What is Tax basis capital accounts?
In short
Partnerships must report each partner's capital account on Schedule K-1 using the tax basis method, which tracks contributions, allocated taxable income and losses, and distributions at tax basis.
Key takeaways
- Tax basis capital differs from book capital accounts kept for allocations, and from outside basis, which also includes liabilities.
- A negative tax capital account can signal gain when the partner exits.
- Errors in capital account reporting can lead to penalties.
Where it's tested
TCP: Partnership Compliance & Planning — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A partner contributes land with a basis of $40,000 and a fair market value of $100,000. Three years later the partnership sells the land for $110,000. How is the gain allocated?