Maintaining Partner Capital Account Balances: Preparing Workpapers, Documenting Allocations and Corrections

Maintenance of capital accounts is one of the more challenging elements of partnership tax compliance. Even experienced professionals sometimes struggle with unclear terms in partnership agreements, applying targeted allocations, and ensuring that allocations and corrections are carried forward in documenting the partners' capital accounts.

Quite often, the capital accounts are not set up correctly, or at all, at the inception of the partnership. Making sure that allocations are properly documented and carried forward, correcting misallocations from prior years, and dealing with complex issues such as nonrecourse liabilities and minimum gain chargebacks can present additional difficulties in maintaining accurate capital accounts.

A critical step in capital account balance maintenance is documenting an adviser's interpretation of the partnership agreement's allocation provisions. The partnership work papers should detail any gray areas where the adviser had to apply independent judgment in making a current year allocation or in adjusting an allocation from prior years. Partnership accounting is by its very nature complicated, and certain transactions and events often cause difficulties in maintaining capital accounts.

Listen as our experienced panel provides a practical guide to creating and maintaining capital account balances, including tips and tools for creating clear and defensible work papers to document partnership allocations and corrections.