrew Kramer, CPA
Senior Manager
Yeo & Yeo CPAs & Advisors

Mr. Kramer has more than 14 years of client service experience, specializing in tax planning and preparation for...  |  Read More

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