1065 Schedule M-2

[eastend19]

I understand that, but how can the balance sheet, which is per books on the tax return, ever be balanced if we are using partner capital now based on tax basis? Income is reconciled and fine. M1 Line 9 Income is LESS than M1 Line 1. If we are using M1 L9 on M2 L3 this will cause parters capital per return to be understated and thus balance sheet is understated and not correct. 

Right now my tax books are correct but the return will not be correct without a positive adjustment to M2 on Line 4 like the person above. 

@AliciaP1 

[AliciaP1]

The Capital Reconciliation section does not report capital on a tax basis but is comparing the balance sheet book balance of capital to your tax records.  Basis is not calculated on a tax return nor on the books.  It is a separate tracking system that most businesses provide details about to partners but is the partners' responsibility to track their own basis.

TurboTax calculates the capital balance based on book-to-tax differences that are entered for the current year.  If you have records of something that has affected the capital account balance that is not reported in TurboTax, you can enter a different balance based on that.  You need to go through the steps I listed to get TurboTax to carry the correct amounts to the forms instead of trying to override and reconcile the M-2 directly on the form.

@eastend19 

[diversion]

"If you have records of something that has affected the capital account balance that is not reported in TurboTax..." 

But the 179 sale is reported in TurboTax, and appears properly everywhere else.  So why wouldn't it be reflected in the capital account as well?  I liken this to handling PPP forgiveness last year.  Both are money from nothing, and both automatically show up in M-1 line 6a.  But while PPP forgiveness also flowed to the capital account in M-2, the 179 sale does not.  Doesn't seem right.

[eastend19]

Agreed. There is something wrong here. It all has to do with Section 179 recapture not being properly reported and flowing through to capital accounts. In my case I have both recapture and guaranteed payments. While M1 is fine the issue really is M2 and TT pulling out guaranteed payments AND section 179 recapture. As such this results in a huge decrease in capital accounts. 

[AliciaP1]

Section 179 deductions and recaptures do not affect partners' capital for the business.  They are both straight pass-through transactions to the partners that are reported on each partner's personal tax return.  Guaranteed payments should end up reducing partner capital by way of reduced net income for the year.

@diversion 

@eastend19 

[eastend19]

I am sorry but that is not correct. Section 179 DOES affect partners capital, especially now that M2 is on tax-basis. You cannot have section 179 deduction on schedule K1 and no corresponding adjustment for the recapture. That would result in capital accounts going negative eventually. I agree that mechanically both the deduction and recapture are handled at the individual level as there are aggregates for individuals across all business entities that are owned. But the way TT is handling this is NOT correct. I have opened this return in ProConnect and it properly adjusts M2 when there is an asset disposition with section 179 depreciation. 

Sale of Section 179 asset is recorded in TT. Gain on Disposition of Section 179 Assets is logged in M1 6a for $XXX. It is then logged on M2 4a. This allows all numbers to tie in to balance sheet if your balance sheet is tax basis. 

Hope this helps. TurboTax needs to fix this bug immediately. @AliciaP1 @diversion