Brenda Colburn Jemmott, CPA, Stockholder and Oakland Office Head
Brenda Colburn JemmottCPA / Partner / Co-Managing Director of Taxview bio

Kelly Creed, CPA, Tax Stockholder in the Oakland office.
Kelly CreedCPA / Tax Partner / Co-Managing Director of Taxview bio

California is Now Requiring Schedules Report California Tax Basis Capital Accounts

2/16/2022

RINA Alert - February 16, 2022 | Volume 20, Issue 3


In general, California tax law conforms to the Internal Revenue Code. However, there are many differences between California and federal tax law. 
 
Because of these differences California is now requiring that California Schedules M-2 and K-1 (565/568) report California tax basis capital accounts and not federal tax basis capital accounts.  This is effective for years beginning on or after January 1, 2021.
 
A tax basis capital account is important in determining a partner’s gain or loss from the sale of his partnership interest and it is also import in determining the ability to claim losses.
 
A partner’s tax basis capital account balance is generally equal to the amount of cash and tax basis of property contributed by the partner to the partnership, increased by allocations of taxable income to the partner, decreased by allocations of taxable loss to the partner, and decreased by the amount of cash or the tax basis of property distributed by the partnership to the partner.
 
For tax years prior to 2020, tax basis capital accounts generally did not need to be disclosed on a partnership’s income tax returns.  Instead, a partnership was allowed to report its partners’ capital accounts on some other basis, such as Generally Accepted Accounting Principles (GAAP), Section 704(b), Tax, or Other, to report the partners’ capital accounts on a Schedule K-1.
 
These other methods were often of limited use to the IRS in identifying potentially taxable situations; so, for taxable years ending on or after Dec. 31, 2020, the IRS required partnerships to report each partner’s capital account on a tax basis for federal purposes.
 
Last year, when the IRS began requiring partnerships to report partners’ partnership capital on the tax basis method, California provided taxpayers the opportunity to follow the federal instructions regarding tax basis capital account reporting but did not make it a requirement.
 
This year, California changed their form instructions to require the use of California tax basis capital account reporting.
 
Please contact your RINA professional with any questions or if you need assistance to determine the tax basis capital for each partner.

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