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

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.

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

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

Learning Objectives

After completing this course, you will be able to:

• Differentiate GAAP, IRC 704(b), and tax basis capital accounts
• Verify annual allocations are made and reported
• Ascertain capital accounts are correctly maintained
• Recognize various methods of complying with tax basis capital requirements
• Determine that a partner's interest in a partnership is accurately reflected

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience preparing complex tax forms and schedules, supervising other preparers or accountants. Specific knowledge and understanding of pass-through taxation, including taxation of partnerships, S corporations and sole proprietorships, qualified business income, net operating losses and loss limitations; familiarity with net operating loss carry-backs, carry-forwards and carried interests.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).