Book
Capital Accounts
Each partner has separate capital accounts that represent
the equity that a partner has in the partnership. The partners share of equity is
the amount that would be received if the partnership were liquidated and all of
the assets were sold at book value, all liabilities paid, and the net proceeds
distributed.
As the partnership carries on trade or business,
these capital accounts will change depending on the agreement between the
partners as to how they will share in the profits and losses. The capital
account should reflect the economic arrangement between the partners.
This balance should be reflected on the tax return
balance sheet and Item L on the Schedule K-1 of Form 1065. This can be a negative figure
because the liabilities are not included.
Tax
Capital Accounts
Many times, the books will be maintained on the tax
capital account basis that will reflect the adjusted basis of the assets
contributed, instead of FMV. Because the tax capital account reflects the
adjusted basis, barring any transfer of partnership interests, there is a close
relationship to a partners outside basis for tax purposes.
This account can also be a negative figure because the
liabilities are not included.
How book capital accounts compare to tax capital accounts:
1. Book capital accounts reflect fair market value of the property at time of contribution and tax capital accounts reflect the adjusted basis of the property at the date of contribution.
2. Book capital accounts reflect the market value of the property at the date distribution, and tax capital accounts reflect the adjusted basis of the property at the date of distribution.
3. Book capital accounts and tax capital accounts do not include liabilities of the partnership. Both are reflected net of liabilities.
4. Book capital accounts and tax capital accounts may both reflect a negative balance, however, it is important to note that outside basis cannot have a negative balance since outside basis includes liabilities.
5. Generally, non-deductible expenses will reduce the capital accounts.
How book capital accounts compare to tax capital accounts:
1. Book capital accounts reflect fair market value of the property at time of contribution and tax capital accounts reflect the adjusted basis of the property at the date of contribution.
2. Book capital accounts reflect the market value of the property at the date distribution, and tax capital accounts reflect the adjusted basis of the property at the date of distribution.
3. Book capital accounts and tax capital accounts do not include liabilities of the partnership. Both are reflected net of liabilities.
4. Book capital accounts and tax capital accounts may both reflect a negative balance, however, it is important to note that outside basis cannot have a negative balance since outside basis includes liabilities.
5. Generally, non-deductible expenses will reduce the capital accounts.
Partners capital accounts can be maintained on GAAP basis,
a tax basis, and certain other bases specified by the Tax Code IRC $704(b).
The method used to maintain capital accounts on the tax
return should be consistent with the partnership financial statements.
Capital accounts are adjusted when property is
contributed or distributed. Unlike basis, which is calculated by using the
adjusted basis of the contributed or distributed property, a capital account is
increased or reduced based on the faire market value of any property
contributed or distributed.
At John
L Mottram CPA LLC, Certified Public
Accountants, we make sure that we create and maintain
for each partner both book capital accounts and tax capital accounts prepared
in compliance with all provisions required by the US Tax Code.
Contact us at
214-390-7446 or go to our website at www.mottramcpas.com.BTW - more on a partner's "outside basis" in an upcoming blog!
