The IRS updated the Form 1065 instructions for tax year 2020 to reflect changes to partner capital account reporting requirements.
Beginning with tax years ending on or after December 31, 2020, all capital accounts must be reported on a tax basis. While not an absolute requirement for tax year 2020 due to IRS penalty relief, changes were made in the TaxAct 1065 product to reflect these instruction changes.
Page 31 of the 2020 Form 1065 instructions provide detail for reporting partner capital accounts on a tax basis method. The tax basis method should be figured on a "transactional approach". If you did not previously use a tax basis to figure each partner’s capital account, you will need to adjust the beginning of year capital account balances using one of these three methods:
For more information on computing capital accounts using these methods, see IRS Notice 2020-43.
Under "Current year net income (loss)", the instructions state to enter each partner’s distributive share of partnership income and gain as figured for tax purposes for the year, minus the partner’s distributive share of partnership loss and deductions as figured for tax purposes of the year. This means that net income per the books is not used in computing the partner capital accounts.
Page 56 of the 2020 Form 1065 instructions also provide further information for calculating the Schedule M-2, line 3 Net Income (Loss) per Books. Again, it the income or (loss) shown on this line is the net income (loss) used in maintaining the partners’ tax basis capital accounts for purposes of Schedule K-1.
If you need to recalculate the beginning of year capital account balances to one of the allowed methods outlined above, you may also need to make an entry on the Schedule L balance sheet for the beginning of year columns. This "tax basis capital account adjustment" may be an asset or liability adjustment, depending on how the capital account balances are changed by the recalculation.